Get Your Parents To Buy You a House!

To most parents, buying a house for their 18-20 year old son or daughter to manage as a rental property as they go through school seems like a somewhat crazy proposal.  After all, most young adults aren’t exactly known for being responsible and organized – two key traits for a successful property manager.  From the other side of the equation, taking care of your own house can be more than an 18 year old can handle and can lead to added stress during a time where life can already be stressful, and when most people expect to enjoy their newfound freedom a little bit.  So why, despite all of these reasons not to do a deal like this can it be a great idea?

Equity Is King

First of all, it is a great deal in terms of building your own equity vs paying someone else rent.  If you are going to move out of the house to go to school you will be paying rent to the university through your residence fees, or to a landlord to rent an apartment or house.  If you pay your parents some rent every month, they can use your rental payments to pay off the mortgage and build equity a little bit at a time.  If a family has multiple students that can live in the same house while going to school, this makes even more sense.  The average student that lives away from home for their degree will likely pay about $30,000 in rent during that time, rather than pay two or more separate rents for each of your children to fill the pockets of other landlords, filling your own pockets can make a lot sense for parents.

Finding the Right Renters

Ideally, if parents buy their child or children a place to live in as they go through school, the child would have some friends that they absolutely trust to come live with them to pay rent as well.  A four-bedroom house with everyone pitching in $400 or so of rent can make a pretty nice mortgage payment!  Of course, as in any rental adventure, the key is to find renters that won’t be too much of a hassle and cause a bunch of problems.  Again, most people probably wouldn’t recommend the student crowd as the ideal renter demographic.  This is where the balance of responsibility, knowing your child, and maybe even knowing their friends comes into play a little bit.  I’ve seen this work for several different groups of students, and it’s amazing how much more respectful young adults can be compared to the average stereotype when they personally know the owner of the house, and have to answer to their friend if anything gets broken.  On the odd chance that something does get broken (let’s be honest, something will probably happen) it can actually be a positive thing for the long-term if the parents/landlords simply force their child and their friends to learn to fix whatever broke.  My buddies learned how to re-plaster, do a little dry-walling, replace some hardwood flooring, and a dozen other little maintenance things that they now know how to do when they move into their own place.  You can’t tell amateurs did the work, and realistically it was a cheap lesson learned.

A Realistic Case Study

Let’s check out the math behind a theoretical situation where a family with three children attend the same school.  If they buy a 4 bedroom house for $300,000, and amortize the mortgage payments over 25 years (with a standard 20% down payment), and we assume a 3.9% interest rate on a 10 year mortgage, the monthly mortgage  bill would come to about $1250.  Most students will pay $400-$600 per month to live relatively close to campus, so at minimum you have the equivalent of $1600 of cash-flow coming in to offset the mortgage if the siblings could find a fourth person.  Once you calculate in repairs, property tax, and all of that other fun stuff, parents might not make a whole lot of money overall, but they are building some pretty substantial equity instead of paying other landlords (be it a university residence or an apartment owner).

Location, Location, Location

In terms of making a pure real estate purchase, buying a multi-room detached house in a neighborhood that is close to a post-secondary campus is quite safe from what I can tell.  Since there is always such a high demand to rent in these areas, housing prices rarely take a beating, and often appreciate at quite a nice rate.  I think it is likely a pretty safe investment if you consider that most educational institutions have been around for decades and aren’t likely to move anytime soon (this is the key to the house’s value).  If parents what to get into being real landlords and renting out the house on the market after their child is done with school, there will always be a demand there, and a healthy premium for being close to campus is definitely the norm across North America.  I’ve also seen students choose to take over the mortgage from their parents completely (basically as a graduation gift from the parents to their child) after they are done university.  What a great way to give your kid a leg up right?  In my opinion, even if there is a housing correction in your market, being close to a campus is one of the safest places to be.

The Taxman

While buying a rental property isn’t a perfect investment, it’s still pretty good.  Some people will quickly point out that you have to claim the rental money as income at this point.  While this is true, don’t forget to also factor in tax deductions for mortgage interest, property taxes, insurance, and upkeep on a rental property.  The coup de grace as far as taxes go is that parents can actually pay their child a salary to be the “property manager” and that is also tax-deductible.  If parents choose to sell the rental property when their child is no longer attending school, keep in mind that any capital gains you made on what you paid for the house is taxable (unlike any capital gains on your principal residence).  The silver lining if the local real estate market takes a dip and you sell at a loss is that you can use that loss to offset other investment income when it comes to tax time.  There is a bit of a formula to figuring out what your capital gains would be, it takes into account the cost of any upgrades you put into the house (although not maintenance).  Capital gains tax is also taxed at only half of the rate as other income, so it’s usually pretty manageable.

Finally, if you purchase a rental property for your children to live in as they attend school they will never have to worry about moving or where they will live the next year.  They will also never have to deal with a residence advisor they don’t like, or a jerk of a landlord (well… hopefully they won’t consider their landlord a jerk anyway).  That stability is worth something.  There is probably some sort of direct correlation between stability and academic achievement, and that could translate into less dropped courses, more scholarships, and several other positive spin-offs.

As long as your children and their friends don’t trash the place, renting to your own young ones can be a pretty sweet deal.  It has to be the right circumstances for there to enough trust going in each direction, but as long as that is there, parents can build a substantial amount of equity, maybe make a little rental income, and give their kids a low rental rate all at the same time.  Did anyone out there act as a landlord for their kids, or are there any students who were “property managers” on behalf of their parents?  Were there any major pitfalls that you can warn others about?