You may save on college housing by buying your child a flat
Friends have recently bought an apartment for their son to live in while he's in college in the United States. Most people simply pay for room and board, but they were able to save some money.
This is a good time to buy for several reasons if you're facing high living costs in a college town.
There are still bargains out there for long-term investors. Mortgage rates have risen over the past three weeks, according to Freddie Mac's most recent weekly survey.
If the economy improves, rates will go up and property prices will follow, making it a good time to buy real estate in the trough of the market.
If you buy a property, you would have the option to rent it or sell it and recoup your equity after your child graduates. Given that the housing market is recovering, you might even make a profit. Let's say your child goes to the University of Michigan, a large public college. The institution lists its undergraduate room and board bill for the 2012-2013 academic year at US$9,752. That's in addition to roughly US$13,000 for tuition for first-year university students if you're a Michigan resident. It would be higher if you are from elsewhere.
Using the Zillow real estate search engine, I found a two-bedroom, two-bath condo near the Ann Arbor campus that lists for US$110,000. As an investment, this is a pretty good deal since the original 2003 selling price was US$140,000. You may even be able to get a better price in other locations.
Assuming you have excellent credit and can get a 30-year, fixed-rate mortgage at the ultra-low rate of 3.45 per cent with a 20 per cent down payment, your monthly cost would be US$610, which includes US$393 for principal and interest on the mortgage; US$159 for taxes and US$59 for homeowner's insurance.
Including the monthly condo fee of US$281, you'd be paying US$10,692 a year for the unit, or roughly US$8,000 for nine months.
If your child returns home for the summer or travels elsewhere, you can rent the space to a summer school student. For further cost savings, if the pad is big enough, you can defray costs with a roommate.
You'd also be able to reap a mortgage-interest deduction and write off the taxes on the unit.
Of course, with property, you'll also need to cover ongoing maintenance expenses, utilities and taxes, and if sometimes apartment associations need to raise its assessment to cover overdue or needed repairs you'll have to pay an additional fee.
Before you buy, look at the tax history of the unit. Has it been reassessed lately?
In depressed housing markets, property taxes should drop, but not always. In the case of the Ann Arbor unit, tax assessments fell about 9 per cent last year and 16 per cent in 2009.
So that's the "room" part of the equation. What about the "board"? Compared with on-campus living, the greatest savings are available if your student is fairly frugal, cooks for himself and doesn't buy a meal plan from the college.
In the final tally, you need to look at the after-tax costs of ownership for your income bracket and project them over four years.