By Martin Walsh
College costs are continuing to rise, much to the frustration of parents everywhere. In order to combat some of these increases, families are getting creative about their housing options by purchasing a second home as housing for college students. This growing trend might be one to consider making your clients aware of, as college campuses are now higher ground for second-home sales.
Buyers in this market already understand the rationale and are ready-to-go buyers for real estate agents. Buying an on-campus home is a good idea for parents who have kids who are in their senior year of high school and looking forward to college. However, many of these potential clients have not considered this option and instead will spend thousands on campus housing.
From my experience, one of the best ways to make the case for purchasing a second home in a college town is by discussing how it can help cut the rapidly-growing costs of an education. Smart buyers can, in fact, leverage the cost of college to purchase property.
Investing in off-campus housing is appealing. When working with buyers on the fence, it’s important for them to understand that they have an opportunity to avoid the high rental rates in college towns and enjoy some great tax benefits. I also tell them that this can be a long-term rental opportunity, which provides students with a jumpstart on the responsibilities of home ownership.
Some of my buyers have gone into the process with the intention of selling the home once their children have graduated. A popular approach is to obtain a five-year adjustable rate mortgage. Once the mortgage is over, the property is sold. Someone else pays down the equity, and your clients may get some appreciation.
On appreciation alone, it has been possible to get a year or two of tuition during the past few years. And, in towns where property prices are growing, the home could still provide a greater return-on-investment. I’ve noticed, and you may have also, that college towns tend to be less vulnerable to price declines than other areas. But in the current market situation, this investment is about building equity, instead of throwing upwards of $40,000 away on rent.
One way to address the tuition question is to point out that a second home allows students to claim residency. Although it only applies to buyers who are currently out of state, this switches them from out-of-state tuition rates to in-state, saving tens of thousands of dollars.
The real key to making this investment work, however, is getting someone else to pay down the equity. I encourage my buyers to invest in properties with two or three bedrooms, so that a student can bring in other roommates that will pay rent. Parents may not have to pay any rent at all.
Additionally, the property can be retained as a rental after graduation, provide housing for siblings who may attend the same school or even offer a home base for a family to attend sporting events.
Here are a few things to keep in mind as you advise parents looking to purchase second homes in college towns.
Keys to Success
• Know the area. I attended Northwestern University and can tell you all about Evanston.
• Find a great place for the student to live; it’s not just about ownership.
• Get a clear understanding of the rental demand and home values around the campus.
• Watch out for older buildings near campus. Those with “vintage charm” may require work to bring them up to code.
• Buildings with owner associations that don’t allow rentals. When the kids move out, you can’t rent it.
• Rental restrictions. Some buildings will only allow a certain percentage of for-rent units, keeping investors out, but more importantly, preventing student rentals.
Martin Walsh is a sales associate in the Winnetka North office of Coldwell Banker Residential Brokerage. He can be reached at 847.446.4500, or by e-mail at firstname.lastname@example.org.
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