College living: the pitfalls of buying property for your childrenSubscriber only
Is it possible for parents to buy a property near their children’s college and later sell it at a profit?
With rents skyrocketing and the costs associated with third-level education going much the same way, it is hardly a surprise when parents look at ways to save money and cut costs.
One of the big – if not the biggest – costs many will face in the years ahead is accommodation, and children attending college away from home can look forward to spending many thousands of euro each year on putting a roof over their heads. Or at least their parents can.
But is there an alternative? Is it possible for parents to buy a property close to their children’s third-level institute, use it for the duration of a college course and later sell it at a handsome profit?
“In Dublin at the moment, we estimate that rent for one student in private rented accommodation would cost on average of €574 per month, or €5,166 for a nine-month rental,” says Dr Brian Gormley, the head of Campus Life at TU Dublin. “Private student accommodation is more expensive.”
He says the university has spaces reserved for TU Dublin students in private student accommodation blocks “and these range in cost from €99 per week for a shared room, up to €220 for a single en-suite room. As these are paid for 40 weeks, the annual cost can be up to €8,800 for a year.”
Using that last number means that, over the course of the four years needed for a typical degree, parents should expect to spend €35,200. If they have two children, then spending on rent alone over four years comes in at more than €70,000.
It will be more if their children do a post-grad.
By any measure these are eye-watering amounts of money and parents will have virtually nothing left at the end of it save for a – hopefully – well-educated child.
For the sake of our argument, let’s look at properties currently for sale in Dublin 7 close to the Grangegorman campus of TU Dublin. There are multiple homes to choose from but we picked a mid-priced, two-up/two-down in Stoneybatter with an asking price of €395,000
Rent vs mortgage
It is less than 10 minutes’ walk from the campus of the TU Dublin and, assuming would-be buyers have the required 30 per cent investor deposit of €120,000 and it sells for the asking price, then the size of a mortgage would be about €275,000.
The monthly repayments on such a loan – based on a rate of 4 per cent over 25 years – come in at just under €1,500 per month or €18,000 a year.
If one of the rooms can be rented for €700 per month for 10 months a year, then it will generate €7,000 – a little less than half of which is lost to tax. That takes the annual cost of the loan down to about €14,000.
The area is very popular on the Airbnb platform so the entire property could then be rented out on that platform for – let’s say – 60 nights over the course of the summer months when college-going occupants are away. That would yield a nightly rent of about €100 – or €6,000. Again deduct a little less than half that for tax purposes and that is additional rental income of about €3,500 which can be subtracted from the annual mortgage which means it would cost €10,500 or €875 per month which comes in at less than the cost of much private accommodation on the market.
These figures do not factor in any appreciation or the fact that, should a parent choose to hang on to the property once their children are educated and pay the mortgage off over time, they will be left with an asset at the end of it all.
The appreciation element is obviously a consideration although it comes with a massive caveat which is also worth looking at.
First the good news.
A one-bed apartment in Custom House Square in Dublin 1 sold for €211,000 in 2014. A one-bed in the same area will sell today for €275,000, an increase in value of €64,000. Two-beds in the same complex have gone up in value by €55,000 over the same period.
So, a parent who bought such an apartment five years ago would have saved on the rent and made a tidy profit as well. Crunching those very simple numbers, would suggest that it makes sense to buy a property to be used by a college-going child rather than wasting money on rent. But those numbers do not, by any measure, tell the full story.
There is an article in The Irish Times archive that it would be dangerous to ignore. The carefully researched piece outlined all of the financial benefits of parents buying homes close to where their children were attending college.
It contained the wisdom of several estate agents, and readers were told that parents were – typically – paying between €300,000 and €500,000 for homes for their children – with income potential to be derived from renting out spare rooms to other students.
In truth, it was not unlike the start of this article.
One quote leapt off the page: “Why not buy a property and watch it grow in value and pay back the mortgage with people renting from you?” an enthusiastic estate agent outside Dublin said.
It was the summer of 2007, just months before the property market collapsed.
Many people who took this – doubtless well-intentioned – advice and paid half a million euro for a second home in the summer of 2007 with a mortgage of 100 per cent, or close to it, found themselves with a property valued at less than half that by the time their offspring had finished college four years later.
Some of those people are still in negative equity today. That fact should never be forgotten.
Even estate agents have been chastened by the crash and few will say investing in property for educational reasons is necessarily the right move.
“It is not for everybody,” says Keith Lowe of DNG. “But there are plenty of people who have money in the bank. And if someone has a few hundred thousand euro and a child going to college then it does make sense because we are approaching a situation where you will have to pay banks for them to keep your money on deposit. And even if that doesn’t happen, then rates are already so low as to offer virtually no return.”
He adds that the requirement for a 30 per cent deposit “will take out a massive group of people who simply couldn’t afford it, and then there is the element of risk. Property prices go up and down over time as we have learned since the crash.” The annual property tax is a further additional consideration too, and while relatively affordable now it may escalate over time.
Lowe does say that over a 20-year period there is still an expectation that a property will not be worth less than it was when bought “and you will have paid off the mortgage and own the property”.
The biggest take-up he sees “tends to be for apartments in the city centre with the reason being these fell heavily in value and were slower to recover – banks were not even lending to buyers of one-bed apartments for a long period”.
Karl Deeter of Irish Mortgage Brokers is less convinced than Lowe that it makes sense.
Referencing the Stoneybatter two-up/two-down, he points to the downpayment of €120,000 “which many people don’t have”.
But there are other downsides too, he says, “You have to manage the place through the year and Airbnb, which is time-consuming or costly to get others to do.” A person is also “committed to the process, the legalities, the taxation, the regulations etc and that comes at a cost as well as with risks that are totally outside of a child’s education”.
He says that when renting to a relative “you may have to prove arm’s length and market rates – if you let a child live there for free there can be tax implications to consider”. And Deeter adds, “Property investment can be a landmine and ties up a lot of capital, the investment value could fall and after four years you’d still owe almost a quarter of a million euro. Consider that against a commitment of the rent only which comes out at €35,000 and it seems to me that you would really need to want to make a property investment and are using your kid going to college as a justification for it. You can totally control costs if you just choose to rent – you can also move house, come and go, stay only nine months and walk away.
Capital acquisitions tax
“There is a different scenario if a person had enough to buy in cash because in that instance if they were trying to pass on assets it might be a way to gift a child early in life so that they have a large capital asset that may/may not appreciate in value. But remember, once that money is gone you use up your capital acquisitions tax relief which may be smaller in the future depending on how taxation develops.”
For Deeter, the 30 per cent deposit is “a big obstacle for many regular people and that is probably a good thing because if they weren’t dissuaded then they may bail into something that they might not be prepared for. The big issue is that the Revenue and law don’t care if you’re an amateur but an estate agent will sell any simpleton a house.
“My general take on this is invest as you see fit, help your kids as you see fit, invest in their education as you see fit but don’t go buying property for them to live in while they study unless you were planning on doing that anyway.”
The final word then, to Dr Gormley, He says the best advice to incoming students “is to look around for the more affordable options, such as home-stay or digs”. He says that in October 2018 when the academic year was already a few weeks old, TU Dublin “still had 300 spaces available on its student accommodation database. These were host family spaces which cost an average of €3,780 a year.” And that comes with no property headaches.
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