Investing in College Real Estate 6/10/07
Stewart H. Welch III, CFP, AEP
Founder, The Welch Group, LLC
Investing in College Real Estate
“Investing in College Real Estate”
Your son or daughter has just graduated from high school. You almost can’t believe that your child is an adult, heading off to college. Of course, you’re delighted but also nervous. With graduation from high school, the rights of passage have begun for your child. This is an exciting time for your child but also a challenging financial time for you as a parent. One way to turn the tables on the high cost of college funding is to buy your child a home to live in for the next four (or five?) years while he or she completes the coursework for an undergraduate degree. As with any real estate purchase, you have to do your homework. You should spend some time exploring the college neighborhood. You’ll want to find a home located near campus, preferably within walking distance. You also want to buy a home with at least three bedrooms, ideally four bedrooms. You’ll want to rent out the extra rooms and have your child act as the “property manager”. Your child will be responsible for finding and keeping tenants. Usually this is very easy because they will have friends who are excited about the freedom of being “on there own” in a real house! While this concept may seem strange, especially if your child has never lived on his or her own, there are some key benefits for you and your child:
· You receive all the tax benefits of owning rental property. Your interest payments are deductible; you receive a depreciation deduction for the property; and all repairs are either deductible or depreciable. In fact, this is one big tax write-off!
· Your child learns some valuable lessons about business, dealing with people and responsibility.
· Your property management “payments” are tax deductible by you and taxable income to your child. This works nicely since your child will be in a very low tax bracket. Your child can then use this money for personal or other college expenses.
· When you go to ‘inspect’ your property, part or all of your travel expenses are deductible. Now that’s a nice thought! You go to visit your child for parent’s weekend, and you can deduct a portion or your airline, hotel and food costs!
· When your child graduates, you would sell the home to another parent with similar goals and, hopefully, realize a nice profit.
As the property owner, you may want to consider charging a higher rent with you paying for such items as utilities, lawn care, etc. Not only will this create additional deductions, but this will also insure that these expenses are paid and the home is properly maintained.
Here’s how to create financial incentives for your child. First, he or she would receive a percent of rents (typically 10%) as a fee for their management responsibilities. This encourages them to keep the property fully rented at the highest possible rent rate. Second, you could offer to share the profits from the home sale after they graduate. This will encourage them to keep the property in good condition.
This strategy offers the possibility of significantly reducing the cost of funding college and the possibility of helping create another entrepreneur!