For parents who are helping their children through university or college, cost of housing is a shockingly large addition to an already hefty tuition bill. Residence costs can range from $6,000 without a meal plan to $15,000 all-in. Off-campus rental properties can cost anywhere from $450 to $2,000-plus a month. Together, the outlay for tuition and housing over a four-year university degree can easily creep up to over $50,000.
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.
A university or college accommodation for your child can be a hard purchase to get right, but with the right planning, it can pay off. When it comes to the property itself, Koven believes that, although it’s a little cliché, where you buy is the most important factor. “Get to know the market, get to know the area and how easy it is to rent. Everyone jokes, but it’s true, the top three things in investment property are location, location, location.” Koven believes that even if you can get a property for a steal, if you can’t rent it, you won’t be making any kind of profit on it.
Tigert adds that almost as important as location is, “condition, condition, condition”—what the property looks like and how well it’ been kept, matters. “Landlords may think that students don’t have high standards,” she says, “but in the long run, a house in better overall condition will rent faster, more easily and get a higher rent than something that’s falling down.”
Adding a regular cleaning service to a property rental is a trend that’s becoming more popular and, Tigert thinks, quite savvy. Although it may marginally reduce profits in the short run, it pays off over time, she says. Especially if you live too far away to check on the property, regular visits from the cleaning service provide “added security that rules are followed, and the property is being maintained both from the tenant’s perspective and the landlord’s,” Tigert says.
Although it may be a smart investment decision, buying a property for your child isn’t the easy way out. It’s key to ensure that your child is ready to take on the responsibility of managing the property, and can be the heavy when other renters step out of line. And it’s equally important that you are prepared to service the property or cover the extra cost of property management services to handle that for you. You need to be confident the purchase works within your overall financial plan as an investment. If it does, you may be saving tens of thousands of dollars in rent, and earning yourself a pretty return after you sell the property.
MORE ABOUT REAL ESTATE:
- Selling your home to your kids—for $1
- Does it make sense to sell two condos to buy one pricier home?
- Should you buy real estate just to stay in the market?
- Capital gains surprises on the sale of your co-owned cottage