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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Back-to-school dorm option could make sense

Tom Kelly, columnist

Back to school means back to the books—including the family checkbook.

If you are ready to drop your son, daughter, grandson or granddaughter in a college environment, tuition and room-and-board payment shock is probably alive and well in your household.

And, you have probably asked yourself more than once if this is a good time to consider buying a home near campus as an alternative to dormitory living.

But before you start visiting homes for sale on quaint university streets, take a look down the road. How many years do you expect your child to live there and, if she transferred, would you want to rent to students who are not family members?

Many accountants advise parents with college kids to estimate what home prices will be when the child’s course work is done. Will that market appreciate 5 percent to 7 percent a year, or perhaps 30 percent in five years?

If your child is headed to a major college or university, the chances are very good your investment will show at least modest appreciation. Some college towns once thought unrealistic because of sluggish sales prices are experiencing a comeback.

But just how much appreciation is necessary to make the numbers work? One rule of thumb is if the house appreciates as much as the parent’s annual tax bracket, the deal may definitely be worth doing.

For example, if you are being taxed at 25 percent and feel the investment will appreciate 25 percent in the time you hold it, it could be a nice option for everybody involved.

A big decision is how to treat the college home as far as Uncle Sam is concerned. It could either be a second home or an investment property. Typically, the student manages the building while mom and dad reap the tax benefits and appreciation that come from owning a rental home. Often the venture won’t work because some buildings near schools are too expensive for the numbers to make it worthwhile. Also, there is the initial problem of handling the down payment and monthly expenses in addition to skyrocketing tuition fees.

“I usually recommend the parent think condo rather than single family dwelling,’’ said Steve Kennedy a REMAX agent in Seattle. “This is to minimize maintenance and upkeep issues while the student is in school—grass cutting, gutter cleaning. “What student would prioritize these issues to the top of the list to protect the investment?”

Not all college towns have big-time prices that only can be handled by the wealthy—or math majors. Let’s use some round numbers and say you found a home or a condominium in a college town that costs $350,000. You would make a down payment of at least $35,000. If you finance the remaining $300,000 at an interest rate of 4.5 percent over 30 years, your principal interest payment will be about $1,520 a month. Toss in taxes, fire insurance, and a few light bulbs and you will be looking at $2,100 a month.

That’s not too bad, especially if you can get four mature students to pay $525 a month rent, not including food and other essentials. Students could probably eat and live in a dorm for less, (young women rarely eat dormitory food anyway) but this way they have an alternative to noisy halls, and the parents have a fairly secure, four- to six-year venture.

There are areas that continue to zoom, bringing more interest from parent-investors. If the property definitely is going to be a rental, you can’t rent to your children and their friends for a song. The IRS will not allow you to show a taxable loss on the property if you personally use it for more than 14 days or 10 percent of the total rental period. Personal use includes renting to any relative unless you charge a fair market rent.

If the student-partner does not pay rent, depreciation cannot result in a taxable loss. Expenses may be deducted, but not to the point where an actual loss is shown. In order for the parent-student partnership to work, students must be responsible landlords.

Responsible landlord? In your family? That’s the biggest consideration.