But some Canadians have decided to turn this financial burden into an opportunity. It’s becoming more and more popular for parents to purchase property in college and university towns, and enter the landlord business with their children as their first clients.
Adam Koven, a real estate agent in Kingston, Ont., says that between 10% and 20% of all the sales he makes in the area around Queen’s University are to parents purchasing property for their kids to live in. For the new condos sprouting up around the city, that number is much higher. “I would say over half the ones that I’ve bought or sold in [a condo building], there has been a student that was occupying it through parents or a parent buying for a student.” As developers look to cash in on the high demand for real estate nears campuses, parents seem to be happy to buy.
“When the rent being paid on an annual basis for two children to attend the same university can reach upwards of $16,000 and a five-bedroom investment property could bring in approximately $24,000 [with additional student renters], it seems like a no brainer,” says Alison Tigert, a real estate agent in Toronto. “Now, after taxes have been paid and maintenance of the property, the profits might not be as lucrative, but you’re saving the original $16,000 you’d otherwise be paying a landlord and getting nothing back in return.”
If you have enough money saved for a solid down payment, then the math makes sense. You can rent out the extra rooms in the property while your child is at school, earn enough rent to cover the mortgage—ideally with a little left over—and sell the property at a higher price point either when your child leaves school or when you’re ready to move on.
But there are a lot of responsibilities that come with purchasing a property for your child to live in, and whether this makes sense for you and your family depends on many factors. Janet Gray, a Fee for Service Financial Planner and Money Coach, says the most important thing to keep in mind is cash flow. “If you’re paying rent of $1,500, you’re pretty sure you’re only paying $1,500. If you are paying a $1,500 mortgage payment for example, then you’re also paying property tax as well, you pay maybe for a parking space in the building, you’re also paying for unexpected repairs that might need to be done, condo fees if it’s a condo.”
There are a lot of additional costs associated with owning a rental property that you don’t need to worry about as a tenant, and if you’re not prepared for them, they have put a lot of stress on your finances. “If it’s in the short term then there’s liquidity challenges. You could have some of your cash tied up in real estate assets that you might not have access to in the short term, so again it relates to cash flow.” Do the math (or ask a financial advisor or accountant to crunch the numbers on your behalf) to see whether you can comfortably cover the regular costs associated with buying a property versus paying rent on behalf of your child.
Additionally, buying a rental property comes with tax implications. As it will not be your primary residence as the purchaser, you’ll be looking at forking over capital gains tax—that’s calculated at your marginal rate on 50% of any appreciation in the property’s value when you sell it. So, for example, if you sell the property for $100,000 more than you paid, tax will be due on 50% of that amount, or $50,000.
In addition, there are ways to minimize that tax burden.