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Leasing a Rental to Your College Kid: Smart Financial Move or Potential Disaster?

Leasing a Rental to Your College Kid: Smart Financial Move or Potential Disaster?

4 min read
G. Brian Davis

G. Brian Davis is a landlord, personal finance expert, and financial independence retire early (FIRE) enthusiast, who...

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Have grown children in college or grad school?

There are some fun possibilities for collaborating with them on a rental property. But none of the strategies are without risk, and not all the risks are “just money,” either.

Still, the advantages are incredibly tempting.

Let’s take a deep dive into the world of family real estate investing, and see what we can dredge up.

The Setup

Say your daughter is planning to move out of the dorm at the end of this year, into off-campus housing. She has another three years of school (college or grad school, choose your own adventure).

Perhaps you’re helping her with her housing payments, or maybe you’re not. But she’s not going anywhere for at least three years.

She doesn’t need an entire house to herself, of course. She could share a house with three other girls.

An idea starts forming in your mind. What if you bought a 4-bedroom house near campus, she moves in, and three of her friends rent the other rooms? The three other roommates alone could probably pay the mortgage. Maybe even with some extra cash flow!

After three years, maybe she sticks around that town, or maybe she moves out. You could keep it as a rental for students or non-students. Or you could sell it and (hopefully) make a decent profit.

Intriguing, right?

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The Sunny Side

Some advantages should be glaringly obvious. First, you have a stable tenant for at least three years. That in itself is a great starting point.

Your daughter or son will also be supplying the other renters, so you don’t need to spend a lot of time on advertising and tenant screening.

Turnovers are theoretically minimal — maybe one of the roommates moves out next year, and maybe another friend moves in. No sweat.

Related: Out of College, Should I Invest in Real Estate or Retirement Accounts?

You also probably don’t need a property manager since your child is effectively managing the property for you. They can let you know if there’s a necessary repair, and they’re keeping the property occupied.

There’s also consistent demand for housing near college campuses. Typically, demand for near-campus housing outpaces the increase in supply.

By the time they move out years later, you may well have accumulated some equity in the property. So when your daughter moves out, you should have several options for moving forward, all of them attractive.

This is great! What could possibly go wrong?

Hidden Dangers

First of all, if your child is responsible for some form of rent payment (however small), what happens if they don’t pay it? Will you evict them?

Perhaps more realistically, what happens when your daughter’s best friend and roommate fails to pay the rent? Will you evict her? Who will serve the wayward tenant with notice? Your daughter? The seas are getting choppy here.

And then there are the parties. Let’s be honest, it happens. Students are hard on properties. What happens when your daughter and her roommates invite a handful of friends over, but more people show up than intended, and come morning there’s $10,000 worth of damage to the property?

All right, let’s zoom out for a minute. Let’s say your daughter is in grad school, living in a city. She wants to live in the trendy, upscale neighborhood downtown, but maybe that neighborhood is too expensive to make a good rental investment. What’s in your interest as an investor is not necessarily what’s in your child’s interest as a student and occupant.

No matter how you look at it, this strategy mixes business with your personal life. Those interests may not always align; if and when they start to conflict, you’ll be a difficult position.

lease-cosigner

Strategic Course Plotting

Consider having your child join you as a junior partner in this venture. You can review neighborhoods , look over the numbers, and walk through potential properties together.

Your daughter should have some skin in this game, too. However little it is, she should be putting something toward the initial purchase. It will give her a sense of ownership in the project, and make her feel like a landlord, not just a tenant.

Related: How to Pay for College Using Real Estate: A Definitive Guide

With that said, don’t put her on the deed just yet. Write up a partnership agreement with her, wherein she only assumes an ownership share after she successfully manages and moves out of the property — without, you know, causing $10,000 in damage. If she is responsible for a portion of the mortgage payment every month, however little, her ownership assumption should be predicated on her actually making those payments.

As mentioned above, she should be responsible for managing the property. She is responsible for finding roommate tenants and screening them side-by-side with you. She is responsible for collecting rents and collaborating with you to oversee repairs when needed.

You can require the roommates’ parents to co-sign the lease, and you can run background checks on them rather than the roommates. (You can run checks on the roommates too if you want, but not many college students have had a chance to build up much credit or criminal history yet.)

Perhaps most importantly, never invest in a neighborhood or property that you wouldn’t otherwise touch. If the fundamentals aren’t sound, if the property isn’t a good investment in its own right, stay away.

A Safe Maneuver?

The strategy outlined above is far from foolproof, but it’s safer than many. Having a stable long-term tenant who has a vested interest in the success of the property is a recipe for smooth sailing.

For this strategy to work, you must have a fundamentally responsible daughter or son. You know your child — are they mature enough to handle this? Or will they balk the first time the boat rocks? Many young adults in their early 20s are simply not reliable enough to entrust with a valuable asset.

But if you have a child who is up to the challenge and ready to get their feet wet in the world of real estate investing, this strategy can be a win for everyone. You’ll get to teach your daughter some valuable lessons about investing, entrepreneurship, and real estate, even while making a tidy profit. Who knows? It could even be the first of many joint projects to come.

Have you tried this strategy? How did it go? What are your ideas for making this technique even safer?

Let’s talk below!