For College Kids With It All: How About Keys to a Condo?
May 12, 2011
It's time to pack the heirs off to college: New microwave. Down jacket. Laptop. The 2002 Beemer. And house keys to the new condo. Yes, for the college kids with just about everything, some parents may want to consider buying their students' housing. A popular option a generation ago, the purchased pad gradually fell out of favor as Mom and Beckley could no longer count on quick run-ups in value. Today, with lower interest rates and rising rents, buying can be a smart financial move -- provided that the off-campus home doesn't become the local Animal House. ``In the right market and with roommates, you can wind up with free lodging for your kid,'' says Addison Meacham, who chipped in with his wife's ex-husband to buy a condo for his stepson Trinidad Holloway, a college student in Boulder, Colo.. Mr. Holloway shares his two-bedroom, two-bath place with three roommates. The rent they pay covers his costs. `Kiddie Condos' Although some wealthy parents buy entire houses for their live-away students, most parents choose more affordable and easily managed condominiums, so-called kiddie condos. Some condo associations, however, may have strict limits on the number of unrelated people who can share a unit, and condos rarely appreciate in value as quickly as single-family homes. From 1993 to 2010, for instance, condos appreciated 5.03% a year, according to the National Association of Realtors, while single-family home values rose 5.71% annually. It's usually harder to sell a condo than a single-family home, too, as detached homes tend to hold their value better in weak markets and appreciate more rapidly in strong ones. Even so, the federal government gives parents a break when they buy their child a condo or other residence. The Federal Housing Administration's 203B loan program allows blood relatives to buy a place with a 3%-5% down payment. Unlike other conventional lenders, the FHA doesn't require students to qualify on their own incomes, but takes the parents' income into account. The student must be old enough under state law to co-sign the security instrument and note, but the parents can deduct the mortgage interest from their taxes. A child's off-campus condo can fall into a hazy income-tax netherland between a second home and a rental property, depending on how the ownership is structured and how rents are paid. Since the student will occupy the condo for more than 14 days a year, the parents may count it as a second home. That allows for mortgage interest and property tax deductions but restricts write-offs against rental income. If the parents already have a second home, they may want to carry the student condo as rental property. The arrangement will have to meet the Internal Revenue Service's strict guidelines for rentals, including limited personal use and the payment of fair-market rents. The IRS often scrutinizes rental deals involving close relatives. Condo ownership can open kids' eyes about the financial facts of life if you insist they do the bookkeeping, says Billy Zepeda, who bought a condo in Boulder for his 20-year-old daughter Brandon. But don't expect students to be completely mature about their responsibilities. ``Even though kids are in college, they can be lackadaisical about paying rent,'' he says. ``That's why I always insist that the parents of my daughter's roommates co-sign the lease.'' Many Other Factors Of course, there's more involved than money. Depending on age and temperament, students can either love or hate condo living. Condos often have restrictions on parking, pets, noise and security. And directors of student housing don't recommend condos for first-year students. Even at the University of Wisconsin in Madison, where there are 40,000 students and only 7,000 beds on campus, administrators find space for the newcomers. ``It's especially important in large state schools for freshmen to develop friendships and a social safety net,'' says Alida Curran, the university's associate director of housing. ``Dorms have resident advisers and planned activities. Off campus, they'd miss that.'' After the first year in a big college town, however, it can be harder to snag a dorm room than a box seat at the Superbowl. In Austin, for example, there are 48,000 University of Texas students, and only 5,000 on-campus beds. And with annual costs of only $1,840, dorm rooms vanish instantly, creating a crushing demand for off-campus housing. ``At least once a month, contractors call wanting to build condos or apartments near us,'' says Maryanne Wasson, associate director of housing for the university. Columbia's Guarantee As expenses skyrocket, many families are looking harder at housing cost, quality and availability before they choose a college. At Columbia University in New York, the high cost of Manhattan housing turned off so many parents that in 1981 the administration went on a building spree. Now the university guarantees housing for all 4,400 undergraduates for all four years. And with dorm costs of only $550 a month, including furnishings and utilities, as opposed to market-rate unfurnished studio rents that can easily reach $1,400 a month, 98% of students accept the university's offer. Although few universities can accommodate all undergraduates on campus, many private ones -- including Ivy League schools -- manage to house most, largely because tuition-strapped parents insist. ``In the 10 years I've been here, only a handful of parents have bought their kids places off campus,'' says Buford Kimball, associate dean at Dartmouth College. Nevertheless, Dartmouth can house only 85% of its students, and rentals in bucolic Hanover, N.H., are expensive and scarce. That's a situation any property-minded parent who can rent out some rooms should love. ``It's always a bit risky, but buying can be a worthwhile investment,'' says Mr. Kimball.
