What to Know About Purchasing a Kiddie Condo
When selecting the best college for their intended career path, students have to not only weigh the program benefits, but also, the cost of off-campus housing. In many college towns, rent can reach over $4,000 a month and is often up to 70% higher than the average market rate. This greatly adds to the already high costs university students face, making it difficult to cover utilities, food, and other expenses as well.
Thankfully, parents can go beyond helping with rent by using kiddie condo loans to purchase a condo in Golden or Boulder near popular universities. Then, they can charge their college kids a fair rental rate, helping them smoothly transition to adulthood. Although this option is a great choice for many, there are some things to consider before taking the plunge. Here's a close look at what to know before jumping into a kiddie condo rental.
What is a Kiddie Condo?
A kiddie condo is a rental home parents buy for their college-aged children to live in while they go to school. This not only benefits kids who can then save money on rent, but also parents who get great return on their investment and get to have an investment property when their child has finished school.
Loans for traditional rentals typically come with a high down payment requirement and unfavorable interest rates. When parents rent out the property to their children, however, FHA home loans offer much better terms for kiddie condos.
Parents just have to make sure their college kids will live in the property for at least a year after its purchase. After that, parents are free to make whatever moves they want, having fulfilled the residency requirements.
Benefits of Buying a Kiddie Condo
While college students often have the option to live in dorm rooms, that arrangement does not work well for everyone. The lack of privacy, frequent distractions, and potential for upheaval can all contribute to students looking for off-campus housing. Unfortunately, high rent costs can leave students choosing between two unfavorable options—unless their parents step in, that is.
When parents buy a kiddie condo for their college-aged children to live in, everyone can potentially benefit. College kids can better manage their finance and their lives, while parents build their real estate portfolio with minimal effort. Here's a look at just some of the ways this option is benefiting students and their parents.
Eases Burden on College Students
Long gone are the days when college students could work through the summer to cover their expenses for the school year. On average, housing, tuition, and textbooks add up to $20,000 to $47,000 annually and that is just a small fraction of what students have to pay.
They also have to cover:
- Class and activity fees
- Personal items
Even working for the full-year may barely cover all expenses students face, especially when trying to cover high rent payments in college towns.
By using kiddie condos to decrease housing expenses, parents can significantly reduce the financial burden on their children. With that help, students can better focus on their studies and earning high marks, rather than working on all their off-hours to cover expenses.
Provides an Additional Income Stream
Even when renting to their children at a fair rate, parents can increase the income coming into their households. With that move, more money stays in the family, helping both parents and their children stay afloat.
If parents are not keen on turning even the smallest profit while renting to their children, they can only charge enough to cover the mortgage payment and maintenance. The mortgage payment amount typically covers insurance and taxes as well.
Alternatively, they can let their children live there for free by making them house manager. As the manager of the rental, they will find housemates, collect rent, and report problems to their parents. With that arrangement, they can still cover the cost of the rental without burdening their child's finances. This even gives children work experience in property management they would have otherwise.
After their child graduates from college and moves out, parents can then use the rental like normal and charge market rate. As long as it is occupied, their rentals will generate a solid passive income that can even assist in saving for a down payment on another rental property.
Builds Excellent Credit
While making timely mortgage payments on a kiddie condo, parents can build even better credit than they had before. If they add their children to the mortgage, they can build excellent credit as well, further improving their financial standing. Then, after graduation, they can use their great credit scores to purchase their own property and start adulthood out on the right foot.
Overall, purchasing a kiddie condo provides parents with true peace of mind that they are doing all they can to help their kids succeed in their goals. The other benefits are just icing on the cake, making it a great choice for those who are ready to take that step.
Best Type of Loans for Kiddie Condos
Although the kiddie condo term is used often, the FHA does not actually have a loan product called that. Instead, they allow parents to either co-sign on their adult child's loan or buy the home outright for them to use as a rental.
To find the best arrangement, parents will need to look at their own credit scores, income, and other financial data, along with that of their child's. With an honest assessment of those areas, they can decide which loan product will work for their needs.
Beneficial Loan Terms to Seek
Whether they elect to co-sign or simply buy the kiddie condo, parents should work with their mortgage broker to find the best terms. Beneficial terms offered for kiddo condo loans include:
Low Down Payment
Depending on their credit scores, FHA loan applicants may qualify for a low down payment. Those with scores above 580, for example, can go with a 3.5% down payment, which equals $10,500 on a $300,000 property.
If the applicant's credit score is in the 500 to 579 range, then their down payment requirement jumps to 10%. Although triple the lowest rate, it is still much less than the 20% required for other loan products. Even at 10%, it is possible to save $30,000 on a down payment for a $300,000 home, for example.
Reasonable Interest Rates
Although it varies from lender to lender, people with good credit can expect to secure a kiddie condo loan with an interest rate in the 4% range. They can also avoid paying additional fees, in the form of points, as long as they are in good financial standing and have a solid credit score.
Other types of loans, on the other hand, come with interest rates up to 8%. Depending on the applicant's credit score, they may also have two to three points applied, usually equally 1% of the property value per point. On a $300,000 property, two to three points would add up to $6,000 to $9,000 in fees in addition to the down payment amount.
Parents can keep their investment under control by looking for beneficial terms for their kiddie condo loan. They can talk with a number of mortgage brokers to see what they offer and how to improve their offers. By following the tips for improving their credit and financial standing, they can ensure the loan terms match their expectations and make a kiddie condo a solid investment.
Potential Drawbacks of Kiddie Condos
Although kiddie condos can work out for many parents and their college-aged children, they are not for everybody. It is important to understand the potential drawbacks, so everyone can make the right decision for their situation.
Private Mortgage Insurance is Required
With FHA loans, private mortgage insurance remains on the loan until the owners decide to refinance or sell the property. This insurance payment usually adds up to several hundred dollars on top of the mortgage payment, driving up costs considerably. And unlike other loan products, parents cannot request its removal upon paying off a significant portion of the balance.
Owner-Occupancy Requirements Apply
When using FHA loans to buy a kiddie condo, parents must abide by their owner-occupancy requirements. These requirements demand that the borrower or their child move into the property within 60 days of closing and live there for at least one year. If the student moves out prematurely, parents will need to move in for the remainder of the year to fulfill their obligation.
Credit Score Drops are Possible
When parents put a kiddie condo loan in their name, the high debt amount could drop their credit score by quite a lot. Although this decrease is temporary, it can disrupt plans to buy a new car, take out a business loan, or go through with other financial moves.
With a look at these drawbacks, parents can decide if any of them are dealbreakers. If not, then they can weigh the top considerations to make the final determination on whether kiddie condo loans are right for them.
Key Considerations for Kiddie Condo Purchases
To make the most of the kiddie condo experience, parents and their children need to take a few key considerations into account, such as:
All Payments Need to Arrive on Time and in Full
As with any mortgage, all payments need to arrive on time and in full to abide by the loan terms. With on-time payments, all borrowers can build their credit scores and avoid late payment penalties.
Parents can ensure this happens by making the first payment, and then collecting rent payments to apply to the next month. Upon collecting the rent, they can put it in an account and use auto-payment to ensure it goes to the lender on the correct date.
Property Values Can Tank if Left Without Care
In order to preserve their value, rental homes need regular maintenance and repair services. Parents need to explain the important of reporting all problems with the rental right away and commit to promptly having those issues fixed. Otherwise, small problems could escalate into costly issues that could decrease the value of the rental or even make it unlivable.
If Anything Goes Awry, It Could Get Messy
Even done with the best intentions, it is possible for a financial agreement to go awry, leaving parents footing the bill. If students drop out of college, stop paying their bills, or face any other issues, parents need to be ready to step up and handle the problem right away. They may need to relocate to fulfill the owner-occupancy requirements, for example, and cover the mortgage payment in full as well.
Since these problems are virtually impossible to predict, parents should weigh all the potential issues and have a solution in mind before moving forward with their kiddie condo purchase. With that approach, unexpected issues will not catch them off-guard and leave them scrambling to enact a solution.
Upon exploring all these areas, parents can take an objective look at their finances, expectations, and more to decide if a kiddie condo in Boulder or another community will serve their family best. If they believe this solution is the right one for them, they can reach out to a mortgage lender skilled in FHA loans to get started. By practicing their due diligence ahead of time, they can then move through the application process and beyond with confidence they are making the right choice.