As college students prepare for the fall semester, parents are getting ready to move them into a dorm or off-campus apartment. The Ottawa Citizen reports that some parents with kids attending college in cities like Montreal, Toronto and New York choose to buy a property (condos in some cities or houses in more suburban areas) and rent it to their college kids. Getting parents more involved in the process gives them more control over their kids’ living situation (no shady landlords taking advantage of students, because now you’re the landlord!) and help ensure that students live in a safe area. It could also mean rental income if the kid has a few friends as roommates.
However, since you as the buyer likely won’t be occupying the property, the financing process is a bit different than taking out a mortgage on a primary residence. Here’s what you need to know:
- For a property that is not owner-occupied, most lenders will require a minimum down payment of 20 per cent. For owner-occupied homes, you’d only have to put down a minimum of 5 per cent, although some buyers of primary residences choose to put down more to avoid mortgage default insurance.
- If you’re renting out other rooms to your kids’ friends, vet those tenants just as you would a regular tenant. This helps set the expectation that you’re a landlord, not just so-and-so’s parent, who expects them to take good care of the property and pay rent on time. Rental offsets (the amount of rent the lender will add to your income when evaluating you for a mortgage) are much lower than they’ve been in the past, so you’ll need strong income to qualify for a mortgage on a rental property.
- Consider what happens when your student graduates. If you have other kids who plan to attend the same university, they could live in the property later on. If you decide to sell the property after one child graduates, keep it mind that it may not have appreciated enough in three or four year to cover closing costs and leave you with a decent return on your investment. If the property is in a desirable area near the university and your rent covers most of your costs (mortgage, property taxes, insurance, etc.), it could make sense to keep it as an investment and rent it out to professors or other students.
Before you take on this additional responsibility, run the numbers and compare it to the cost of your child living on campus or in a rental owned by someone else. Some parents have the desire to purchase an investment property and become landlords, while others simply don’t have the cash and prefer their children to live at home or in more temporary housing.