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

by | BiggerPockets.com

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.

Download Your FREE guide to evicting a tenant!

We hope you never have to evict a tenant, but know it’s always wise to prepare for the worst. Navigating the legal and financial considerations of an eviction can be tricky, even for the most experienced landlords. Lucky for you, the experts at BiggerPockets have put together a FREE Guide to Evicting Tenants so you can protect your property and investments.

Click Here For Your Free Tenant Eviction Guide

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?

refinance

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!

About Author

Brian Davis

Brian is a rental investor with 15 income properties, who provides free video training to help everyday people start earning passive income at SnapLandlord.com. He's also the co-founder of SparkRental.com, which provides free services & education for landlords. His rental management is almost completely automated by now, allowing him to travel the world (his current home base: Abu Dhabi).

14 Comments

  1. Michelle Moore

    I purchased a 3 bedroom house for my daughter to live in during her college years which included veterinary school. I saw this go wrong when another family member tried this but the college student didn’t have what it took to collect rent from friends, so I set it up so that the lease was signed by me and rent had to be mailed to me each month. This creates more of a sense of urgency to pay the rent or get evicted than when you owe your “friend”. However, the deal with my daughter was that I gave her the rent money and she paid all bills such as utilities, insurance, and taxes and got to keep any leftover money.

    I paid cash for a foreclosed house and our family “flipped” it before she moved in, replacing the bathroom, all flooring and doors and painting everything. Since my daughter rented to mostly graduate students, she kept stable roommates and was able to live rent-free and paid for her third of the utilities and all of her other living expenses with the money from the tenants. I planned to sell the house when she graduated, possibly for a profit but she met her husband and they asked if they could purchase the house and live in it together after they got married. I sold it to them for the money I had put into it and they were able to live there for the next year, and then sell it for a profit when she graduated from vet school. This made a great “wedding present” that didn’t cost me anything plus I saved the money that I had planned to spend on her housing expenses while she was in school.

    Done right, this is a great idea. Win-win!

  2. Laura Tokgozoglu

    We have two daughters who are living in the same college town…one just graduated and got a job there, the other has 2 years left. We bought a condo last year,thinking that one or both of them would live there but it had a tenant in it already with a lease. She is a great, clean tenant and has told us she wants to stay until June 2018. Since she is such a great tenant we are now planning to buy another condo or even two for our daughters. The college is Liberty University which is growing all the time. Lynchburg, which is where Liberty is, also seems to be growing so this fits with our goal of buying rental properties with the goal of having passive income. Our goal is to buy one rental property a year for the next fifteen years.

  3. Alex Craig

    Simple solution. We manage quite a few college rentals and because most college students do not work enough to qualify, they get their parents to consign, which basically says the parent is committing the payment as they qualify too. We have never had a trashed place nor a late payment…seriously, none. Then again, the college we have the most rentals is a $50,000 a year private college where most of the parents are loaded.
    Personally as long as my daughters are doing well in school, as far as I am concerned, they are living rent free. We get 18 years to save for this. My take is, they are there to learn and focus on their studies. I had to work all through school to pay 100% of my bills and it took me 8 years to finish. I felt like Tommy Boy walking across the stage to get my diploma.

  4. I did this exact plan with my daughter. She didn’t like the dorm and I was throwing way $13,000 a year for it. So her second year we found a house that only needed some minor repair work and I had her live in it for a semester while we fixed it up then her friend moved in and everything went great. After 2 years I started looking around the town and after all is said an done I now own 3 single family homes and a 4 plex in the town and my daughter bought her first house.

    all this because I was to cheap to keep paying for the college dorm…….

  5. Colin Reid

    I was the student in this scenario. I was not a good property manager, and while we didn’t cause $10k in damage, I probably did a little more than normal wear and tear. I didn’t know jack about investing then, and while I don’t know the exact numbers, I know they were bad enough that my parents (both CPAs and mom has been an agent for 20 years) haven’t invested in real estate since.
    Overall, I was a great example of the kid with no skin in it and not enough maturity to be given that responsibility.

  6. Jessica Sorensen

    I saw this go wrong when I was in college. The parents of a friend thought it would be a great idea to do exactly this, and bought a four bedroom for their son plus four friends (including me). The house was great and in a nice area close enough to campus.

    However, they trashed the place and completely took advantage of the parents. The lease said no pets, guess who decided it would be fun to get a puppy AND a kitten? They left the animals alone most of the day, threw parties, left food everywhere, and one bedroom looked like a hoarder lived there.

    I moved out after less than a year (and lost some friends). By the time they left, the hardwood floors had water/urine damage, the countertops were chipped and stained, doors and baseboards had been chewed up by the dog, the carpet needed to be completely replaced, and the siding needed work from where they practiced with their throwing knives…

    Oh, and did I mention that the house was purchased in 2007? They sold at a huge loss by the time everyone graduated/dropped out in 2010.

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here