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Investing in a 'Student Condo'
Why not consider buying a student condo for your child as both a solution to the housing scarcity and an investment?
Canadian youth are heading
to college and university in record numbers. As these sons and daughters plan
this exciting next step, they may be faced with the harsh reality of a lack of
reasonable accommodations. Why not consider buying a student condo for your
child as both a solution to the housing scarcity and an investment?
This imbalance is precisely what my colleague Sandra is wrestling with as her son heads to a university in Quebec this fall. Sandra feels she wants to invest in a condo for him. She figures that buying a condo compared to what she would be paying for a dorm will enable her to at least break-even when she sells. “If the property appreciates, then it may even help offset some of the costs of his education,” she says.
Sandra’s attitude is a good one and realistic for parents who only expect to hold their ‘student condos’ for three-to-five years. Many financial planners would agree that it is really too short a period of time to realize enough of a return after the expense of holding and then selling to make it worthwhile. Additionally, on the positive side in Sandra’s case, is that she is in a position to buy the condo outright rather than mortgaging it, and feels that after factoring in her son’s expenses plus the realtor’s commission when she sells, she will have made roughly the same return on her money by investing in a mutual fund and making withdrawals to pay for rent.
The situation is more positive for those individuals who intend to buy and hold the condo after their child graduates. Depending on the particulars of the area, some parents may also be holding the condo for retirement use later in life. The consideration that has to be focused on is whether one views their student condo as a long-term investment. Parent-buyers may also decide to hold onto the condo after their children graduate once they realize how attractive the cash flow is.
Chiming in on the conversation with Sandra, was another colleague of mine. James and his wife are also considering buying a student condo, but they have expanded their search to other university towns. Indeed, there may be a reason not to link the investment to a child at all. It just needs to be a good investment — rents need to be rising in the area you choose, and there should be an opportunity for appreciation over time. If those factors are not present at a child’s university, then parents should invest in another town and pay rent for their child’s housing instead. If the investment goes up in value, you will make money. Just remember that those gains will be taxed. Also remember, mortgage rates and other costs change, and these changes will impact the numbers and your decision.
Things to consider before you decide:
Plenty of parents are opting for the home purchase instead of the dorm rental -- but that's not always the best way to go. Before you plop down money to purchase your kid's "dorm" unit, be sure to run the pros and cons, which are generally dictated by finances and time.
You can buy the property in your name, in your child's name, or both. If you buy the property in your name, you should consider:
- The rental income you charge can pay a lot of your costs. Just remember you have to declare that income on your tax return.
- As a landlord, you can also claim many of your expenses, including mortgage interest. Assess your costs carefully before you buy. They will vary with the local real estate market, mortgage rates and other factors.
- Plan for some vacancies. Your child (or their
roommate) may not stay in the condo over the summer break. Are you really
going to ask them to pay rent if they are living somewhere else for a few
- Remember that you will own a greater share of the equity as you pay off the mortgage. And, the value of the condo may rise over time. This can offset your costs. But whether you do more than break even depends on what happens to housing prices in the area.
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