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Considering University Area Housing as an Investment

November 8, 2007 | By Kelley Koehler | Filed Under Home Buying 

University area housing is all the rage this week.  There’s a question often overlooked when it comes to buying a house for your college student – what happens after graduation?

When asked, most people want to sell it and make money.  Leasing it out for a period of time is a distant second answer.

So how long until your kid graduates and you want to sell?  2 years?  5 years?  That’s going to make a big difference.  The longer you hold the property, the more costs you’ll incur on maintenance, mortgage, taxes.  But the longer you hold, the better your chances of seeing a market turn around, perhaps even some normal appreciation of 3-5% percent for a year or two.

Selling it in 2 years and expecting a profit might be difficult.  Let’s say we can find a decent deal today, buy a 3 bedroom University area home around $200,000 that needs maybe $10,000 in updating and repairs (you don’t want to put your kid in an unsafe home or into something that won’t be easy to maintain, do you?).  We’ll even use a rosy scenario.  Let’s say 3% appreciation per year.  You buy with 10% down at a 7% investor rate.  Your kid has two roommates, who each pay $400 per month in rent.  Your kid lives there for free (lucky guy).

Simplistic Scenario:

Purchase Price $200,000

plus Closing Costs: $4000

and repairs/upgrades: $10,000

Total In: $214,000

Total Lease Income over 2 years: $19,200

Appreciation over 2 years at 3% annually: $12,180

Let’s say you get half the cost of your improvements back: $5000

Sales Price in two years, rounding to nearest 10th: $220,000

Selling closing costs: $18,000

So:

   $220,000 sales price

- $   18,000 closing costs

- $214,000 original purchase plus closing and improvements

+ $19,200 lease money

- $   28,741 monthly PI mortgage costs

- $   2,000 maintenance costs

+ $ 9600 in money not spent on kids apartment rent

- $  4,000  taxes and insurance

= $-17,941

So you end up $17k in the hole all in all, but we’ll make some of that up in tax benefits.  To really make the numbers work, you need to get more rent, make smarter improvements to raise the value of the house, or have greater appreciation.  What will you pay for your kid to rent a place or live in the dorms for 2 years?

At 5 years, with the same scenario (your kid moves out after 2 years and you rent the whole house out for $1200), you end up $10k behind, but again, that’s before some nice tax benefits.  If we get closer to 5% appreciation per year, at 5 years, you end up with $8k in your pocket after all your costs, plus the tax breaks.

If you can find the right deal, and have a good plan for the house and the amount of time you will own it, then it can make a lot of sense to buy an investment property that your university student lives in while attending college.  Just don’t expect to buy a typical house, not improve it, and make a huge profit when you sell it in 2 years.  We’re not in that market anymore.

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