Is buying student a house better than renting?

Is buying a student a house better than renting?

Garry Marr, Financial Post 

It's nearly back-to-school time and the last thing Pierre Ferland wants to talk about is student housing.

The chief executive of Maestro Realty Advisors, which is 55% owned by Caisse de depot et placement du Quebec, is leaving the student housing business -- tired of the endless challenges of upkeep.

"We have four properties and we are probably going to exit them. We didn't have a lot of success," says Mr. Ferland. "We underestimated the management side of that business. It's students, they don't really care."

Think John Belushi in Animal House.

If a CEO of a company that manages billions in real estate funds doesn't think much of investing in student housing, should you be thinking about buying a property for your university-bound child?

It's a tempting proposition for sure, when you consider the costs of housing. Even with today's sky-high university fees, the bulk of the cost for sending your child away to university is going to be food and lodging.

Halifax-based broker Al Demings, a former executive director of the Nova Scotia Association of Realtors, says with five universities in his vicinity, a small chunk of the housing market has been dedicated to investment properties housing students.

"Starting in the late spring, June and July, we start to see people coming in looking to [invest]. It's fairly common, I've dealt with several myself," says Mr. Demings who works for Re/Max Nova. "If you've got a doctor in Toronto who is sending his daughter through Dalhousie Medical School, he knows she's going to university for at least four or five years. They treat it as an investment and they've done quite well."

There's really two ways to go if you are considering buying a property this way: One is to buy a small condo for your child and the other is to buy a house and rent rooms.

"We are actually seeing students buying housing themselves. They scrape together money, rent to other students, and they come through university with no debts," says the real estate agent.

One bedroom with a shared kitchen can easily generate $500 per month in rent. Multiply by three bedrooms and you've got $1,500 in rental income for that house. The price of a four-bedroom house can run from $250,000 to $400,000, but based on 20% down, the mortgage on a $300,000 home, for example, could be carried from the rent alone (based on today's interest rates and a 25-year amortization schedule).

"The one thing that happened on the negative [side] is this option became so popular that values of homes were inflated," says Mr. Demings. But that was two years ago, he says, and prices have since declined.

The one-bedroom option is probably a simpler way to go. In Halifax, a small condo that costs $200,000 to buy could rent for $900 a month. Four years of university could easily amount to $40,000 in rent because students generally have to pay for the summer months, which are almost impossible to sublet.

Let's say you did buy that condo and put 20% down. Based on a four-year closed mortgage at 4%, your mortgage payments would be less than $850 per month. Taxes and condo fees would probably add another $325 to the monthly bill.

The bill is higher than the rent, but you are saving principal, a small amount in the first four years of a mortgage.

The real bet is on capital appreciation, which would have to be enough to offset the transaction costs and capital gains tax when you do sell it.

It's a gamble and one that Al Nagy, an Edmonton-based certified financial planner with Investors Group, says a few of his clients have taken. He generally advocates owning versus renting, when you can make it work.

"You realize when you get into this type of investment, it's almost an occupation. It's a second source of income but you have effectively become a landlord," says Mr. Nagy. "It's more high maintenance because you do have to worry about when the plumbing breaks down."

That everything includes the parties that are as much a part of university education as the academics. Do you want to invest in that?