Is buying a condo for your college student the right choice?

If you're the parent of a student looking at colleges or graduate schools, chances are you are all too familiar with the sticker shock of college tuition, room and board.

According to College Board's latest Trends in College Pricing report - even after adjusting for inflation, tuition, fees and room and board at private, four-year undergraduate institutions have increased by more than 10% in the last five years and now average $45,370 a year at the national level. If you happen to be looking at private colleges in and around major cities like Boston and San Francisco, be prepared to pay well above $200,000 over four years, making that national average look like a discount.

Faced with escalating prices, and buoyed by improving real estate markets and low interest rates, a growing number of parents have decided to forego paying dorm room or off campus apartment rental fees - dorms can cost $15,000 or more per year, while rents in high-rent cities such as San Francisco, Boston and New York, can exceed $3,000 a month - in favor of buying a condominium for their son or daughter to live in while at school. For many, this strategy of converting room or rental costs otherwise lost into an investment has proven to be a practical method for building equity, diversifying a portfolio, enjoying tax benefits, and in some cases, capturing profits that offset tuition.

Despite these success stories, determining if it's right for you will depend on many variables. The following are a few important considerations that can help with the decision.

Research the local market. When buying a condo for your college student, remember that it's an investment that you will hold over time. Given the significant differences in housing appreciation rates in markets across the U.S., there is no substitute for doing your homework on local market conditions before making the decision to buy. Just because prices have been increasing in recent years doesn't mean they will continue to do so, and don't forget to factor in the impact of a broker's commission on the sale.

Should you decide that the strategy makes sense, then it's time to start shopping. The old real estate adage "location, location, location" rings true in this case as well. You'll want your student in a safe neighborhood within walking distance to their school or near mass-transit. Will your child want to bring their car to town? If so, is parking available near your property and at what extra cost, if any? Is there a grocery nearby? Food delivery? And what is the proximity to health care providers?

You might expect to pay a premium for a condominium that satisfies these and other requirements because they will also be in demand among other parents with the same idea. The good news is because of this demand, the right choice could pay off when the time comes to either sell or rent after your student graduates.

Consider your timeline. Similar to the broader economy and the stock market, the real estate market is cyclical, and prices rise and fall unexpectedly. For undergraduate students, a window of four to six years is realistic (just 39% off college students obtain a degree within four years). For graduate, law and medical students, the timeframe may be longer along with the likelihood they will remain in the region after graduating. However, there are no guarantees your student will remain at the school for a specific period of time. There's always a possibility he or she could end up transferring to another university or studying abroad for a year.

In light of these uncertainties, the unpredictable nature of the real estate market and the disadvantages forced-sellers face, there's a chance you may need to hold on to the condo for a longer period than anticipated to realize the potential of the investment. Given this prospect it is best to carefully consider the realities of becoming a landlord before taking the plunge.

With real estate comes responsibility. In addition to buying the condo, you'll also need to cover ongoing maintenance expenses, taxed and utilities. In some cases, monthly condo maintenance fees will cover a portion of these expenses.

If there's extra space in the condo, it's likely your own son or daughter will want to add a roommate, which can help further offset expenses to make the strategy more appealing.

Further, providing your child an opportunity to live in housing that was bought as opposed to rented can also help him or her learn how to take on additional responsibility and improve his or her financial literacy by overseeing items such as expenses, maintenance and rental income.

Don't overlook the intricacies of condos. Just as it's important to have a solid grasp of the conditions in the local market, learning as much as you can about how the condo association is run, how responsive the property management company is and what the neighbors are like often goes a long way in avoiding future headaches.

If you're planning to rent out additional rooms in the condo, it's best to let the real estate agent know this in advance to avoid situations and regulations that could create future challenges.

Weigh the tax benefits. There are several favorable tax policies including the mortgage interest deduction, and if rent is collected, the ability to write off operating expenses like utilities, insurance, repairs and more. While attractive, the impact of these tax benefits can be quickly offset by any market depreciation, and therefore it is important not to let the tax tail wag the dog.

As proven time and again by parents in markets across the U.S., converting the money you would pay for college housing into a condo investment can help save money by keeping the costs of room and board in check, while adding diversification to your portfolio along with the chance of enjoying upside gains. However, by no means is the strategy risk-free given the unpredictable movements in housing prices and the unique challenges of becoming an accidental landlord. By weighing as many known and unknown variables ahead of time (not unlike the process of selecting the right college), you'll be able to make the right choice for your family.

Source: Zillow.com "College Towns: Buy vs. Rent" 9/8/2014

The views expressed in the article are those of the author and/or person interviewed and do not necessarily reflect the views of Silicon Valley Bank, a division of First-Citizens Bank and First Citizens BancShares, Inc. The materials on this website are for informational purposes only, are subject to change and do not take into account your particular investment objective, financial situation or need. Since each client’s situation is unique, you should consult your financial advisor and/or tax planning professional before acting on any information provided herein.