The cost of a college degree continues to outpace inflation and shows little sign of slowing. When it comes for paying for college, parents and students should look closely at room and board which can makeup close to half of the annual cost of your four-year degree.
With demand for off-campus rental housing increasing, financial experts are advising clients to consider buying a rental property in college towns to help offset the cost of college.
College housing can easily cost more than the mortgage payment on an investment property so from a financial standpoint, it makes sense to buy a rental property and rent out the extra space.
The first step in buying a college town rental property is to thoroughly research properties in the area. If you are not familiar with the area, I would recommend hiring a real estate agent to help identify potential properties. One tip is to visit the college student union and check out the bulletin boards for an idea on where students are renting and areas to avoid. Generally the closer to campus the higher the rent so you will want to keep this in mind during your search for properties.
Since you are now a landlord you can also take advantage of certain tax deductions such as: maintenance and repairs, loan interest, property and improvements depreciation, taxes, insurance, utilities, travel and vehicle expense, and property management fees. If this is your first rental property, keep good records of every expenditure and hire a CPA to file your taxes, at least for the first year.
Research Landlord Regulations
I strongly recommend you add the following rental property management guides to your library before purchasing your rental property. I manage my own rental property and have found them invaluable!
Renting out your property can be a lot of work, especially when you will be dealing with the higher repair bills and turnover that comes with renting to college students. Don't let this scare you away though. By buying a rental property close to campus that is structurally sound and only needs cosmetic updates, you can own a desirable investment property that will generate income.
One of the best parts of owning a rental property is knowing that your tenants are paying the mortgage for you which ultimately increases the value of the property. By the way, while you're at it, why not charge your child rent and reimburse yourself using funds from your childs 529 college savings plan? As long as your child is attending at least half-time, you can use funds from a 529 to pay for room and board. There is a catch. Off campus room and board can not exceed the cost of room and board that is included in the cost of attendance as calculated by the college.
Tax Implications to Consider
If you gift the property to your child, there will be no stepped-up basis and your child will have to pay the 15% capital gains when they sell the property. In other words, your child's basis will be equal to your basis for the property and not the fair market value at the time of gifting. If your Child later decides to convert the rental property to a primary residence, current tax law would require them to pay a 25% tax on the total depreciation expense that was claimed during the time the property was a rental. The best course of action is to hire a CPA or lawyer that specializes in tax law to advise you on how to handle the gifting or transfer of real estate.