Turning Expenses into Income: The Case for Buying a Home During the College Years

What if Investing for College Became Investing While in College?

July 30, 2024 - Rankin, Goulder, Kissinger

The anticipation of higher education brings with it the looming reality of skyrocketing tuition fees and living expenses. While the college experience may look different for each student and family, the financial burden can be overwhelming with parents striving to balance their savings, current expenses, and future financial security. While traditional savings plans like 529 accounts are a popular choice, an alternative strategy gaining attention is the potential financial benefits of purchasing a home for their child’s college years. This approach not only provides housing but also opens up opportunities for significant financial returns.

According to Northwestern Mutual’s 2024 Planning & Progress Study, 95% of American parents saving for their children's college education expect to cover more than half of the cost for their children. While about one in three (36%) say they will pay for the full cost, 64% expect their child to pay something. On average, they expect the total cost of college to be $77,300 and aim to pay it off by the age of 45.

That cost is rising annually. The National Center for Education Statistics reports that from 2000-2022, the average annual tuition inflation was 4.8% at public four-year colleges. In the same period, the average tuition inflation rate was 4.4% per year at public two-year colleges and 3.4% at private two-year colleges.

Furthermore, in 2023 families had $450.5 billion saved for college in 529 plans, making the average 529 account balance $27,741. In Colorado, there are over 400,000 current 529 plans set up by parents earmarked for their children’s college education. It’s no doubt a priority for many, though parents still have doubts about the long-term financial impact of paying for some or all of their child’s education including tuition, books and living expenses.

College Home as Investment - Denver, Colorado

For Sale in Denver: An example of a home with the potential to be a great investment or owner/user property, 3047 W 47th Avenue Unit #412 in Denver is just a mile from Regis University (photo copyright Rankin Goulder Kissinger)

Turning Living Expenses into Income Opportunities

One of the innovative strategies parents can consider is purchasing a home for their child to live in during college, instead of paying for dorms or off-campus rentals. We see and have worked with clients throughout the years who have taken advantage of this situation and seen the long-term benefits. With so many colleges and universities near where we live and work including the University of Colorado campuses in both Boulder and Denver, the University of Denver, Regis University and Metro State University just to name of few, there are thousands of students looking to live near campus – and also paying a premium to do it.

Let's break down the potential financial benefits of this approach using this example with data provided by some of our favorite lenders - Jessica Howard and Jill Nelson of Alameda Mortgage Corporation. For this example, we take a look at our current listing at 3047 W 47th Avenue Unit 412. This welcoming two-bedroom, two-bathroom home is a stone's throw from Rocky Mountain Lake Park and less than a mile from Regis University. This move-in ready unit features modern finishes and appliances, near shopping and dining and comes with a minimum rental term of six months.

Income potential:

Starting Home Value: $310,000

Forecasted Appreciation: 4.7%

Appreciation Gain: $62,525

Estimated Value after Year 4: $372,525

Investment: $62,000

Rental Income: $133,429

Gross Revenue: $195,954

Expenses: $123,967

Profit: $71,987

Return on Investment: 116.1%

The above numbers account for HOA fees of $3792/year, Maintenance/Repairs of $1500/year, and Property Taxes of roughly $2000/year as well as real estate fees to sell the property in four years. They are calculated using 20% down and $2834 as the “market rent”, along with forecasted appreciation including 5.94% annual rental increase. It also takes into account the student (child of the parents) paying half the mortgage ($1,127 per month) as an example.

An example breakdown of ROI (Return on Investment):

Above: A look at projected revenue, income and expenses over time of a college home investment using 3047 W 47th Avenue Unit #412 in Denver as an example.

[Click here to download full chart PDF]

It’s obviously important to note that this is an example with numbers that can vary depending on the exact situation and forecasts into future. What is near certain, however is that this could be an incredible income opportunity versus what is typically a significant added expense of living accommodations during the college years for students and their parents. The added income and appreciation over time could result in your child living for “free” over the course of those four years with the possibility of significant added income as well.

Weighing the Pros and Cons of Investing in a Home

In 2024, Americans voted real estate as the best long-term investment, according to a new Gallup poll. And in fact, real estate has come out on top of this poll every year since 2014, beating out stocks or mutual funds, gold, and savings accounts or CDs. Investing in real estate can be one of the safest ways to build your wealth. In Colorado specifically, the Denver market continues to perform as one of the most consistently desired places to live in the United States.

Just as with any investment, there are potential risks as well to take into account before making the decision.

Benefits of Buying a Home:

Appreciation: As the real estate market grows, the value of the property increases, providing a substantial return on investment.
Rental Income: Renting out additional rooms can generate income that offsets the mortgage and other expenses.
Fixed Housing Costs: Unlike renting, where costs can fluctuate, owning a home provides more predictable expenses.
Tax Benefits: Homeowners can benefit from tax deductions on mortgage interest and property taxes.
Investment in Real Estate: Real estate is often a more stable investment compared to other financial instruments, adding diversity to a financial portfolio.
Stability and Storage Space: Rather than moving each year – including possibly to and from college in the summers – your student has the stability and storage space to keep his or her belonging in a single space.

Considerations and Risks:

While this strategy can be financially rewarding, it's crucial to consider potential risks:

Market Variability: Real estate markets can fluctuate, affecting home value and rental income.
Maintenance and Repairs: Homeownership comes with ongoing maintenance responsibilities and costs.
Selling Challenges: Selling a property can take time and might not always yield the expected profit.
Financial Stability: Ensure that this investment aligns with your overall financial situation and goals.

Denver home prices graph last 10 years - real estate as college investment

This chart from the Denver Metro Association of Realtors shows the 10-year trend in Denver Metro close prices..

Investing in a home for your child's college years is more than just a financial decision; it's a strategic move that can transform a major expense into a rewarding opportunity. With careful planning and consideration, parents can potentially benefit from property appreciation, rental income, and various tax advantages. While this approach carries certain risks and requires diligent management, the potential return on investment makes it a compelling alternative to traditional renting. As families continue to navigate the financial complexities of higher education, exploring innovative solutions like homeownership can provide both stability and significant financial gains, ensuring a brighter and more secure future for both parents and students.

Allison Rankin, Jane Goulder, Amy Kissinger - real estate investing experts Colorado

Together, with Allison Rankin, Jane Goulder, or Amy Kissinger and the power of Compass – Denver’s leading brokerage – we possess the experience, resources, and relationships to assist you. Whether you're considering buying or selling anywhere in the Denver area, reach out to us today!

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