Firstly, there have been other posts within the past few months that touch on this particular subject matter, however I will go into more detail to outline why this resource may be very worthy of consideration for parents with college bound children. I was first exposed to this concept back in the late 1970's when my wife and I sold a home located about a mile from the Ball State University Campus in Muncie, Indiana. Our buyers used this resource to purchase our home for their college bound son. If I am not mistaken, they had another child that was also college bound within the next 2-3 years. Absolutely a brilliant strategy!
Without question, college and career planning is one of the most difficult issues for most American families to deal with. Like many things in life, the cost of a college education has soared over the past few years. Even if your child is fortunate enough to obtain scholarship assistance paying for their education can still be out of reach for many families.
Annual tuition and fees can range all over the board depending on the College or University, whether it is public (in-state, out-of-state) or private. Probably $10,000 to $30,000+ annually. If your child has obtained scholarship(s) you are further ahead than most American families. Tuition and fees, for the most part, are going to be what they are going to be. Housing expense will be the primary expense that may be more controllable for you.
Housing expense will range all over the board as well. For discussion and illustration purposes in this post I will use $6000 a school year or annualized...$500 monthly. Quite often the school year will be nine months. Other numbers or calculations will be rounded to facilitate discussion.
The whole point of this post is to generate thought on your part on how you may be able to use a FHA "Kiddie Condo" loan as a resource to make your childs' college education more financially palatable or even possible for you to manage. The child/student could obtain a FHA loan with the parent(s) signing as non-occupant co-borrowers. The following example or scenario is presented. You can substitute your own numbers to any of this based on your own research.
Single Family 3/2 home, purchase price $160,000, interest rate of 6.25% fixed for 30 years, 2.25% down payment. A calculation of 5% of purchase price for total required investment (down payment and settlement costs) or $8000. This will obviously vary somewhat based on the typical costs for the area.
Using the above terms the monthly housing expense is $950 principle and interest, estimated $350 for taxes, insurance and mortgage insurance premium for a total of $1300 monthly piti. Since your child will not be in dormitory housing we will add $300 monthly for utilities bringing the total monthly housing cost to $1600 a month or $19,200 on an annualized basis. Yes, quite a chunk of change! But let's do a stubby pencil drill and tweak the numbers to further explore the possibilities.
In this scenario we are purchasing a three bedroom home which would house from 3 to 6 students depending on how you choose to set up your concept. Let's use 5 (your child and 4 tenant students) which would probably give your child a bedroom/study area to themselves. Let's assume that you set the student tenant rents at $4800 per year in an effort to attract tenants with the affordability. $4800 x 4 is $19,200 per year in gross rental receipts. This means that you have saved $6000 a year, $24,000 over the span of a 4 year college degree and your child has lived there for free. Not to shabby....right? Right.....But wait....it gets even better (just like that TV offer that encourages you to break out that credit card....right now!)
Let's review your accomplishments which can be any one thing or any combination of things. Your child has lived there for free, you have used this savings to offset the cost of tuition and fees, you have eliminated or reduced the amount of student loans required to get your child through college, etc, etc.,.....and you have increased the the equity position in the home. First by approximately $8000 in principle reduction and using a modest appreciation rate of 4% year over year an additional $25,000+/- for a total of $33,000. You have helped your child to start a credit record which will pay many dividends down the road, So what now:
- Sell and recoup funds
- Payoff student loans
- Sell and contribute toward graduate school
- Sell and contribute to your child's purchase of their first "real" home to start of their new life and career
- Keep as rental investment property to further fund graduate school
- Follow-on college bound children to occupy and continue the savings and equity building
- Whatever else is important to you and your child....dare to imagine!
At the end of the day there is nothing absolutely new about this concept....but focus can be lost or information doesn't always continue to flow steadily....or it just never crosses the mind!
FHA has made some revisions that makes it more "User Friendly" and easier for Sellers to accept a purchase offer from a buyer looking to purchase with a FHA Loan. For more information check my post: Its Time to Re-visit an Old Friend...Hi Mr FHA..
So as a consumer with college bound children...explore these possibilities! As a Real Estate professional or a mortgage loan officer did you really know and understand the "Kiddie Condo" concept? Is it a tool or resource that you can use to help your clients? Could you more readily market yourself promoting this product and concept?
What say you?
Copyright 2007, Ron Withers, All Rights Reserved
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