The cost of living in college has skyrocketed. With all the money you’re spending on housing, you wonder if you could be paying a second mortgage. And suddenly, it dawns on you. You COULD be paying a second mortgage — and she’d never have to shower in the gross hall bathroom again.
Living on campus cost an average $10,440 to $11,890 during the 2016-17 school year, according to the College Board. For students attending a four-year school, that adds up to more than $40,000, and even higher if they take a fifth or sixth year (hey, nothing wrong with a victory lap or redshirt year — except when Mom and Dad are paying for it).
As a parent, unless your child is on scholarship or receiving substantial financial aid, you’re probably the one footing the bill. And while you may have saved and planned scrupulously over the years, the thought of spending $40,000 on housing alone for Junior might give you pause. But a second house comes with its own costs and plenty of potential headaches.
A second home’s pros and cons
The most cost-effective way to buy a college home for your student may be finding a property that can be classified as a second home. The upside? You could potentially put less money down and qualify for lower interest rates, not to mention you can deduct real property taxes — up to $1.1 million of combined mortgage debt if you declare the property your second home.
How? Prove your student will be the primary resident and spend a significant amount of time on the property. Also, ensure the home is 75 miles or more away from your primary residence.
“You may need to write a letter to explain the situation and prove that the child lives there,” especially if the home is not in a vacation area, says Robert Sinohue, a Movement market leader in northern California. An added bonus: You’ll have a place to stay when visiting Junior, and you won’t have to worry about inappropriate roommates or mold-filled dorm rooms.
However, you’ll need to think about additional costs, aside from your new monthly mortgage payment. As the owner, you’ll be responsible for repairs and damages, even if you’re not renting out the house. Plus, the length of time you’ll own the house is so quick, you won’t necessarily break even. But if you have multiple children starting the same school at the same time or closely thereafter, owning and housing your children year after year may prove to be cheaper. Generally speaking, location dictates the decision. “Buying a house wouldn’t make sense in a high cost area,” Sinohue says.
Parents should also consider whether students are required to live on campus for a certain number of years and be wary of the fact that some freshmen drop out or transfer to new schools. Some scholarships don’t allow housing funds to be used for off-campus housing, and certain savings plans (namely 529 college savings plans) restrict how housing money can be used.
Consider it an investment
You have other options if a second home doesn’t fit the bill. If you want to rent the house out to Junior and his or her friends, you’ve got a chance to recoup some of your investment with an investment property. Rental properties, like all investment properties, carry a higher interest rate depending on your lender, according to Sinohue. You’ll probably have to pay a heftier down payment, and your debt-to-income ratio will need to be relatively low. But you can count the extra income you’ll bring in from renting the property, and you can use that income each month to pay for upkeep, repairs and more.
Speaking of repairs…
If you’re snagging a low-cost house that needs repairs upfront, Sinohue suggests considering a Fannie Mae HomeStyle loan, which gives you money for the home’s potential value after repairs or improvements, rather than just the base value.
This form of financing allows you to get financed for the potential value of the house after repairs or improvements are done, rather than the base value. This additional financing covers the repairs or improvements, so you can put in a new shower and updated amenities before Junior moves in.
All rental properties come with some risk of high-cost repairs, including damage from tenants. With college kids, this risk is intensified. While Junior may seem like the bookworm type, if he and his friends decide to throw parties every weekend, you could find yourself looking at costly damages and significant upkeep. Depending on how involved he or she is in the housework, you could also be required to spend a lot of time taking care of the property — from mowing the lawn to cleaning the gutters.
The million dollar question: Is it worth it?
It depends on your personality, time commitment and dedication to this new house. If you’re willing to put in the time, and continue to rent or own the property after Junior has graduated (and possibly after he or she has hit a few life milestones, as well), it could be a profitable investment. If the house is in an area where values appreciate, it could be a smart fiscal decision.
On the other hand, if Junior transfers, the market tanks or the parties get out of hand, you could end up sinking a lot of money into a property with no return.
We can’t make the decision for you. But we’re here to help. Make #asmartermove and speak to a mortgage professional about your situation before making your final choice.