By: John Wasik
August 10, 2012
(Reuters) - Friends of mine recently bought a condo for their son to live in while he's in college. Most people simply bite the bullet and pay for room and board, but they were able to save some money.
Several compelling reasons make this a good time to buy if you're facing hefty living costs in a college town.
There are still bargains out there for long-term investors. Mortgage rates have risen over the past three weeks, according to Freddie Mac's most recent weekly survey. If the economy heats up, rates will rise even more and property prices will follow, making it a good time to buy real estate in the trough of the market.
The other main reason is that demographics are on your side in a college town. Generation Y, or "millennials" born since 1980, are 70 million strong - the largest generation since the baby boom. They show no signs of avoiding college, even if the overall economy remains sluggish.
If you buy a property, you will have the option to rent it or sell it and recoup your equity after your child graduates. Given that the housing market is recovering, you might even make a profit.
Here's how the math typically works:
Let's say your child goes to the University of Michigan, one of the country's largest public colleges. The institution lists its undergraduate room and board bill for the 2012-2013 academic year at $9,752. That's in addition to roughly $13,000 for tuition for freshmen if you're a Michigan resident.
Using the Zillow real estate search engine, I found a two-bedroom, two-bath condo near the Ann Arbor campus that lists for $110,000. As an investment, this is already a pretty good deal since the original 2003 selling price was $140,000. You may even be able to get a better price in other locations, if the property has been on the market for a long time and the seller is motivated.
Assuming you have excellent credit and can get a 30-year, fixed-rate mortgage at the ultra-low rate of 3.45 percent with a 20 percent down payment, your monthly cost would be $610, which includes $393 for principal and interest on the mortgage; $159 for taxes and $59 for homeowner's insurance. (This is Zillow's estimate; the actual rate you obtain varies).
Including the monthly condo fee of $281, you'd be paying $10,692 a year for the unit, or roughly $8,000 for nine months. If your kid returns home for the summer or travels elsewhere, you can rent out the space to a summer school student. For further cost savings, if the place is big enough - and it's not hard to be compared with the typical dorm room - you can defray costs with a roommate. You'd also be able to reap a mortgage-interest deduction and write off the taxes on the unit.
Of course, with property, you'll also need to cover ongoing maintenance expenses, utilities and taxes. Most condo fees cover some of that (exteriors and water bills), but it pays to look at the history of the complex. If the condo association needs to raise its assessment to cover overdue or needed repairs - such as a roof - you'll get hit with an additional fee.
Before you leap, look at the tax history of the unit. Has it been reassessed lately? In depressed housing markets, property taxes should drop, but not always. In the case of the Ann Arbor unit, tax assessments fell about 9 percent last year and 16 percent in 2009.
So that's the "room" part of the equation. What about the "board"? Compared with on-campus living, the greatest savings are available if your student is fairly frugal, cooks for himself and doesn't buy a meal plan from the college.
In the final tally, you need to look at the after-tax costs of ownership for your income bracket and project them over four years. If you're relying solely on the property appreciating for the investment to make sense, it may not work for you. Many markets will take years to recover in terms of resale value. If you plan to hold onto the property, it's much simpler and you only need to know if you "net out" after all expenses are subtracted from your rent income.
Don't want to buy a property, but still want to invest in student housing? Funds that invest in Real Estate Investment Trusts sidestep the issue of directly owning and managing a campus property. American Campus Communities, a publicly traded REIT, owns nearly $3 billion in student housing at more than 173 colleges across the country. They also manage and develop student residence units. Another option is the Education Realty Trust REIT, which owns housing communities in 19 states. It pays a 3.5 percent yield.
For my friends, there's another factor: They like the idea of their son being in a comfortable condo with plenty of room. Sometimes a parental return on investment can't be measured in dollars.