If you are paying for rent on an apartment, condo or home for your child to live in during their 4 years of college and based on a rental payment of $1,500 per month, the total cost of rent over that four year period would be in the ball park of $72,000. That cost could increase if you would be responsible for the utility bills as well. The pros of this situation would be that any type of maintenance or repairs would be done by the owner of the property and the worst case scenario is that you would forfeit your security deposit on the rental to repair damages. The cons of this situation would be that after you leave this rental once your child has completed college, you have basically spent $72,000.00 with no way to recoup those monies spent aside from possibly getting a tax credit each year.
On the other side of the fence is buying a home for your child over their 4 years of college via a mortgage or cash purchase. Let’s take a look at a mortgage at $180,000, what a mortgage payment would cost per month at 6%, and what would you spend in a mortgage payment over those 4 years. In this case, if the annual interest rate is 6% assuming a standard 30-year mortgage (360 months), over four years, the monthly mortgage payment on a $180,000 loan at a 6% interest rate over 30 years would be approximately $1,079.19. Over four years, the total amount spent on a mortgage payment would be approximately $51,801.17. That already is a savings of $20,198.83 minus any repairs and utility costs over that time frame. Another option in this scenario is that another college friend / student of your child could possibly live with, be a roommate, and rent from you at which even at $500.00 per month would cut your mortgage payment in half.
So now the 4 years of college are completed, what are my options with this home that we have purchased? Well, there are a few choices to think about and make here. As the homeowner you could resell the home or keep the home as an investment opportunity to rent to others. Let’s take a look to see what it looks like if you decided to sell the home:
The value of a $180,000 home when you made your purchase appreciating at modest 2% per year would be approximately $194,837.79 after a four year period, so you have built up a little equity which is great. Over 4 years, at a monthly payment of approximately $1,079.19, you would have spent about $51,801.17 on mortgage payments, so you have already saved approximately $20,000.00. Also, owning the home would have offered tax benefits, such as deductions on mortgage interest and property taxes. This can effectively reduce the cost of owning. Enough about savings, what will it cost me to sell the home?
The costs involved in selling a home are real estate agent fees, closing costs, state & local taxes, and possibly a capital gains tax, which can reduce the profit from the sale. To understand the financial advantage, let’s compare the net gain or loss from owning the home (considering appreciation and equity build-up, minus mortgage payments and estimated selling costs) against the total rent paid over the same period.
Let’s assume typical selling costs (including real estate agent fees and other closing costs) are about 6% of the home’s sale value. We’ll then compare this to the total rent paid.
The financial comparison yields the following results:
What we know is that the total rent paid over 4 Years would amount to you spending at a minimum of $72,000, not including any utilities.
In comparison, the financial advantage in buying and then selling the home is more advantageous than renting, as the net gain from owning and selling the home is significantly higher than the total of which would have been paid out in rent. In my State of West Virginia, if you were to sell the home at a modest appreciation of 2% over 4 years it would sell for approximately $195,000. Your approximate costs to sell would be in the ball park of $13,000.00 for in state sellers to $18,000.00 for out of state sellers. So the bottom line is that an in state seller would be at approximately 182K minus the mortgage payoff and an out of state seller would clear approximately $177K minus the mortgage payoff. This would present the seller with an opportunity to break even or walk away with a little bit of equity. The alternative with just renting is $72,000 spent and gone.
The second scenario would be to keep the home, town-home, or condo as a rental unit. In this case, you could continue to collect rent on the property for as long as you would like to keep it. Keep in mind, in or out of state, a good property manager would be wise to hire to rent, do background checks on possible renters, look after, maintain, and collect the rent for you in your absence. Most property management fees vary, but 10% of the monthly rent and a start-up fee is a pretty good ball park number for a property manager for hire. Contracts with a property manager will vary, so read over your contract carefully and choose wisely to get the perfect property manager for you and your situation. In most case scenarios, the longer you keep it as a rental unit, the more equity you will bring to the home over the years. Make sure to keep up with any upgrades and possible repairs to keep the home in good shape to get the very best possible equity once you do choose to sell. The pro’s in this scenario are that you could create a nice passive income. The con’s here would be and not limited to the costs to keep maintaining the property, possible higher local taxes on the property, and keeping the property up to code.
It’s important to remember that this analysis simplifies many variables and does not include all potential costs and benefits (such as tax benefits, maintenance costs, possible capital gains tax, changes in market conditions, or personal circumstances). These factors should also be considered and you should consult with a real estate professional in your area for closer analysis and guidance.