With the cost of college tuitions rising and the simultaneous real estate prices dropping, some savvy parents are investing in real estate for their kids as opposed to paying dramatic prices to colleges for room and board.
Standard dorm rooms don’t offer any profit opportunities. The student lives at the dorm for a year or two and then generally moves out to an off-campus apartment. It’s just like any other renting situation: you get nothing in return for your rent payment except a roof over your head. No equity, no ability to sell for a profit.
However, with a multi-bedroom condo, your student can live there for all 4 years of college and the other bedrooms can be rented out to other students, with that rent money going towards the mortgage payment. You are in control of choosing a safe neighborhood for your student and properties for sale are in better condition than off-campus apartments that are rented out to college kids.
Landlords are concerned about rowdy kids partying and destroying the property, so they are generally slow to do any upgrades or renovations. Rowdy kids could still make some messes and break things in a private condo but there will most likely be condo association rules regulating noise and possibly forbidding any kind of stereotypical college parties.
After your student is finished with their degree, it’s up to you if you want to sell right away or rent the condo to another tenant. At this time you wouldn’t be limited to renting to a college student; you could instead find a young college graduate or other professional tenant who might want to stay in one place longer than a year.
Tax Deductions for College Condos
Always check with your attorney or accountant prior to buying for specific rules in your state, but in general, if you rent the property at market rates to a family member using it as their primary home, you can deduct tax losses from the rental activity.
You can also deduct the mortgage interest and real estate taxes. You may even deduct operating expenses – such as association fees, utilities, insurance, repairs and maintenance.
Of course, where will a college student get enough money to pay market value? Well, you are allowed to gift your child up to $13,000 per year without any tax consequences. If you’re married, both spouses together can gift up to $26,000 and your child will then pay that money back to you in rent.
Of course, who wants to just hand over thousands of dollars to their college student and trust that you’ll see it returned each month as rent? That totally depends on the maturity level of the child but keep a separate bank account for all the rental income and expenses so the IRS won’t ask any questions.
Like I said, the tax stuff can get complicated so be sure you hire a good real estate attorney to answer all your questions. Do you think this is a sound investment strategy? Leave your thoughts in the comments section below.
For more tax information, see this article.