Dorm alternative entails more than cash

Our kids are grown and gone, so we no longer face how to pay tuition and dormitory costs at this time of the year. We know quite well the bill can be stunning. We did invest in a college rental years ago and are now often asked if an off-campus home makes sense.

The investment did appreciate for us, we made a small profit and our kids were more comfortable in a larger space. We made a mistake, however, in allowing one of our sons to be the only one choosing the “house manager” while he spent a year abroad. The roommates did not get along, a couple of them were prone to throw late-night parties and we paid a stiff price on repairing relationships with the neighbors who were wary of our purchase in the first place.

While it’s probably too late to close on a home in time for the fall term, this is the season that many parents conduct preliminary research about the possibilities of off-campus housing. But before you start visiting homes for sale on quaint university streets, take a look down the road. How many years do you expect your child to live there and, if she transferred, would you want to rent to students who are not family members?

Many accountants advise parents with college kids to estimate what home prices will be when the child’s course work is done. Will that market appreciate 5-7 percent a year, or perhaps 30 percent in five years?

If your child is headed to a major college or university, the chances are very good your investment will show at least modest appreciation. Some college towns once thought unrealistic because of sluggish sales prices are experiencing a comeback.

But just how much appreciation is necessary to make the numbers work? One rule of thumb is if the house appreciates as much as the parent’s annual tax bracket, the deal may definitely be worth doing.

For example, if you are being taxed at 25 percent and feel the investment will appreciate 25 percent in the time you hold it, it could be a nice option for everybody involved. While the 25 percent might appear to be a wishful figure, many college towns appreciate faster than the average neighborhood.

Some real estate agents recommend that parents “think condo” rather than single family dwelling. This is to minimize maintenance and upkeep issues while the student is in school – grass cutting, gutter cleaning. What student would prioritize these issues to the top of the list to protect the investment?

Also, there is the initial problem of handling the down payment and monthly expenses in addition to skyrocketing tuition fees. There are areas that continue to zoom, bringing more interest from parent-investors. However, with the stock market now on the uptick, a rental in a college town may have less appeal, especially if the monthly rents do not cover the monthly mortgage payment, taxes and insurance.

A big decision is how to treat the college home as far as Uncle Sam is concerned. It could either be a second home or an investment property. If the property definitely is going to be a rental, you can’t rent to your children and their friends for a song. The IRS will not allow you to show a taxable loss on the property if you personally use it for more than 14 days or 10 percent of the total rental period. “Personal use” includes renting to any relative unless you charge a “fair market rent.”

If the student-partner does not pay rent, depreciation cannot result in a taxable loss. Expenses may be deducted, but not to the point where an actual loss is shown.

If you are going to attempt a college rental, make sure all the details are clarified – especially when family member is involved. In order for the parent-student partnership to work, students must be responsible landlords.

Tom Kelly’s novel “Cold Crossover” is now available in print at bookstores everywhere and in both print and Ebook form from a variety of digital outlets. Follow real estate agent and former basketball coach Ernie Creekmore as investigates the disappearance of his star player on a late-night boat. Check out the national reviews and put “Cold Crossover” on your list.