Like many parents of university students, Kim Leone desperately wanted to rescue her child from less-than-ideal living conditions during her final years of university. So instead of paying another $6,000 in rent for the school year, she and her husband decided to purchase a second home that could serve as daughter Sarah’s home away from home.
The initial goal was to provide a safe environment that would offset rental payments and perhaps even pay for itself. But with Sarah set to return home next spring, Kim is now hoping to sell the six-bedroom condo townhouse a few kilometres from Ottawa’s Carleton University for a tidy profit. “In the beginning we weren’t looking when we purchased it of making a profit,” she said in an interview from Hamilton, Ont. “But now, in keeping our eye on the real estate market, there I know we’re going to make a profit.”
Purchased two years ago for about $210,000, the unit in the Hogs Back district is being listed for $270,000. The Leone family put five per cent down and spent $15,000 to create two basement bedrooms. With five student renters each paying between $425 and $500 per month, the townhouse fully covered its costs and gave Sarah a less stressful environment to complete her studies and gain her independence. “It’s the best thing you can do for your child,” Kim said.
It’s a feeling echoed by 22-year-old Sarah, who said she’s thankful for the experience of being a landlord, which included collecting rent and finding replacement tenants. She urges parents to consider purchasing after their child experiences the first year living in a university dorm and advises them to do their homework to ensure rental income can cover costs.
A growing number of parents have turned to ownership over the past 20 years as an alternative to student residences or frat-style rentals, industry experts say. Patrick Walchuk of Keller Williams Ottawa Realty, who helped the Leones purchase the townhouse, said he’s seen interest grow as people have looked to real estate as an investment alternative during the stock market weakness. “People want to put money as an investment into real estate and they figure they can kill two birds with one stone and also provide shelter or accommodation for the kid that is going to university.”
With Ottawa’s real estate prices growing about six per cent annually, the nation’s capital presents an opportunity to make profits, he said. University towns, such as those in southwestern Ontario, are also good locations because prices are relatively low and with good resale markets. He urges buyers to be realistic about expectations. Most buyers end up in condo-style arrangements that include maintenance instead of relying on their child.
High cost cities such as Toronto, however, can be more challenging because it’s harder to get high enough rents to cover the costs of ownership, says David Larock, an independent mortgage planner.
He suggests that rental income should be at least 10 to 20 per cent more than the total expenses for the mortgage, property taxes, maintenance and food costs. “Any time the cost of carrying the property as an investor exceeds the rental income that can be earned, the investors are essentially subsidizing the renters so at that point it’s a better deal to rent than to buy,” he said.
Not exclusively the purview of the rich, buying a university home can also make financial sense for middle-class families, especially those with a few kids heading to the same academic institution. “It’s sort of like hand-me downs. You get a hand-me-down house as opposed to hand-me-down pants,” added Larock.
Like all real estate investments, longer time horizons put the owner in a better position to realize a financial gain and offset some of the costs like realty fees and taxes. Larock cautions that buying may not be the right option for everybody, including those parents with children heading to American universities.
Plummeted U.S. housing prices may seem like a great opportunity. But Larock said a high “shadow inventory” of homes may suppress prices and make it harder to sell down the line. “Personally, I would not be buying property in Florida right now, even though prices have come right down.”
Parents should avoid buying a second home if there’s a risk they won’t be able to pay the mortgage and may be forced to sell it with little notice, he added. With classes set to start in about six weeks, time is running out but it’s not too later to buy a home for this year. The choice of tenants may be limited but many students continue to scramble to find accommodations through to October.
The Canadian Press