The number of homes purchased as second residences and as rentals continues to be a greater percentage of the total housing picture. For parents of students headed off to college, back-to-school often means shopping for clothes and off-campus shelter.
In a recent column, we addressed the possibility of researching homes in a college town as an alternative to dormitory living. From a tax standpoint, the arrangement could either be a second home or an investment property. Typically, the student manages the rental investment while mom and dad reap the tax benefits and appreciation that come from owning a rental home.
Often the venture won’t work because some buildings near schools are too expensive for the numbers to make it worthwhile. Also, there is the initial problem of handling the down payment and monthly expenses in addition to skyrocketing tuition fees. However, there are “doable” areas that continue to appreciate, bringing more interest from parent-investors. With the stock market now more of an “iffy” option for many folks, a rental in a college town has become more appealing.
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 do not have children, or feel they are not mature enough to head up a dorm-alternative household, there are still attractive rental possibilities for your potential property that do not include underclassmen seeking the next “Animal House.”
The number of visiting professors to college campuses always is underestimated, as are the number of staffers (secretaries, security, catering, librarians) who often are terrific rental-lease prospects. Notes to human resource representatives have worked wonders in landing mature renters, as have inquiries posted in faculty lounges and on-campus faculty living areas. Graduate students (some married) also form a significant, yet untargeted, renter pool. Sometimes, professors seek alternative housing for highly coveted students.
For example, several years ago, the dean of the Institute for Theological Studies at Seattle University was trying to locate a group home for a number of his graduate students. Several of his applicants were former nuns relocating from other states. Needless to say, the women were not eager to occupy rooms of an undergraduate high-rise dorm dominated by college freshmen.
The dean contacted an investor friend whose wife was an associate on the Seattle University faculty. The investor did not own property in the area but told the dean he would see what might be for sale. A quick drive through the area revealed no “for sale” signs, so the investor copied down the addresses of several large houses within a four-block walk from campus. Today, the investor would have been able to enter the addresses into the county’s real property database, or other property Web sites, to determine the owner and tax assessment. Then, however, he had to make a trip to the county treasurer’s office to determine the owners’ names and mailing addresses.
The investor found a willing seller who not only would make the home available so that the former nuns could occupy the house in time for the fall term, but the owner also agreed to provide seller financing. The arrangement worked for all parties involved — the dean used the example as a recruiting tool; the former nuns (none of whom owned a car) found affordable housing within walking distance from campus; the investor secured an appreciating asset while the nuns covered his monthly housing costs; and the seller got a quick, clean sale.
What made the deal run smoothly was the investor’s ability to meet and communicate with the eventual seller the intent of the rental. People will often listen when they hear that former nuns need a place to live.
If you want to invest in a college rental yet would prefer not to rent to undergrads, take a day and meet some of the department heads and other resource officials on campus. There could be a group that fills the investment property you would like to buy.
Tom Kelly’s new book “Cashing In on a Second Home in Mexico: How to Buy, Sell and Profit from Property South of the Border” was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on Amazon.com and on tomkelly.com. Tom can be reached at firstname.lastname@example.org.