If your college student is getting ready to live off campus, buying a rental property or condo may be an option worth considering. Of course, with high rental costs and the opportunity to create a tax shelter for your hard earned money, this is a strategy many parents have found to be beneficial.
An investment property is an excellent opportunity to put your money to work for you, and may even help offset some of the income invested into your child’s education. However, there are various factors you should consider before making any final decisions.
1. Long term goals – Although appreciation rates may be favorable, it is important to discern how long you intend to keep the property. Within a few years your son or daughter will be finished with their education, and you will still be left with a property to care for.
Some individuals would rather keep the home as an investment and continue to rent the property out to new students. Additionally, this may be a place that you will plan to use for future visits or football games long after your child is done with school.
The problem with solely relying on strong appreciation rates is that you may not be able to command the price you desire a few years from now. So unless you are prepared to hold onto the property for a longer time period to make the investment worthwhile, this may be something worth reconsidering.
2. Maintenance & management – Next, purchasing a rental property is a big investment, so you want to ensure that your property is kept in good condition. Although your son or daughter may be extremely reliable, you may need to consider other friends or roommates that will have to share in on the rent.
Are you comfortable with trusting in 2 or more college students to watch after your property? Also, it may be required to pay a property manager (especially once your child graduates) to help manage the home if you live at a distance.
Finally, it will be important that you can find reliable contractors to take care of any maintenance hassles and ensure that the property remains in tip top shape.
3. Cash flow & taxes – After carefully reviewing the first 2 points, you may still feel that a rental property for your student is well worth the investment. If this is the case, then there are a few things you must know about finances.
First of all, be sure that you are buying smart. Work with a qualified agent who knows the area and can help direct you to the best deals. They will be able to help you figure out projected rental income and appreciation rates as well.
After factoring in taxes, insurance, maintenance, associate fees, your mortgage, etc. you will want to make sure that you have some cash flow for extra profit and to cover unexpected problems that may arise down the road.
This will also make your investment pay off more in the long run and can free you up to invest in future properties as well. For those who are married, you must be aware that there is a limit to how many itemized deductions you can write off if your gross income exceeds approximately $240K.
Therefore, though it is possible that you can include the taxes and mortgage interest as deductions on your second property, this is something you will still need to review with a tax professional.
Finally, be aware that the property can also be susceptible to capital gains tax once you are ready to sell. Either way, you will still be eligible for some depreciation on your home and to write off a portion of your maintenance and utilities, so there are always good reasons to buy.
All in all, buying a rental property for your college student can be a wise investment for you and your family. We strongly advise that you take time to sit down with your financial advisor and/or tax pro to discuss the options available to you. For further guidance on locating a property, please contact us using the information listed above.
One of the most important aspects to investing in real estate is how you finance your property. Although all other factors may look favorable, having no or little access to good terms could be a deal breaker. Therefore, before doing anything else, it is important that you begin to line up some potential sources and explore what options are available to you.
There are various ways to start investing in homes, and each source has its own set of strengths and weaknesses. Your exit strategy, the condition of the property and various other factors will play a part in how you may be able to finance each specific investment. So let’s explore 3 of these top sources:
If one of your strategies is to buy, hold and rent, then using banks may be a safe bet for some of your investment properties. This is a source that can be considered up front when a property is in considerably good condition. Most banks will not support the financing of a fixer upper until repairs are completed, due to the amount of risk involved.
Therefore, you may need to spend a little extra time searching for those diamonds in the rough. Traditional financing is extremely favorable, because you can usually get some of the best interest rates, terms and closing costs when approved. The process certainly will take longer than using cash buyers or hard money lending for example, but it can be worth the wait.
Hard Money Lenders
For those who will either be flipping a property or would need to conduct significant repairs in order to refinance may want to consider building a relationship with a hard money lender. It is advisable to shop around to at least 2 or 3 in your area when possible to see which terms you find to be most favorable.
These loans will come with much higher interest rates (typically 12% or more), points and some type of balloon payment near the end of the agreement. Hard money may be offered for 6 months to a year while the repairs are made, until the home is ready to be sold or refinanced for better rates.
It is important that investors are prepared to either rent out or lease-to-own their property if perhaps the home is unable to sell on the market quickly enough. Also, newbie investors beware! Flipping houses can be more difficult that it may seem, and you must have a solid plan in place so that you are not forced into a tight financial situation.
Before ever considering this option, it is strongly encouraged that you talk with a local attorney that specializes in SEC policies. Laws can vary on a state by state basis, so it is important that you have a good understand of those guidelines before building any relationships with private lenders.
However, when done correctly this can be a powerful resource available to you, that doesn’t require credit checks or adhering to all the strict guidelines enforced on mortgage companies. Private lenders can be nearly anyone who has access to the necessary funds for your purchase (i.e. your doctor, friends, family, or investor club).
Typically private lenders can receive anywhere from around 9% and up for their investment, which is secured by the property and can be a great investment for them based on today’s rates. Loans can be negotiated on a property by property basis so that each investor only funds the deals that they are comfortable with.
With these 3 examples alone, you may have all that is needed to start funding real estate deals. Therefore, take action now and begin building the relationships and networks of lenders that you will need in order to start investing.
Are you in need of referrals? Contact us today to access a list of preferred lenders that we will recommend for your investment business.