Kiddie Condos

January 14, 2005

Many people are trying to find profitable ways to invest outside of the stock market. For those with college students, buying a condominium can be a lucrative short-term investment and a welcome alternative to writing the landlord a check every month.
"More and more frequently, people are looking at the option of buying housing for their son or daughter while they are in school, as opposed to paying rent," says Charles Delaney, associate professor of finance, insurance and real estate in the Hankamer School of Business. These housing investments, often called "kiddie condos," may offer several benefits to parents who purchase them and the students who live in them.
The greatest advantage is avoiding rent, Delaney says. "You have an asset that potentially can appreciate in value, that can provide you with benefits in the form of tax depreciation, mortgage interest and property tax write-offs." In a three-bedroom condo, only one-third of the unit is considered personal living space; the other two-thirds can be depreciated if rented out, which may be deducted on the owner's federal taxes, he says. 
Smart buyers analyze the market trends. In Waco, for instance, because of additional available housing on and off campus and a steady enrollment at Baylor, housing prices are falling. "That's a double-edged sword," Delaney says. "On the one hand, it's good for prospective buyers because as these values start falling, they can buy these condos at a better price. The question is, 'What are market trends going to be in four years when I try to sell this condo?'" 
If prices fall, buyers could break even or lose money when they sell at graduation time. If prices rise, parents may be able to recoup their investment and a little extra in the form of capital appreciation, Delaney says. 
Some quick math shows how this would work. The price of an average three-bedroom condo near the Baylor campus is about $150,000; rent is $1,500 a month, or $72,000 over four years. If two of the rooms are rented out at $500 a month each ($48,000 over four years), the income from tenants may equal the extra association, property tax and maintenance fees associated with owning a condo. "If you structure the deal well, it can pay for itself," Delaney says. If the price of that condo dropped up to 20 percent during that time, parents still would be ahead financially. 
Another way to maximize a condo purchase is to pay the child/tenant a salary for performing the duties of a property manager -- a tax-deductible expense. Although there are extra costs related to buying a condo such as mortgage payments, repairs, maintenance and association fees that should be evaluated before a purchase, Delaney says the tax benefits often outweigh them. Two-thirds of those fees and maintenance expenses also are tax-deductible if two of the bedrooms are rented out. 
An investment of this type offers more than just financial benefits. Parents and students also gain peace of mind, Delaney says. "To a certain extent, a kiddie condo is a more stable environment. The son or daughter is going to know they have a place to live through college," he says. "Renting is a hassle you don't have to deal with."