Kiddy Condo or how I paid for my room at college

OK, there are people that will say that I stole this from Jeff Belonger (http://activerain.com/blogsview/600662/-Kiddie-Condo-FHA) and they would be absolutely right. However, Jeff doesn't post to the Oregon sites and this information is just too good not to forward. I have done this in the past and it really works. Thanks Jeff for your hard work on this information.

Are you always looking for a great investment?  Do you have any kids going to college or in college, especially the University of Oregon?  Well, don't let the picture to your right scare you. Just as many of us can relate to the movie Animal House and James Belushi, especially in Eugene where Animal House was filmed, we all know that is not what college is about. But, it is darned expensive. How about another way to help pay for your kids education?

Let's talk about a Kiddy Condo loan. (Please note, the lenders don't like this term and I don't use it with them.) It is your basic FHA loan that allows for a non-occupant co-borrower to help someone to purchase a home. The co-borrowers will not be living in the home and must be a family member/relative.  Why the term condo?  Probably because your child will end up with roommates.  A 3 or 4 bedroom house would be a much better investment than an actual condo, in my opinion, especially since you can usually get into the home with little or no money out of pocket. Again, I will explain this below.

 As mentioned, college can be very expensive. I am going to use some basic numbers that won't apply in every college town or will be the same expense for a dorm room or an apartment. But let's assume that it costs your kid $700 a month to rent. And a cash deposit of $1,400. In my scenario below, I will show that the average student is in school 9 months out of the year. If they take summer classes, the numbers are actually better.

Okay, now you find a home that is worth $200,000 and that has 4 bedrooms. The taxes are going to be $2,400 a year and homeowners insurance is going to be about $350 a year. (Keep in mind, every region or area is different, taxes, insurance and rent could be significantly different than this example.) FHA's minimum cash-requirement is 3%. There are ways to basically get a buyer into a home with no money out of pocket, such as Down Payment Assistance programs (DPAs...see my previous post on these at http://activerain.com/blogsview/569152/Down-Payment-Assistance-Programs ) even on FHA Loans. But again, each buyer is different, depending on credit scores, assets, income, and what you can get from the seller as a seller contribution and possibly from a DPA. The cities of Eugene and Springfield also offer home buyer assistance programs, but Eugene requires us to count the co-buyer's income. Springfield doesn't.

Qualifications for this loan:  The college student needs to be on the loan as a primary residence in order for this to work. Otherwise, if the parents just bought it, it would be classified as an investment property with 10% or more down and a much higher rate. The borrower, aka student, doesn't need a job but it is helpful, as long as the parents can qualify. But the borrower (student) does need a few pieces of credit. You can even use non-traditional pieces of credit such as car insurance and cell phone. But they still don't need a credit score. For all intents and purpose, the non-occupant co-borrowers should have a 640 credit scores.

** The seller help was not included in monies needed because it would not be factored in this example. It's just from the seller to complete the transaction. **

 As mentioned above, we were buying a 4 bedroom house. If you take the rent payment times 4, times 9 months, that would give you the max rent collected for a 12 month period. (Assuming that this property won't be used during the summer). I figured roommates wouldn't be willing to pay as much to share the house as your child would, so I reduced that by $100 each to make a fair comparison.

There are some other factors to think about, in order to make sure that this might be a good financial decision on your part. You may be able to write off your interest and taxes that you are paying in the mortgage. Let's just assume that you fall in the 30% tax bracket. Your total interest paid in the first year will be $12,832, which means you will be able to write off about $3,849 plus an additional $720 on the taxes. You are also paying down your principal by $2,217 in the first year. Just in the first year, you saved:

If you add up all three numbers you would be saving $6,892 the first year. It cost you $6,000 to get into the property. Let's just say for arguments sake that your kid stays in this house for 3 years, because many colleges or universities say that your kid has to stay in campus housing for the first year. That would mean that you would save $20,676.  And after you deduct what it cost you to buy the home, your profit in 3 years was $14,676. Even if you took 10% out of the equation for other expenses, you would still make $13,208 on your investment. Not bad for a $6,000 invest and a good return in 3 years. (Also, I didn't include appreciation into the figures, typically, 2% to 3% a year, depending on location.)

Overall, the sky's the limit. But let's look at the positives:

• The savings could be used to allow your kid to live rent free, which could lower any student loans needed.
• Could eliminate a job on the side while at school.
• The purchase of this property will also give your kid good credit, establishing credit for the future.
• If your kid took summer classes, you could still live rent free. If any of the other students took summer classes, you could get creative and rent to them in the summer for half price, knowing that you already made money during the school year.
• If your kid was going to take graduate classes at the same school, this would add to your overall savings and expenses.
• You could still keep this property after your kid graduated and use it as extra income.
• Lastly, you could sell the property after your kid graduates, usually for a profit also.

 FYI.......  Even though this program is sometimes called a Kiddy Condo program and the example was used as buying a home with your kid(s), this program can be done anywhere with the help of a family member or relative. Basically having them as a non-occupant co-borrower to help purchase or refinance your home, no matter where it is located.

***** Anything tax related that I disclosed in this post is only of my opinion and knowledge of mortgage programs. For exact facts and consultations, please speak to a tax accountant (CPA) and a financial planner for more professional advice.*****