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U of G Parent Math

So your child is attending the University of Guelph next September, you live out of town and you need to find affordable student housing for the next few years.

What do you do?

There are two basic options for you at this point:

1.    Rent a room in a house or apartment just for them during this time,

Or

2.    Purchase a student rental investment property in which they will live and rent out the other rooms. 

With the first option there are some pros and cons. Honestly, it will be less work and responsibility for you, and essentially worry free for the most part. You pay the rent to the landlord and they do the rest. The headache factor should be low and it will require minimal effort on your part as the parent. However, all the money that you give to the landlord over the course of your child’s University education goes directly into their pocket and you will never see it again.

The second option will require more work and responsibility on your part. You are responsible for the entire investment property, maintenance, tenants, bills, taxes, and everything else a typical homeowner could expect. This isn’t the end of the world, nor does it mean you will have to quit your day job in order to run it, just that it’s a little more hands on than renting a room. The major bonus here is that the money you would be paying for your child’s rent to someone else can now be redirected into your own pocket. The other tenants pay down your mortgage and you get the benefits of the investment’s property value going up, assuming the real estate market is on the rise.

So let’s assume your child is attending the University of Guelph for the next 4 years and take a look at the financials for each option.

Option 1 – Rent a room

Total Monthly Expenses = $500

Total Monthly Income = $0

Total Housing Expense over 4 years = $24,000 ($500 x 48 months)

Total Equity built up over 4 year term = $0

Option 2 – Purchase a home

(Let’s assume you are buying a 4-bedroom condo townhome student rental for $350,000 with a fixed mortgage rate of 2.6%, compounded semi-annually, for a 4 year term, amortized over 30 years with a 20% down payment)

Purchase Price – $350,000

Down Payment – $70,000

Additional funds required on closing– approximately $5,350 (Land Transfer Tax, Lawyer fees, home inspection, and title insurance)

Mortgage Amount – $280,000

Monthly Mortgage Payment – $1121

Monthly Property Taxes – $259

(MPAC Assessment of $250,000 x 1.241067% 2016 Guelph Mill Rate)

Monthly Home Insurance – $60

Monthly Condo Fee – $210

Monthly Utilities – $250

Total Monthly Expenses = $1900

Total Monthly Income = $1500 (3 rooms x $500)

Your child’s monthly rent = $400

Total Housing Expense over 4 years = $19,200

So the cash flow works out great. It’s actually $100 per month cheaper than renting a single room, and over the 4-year term you would save $4800 in rent.

But here’s the kicker!

Over that 4-year term, your mortgage gets paid down $33,585 and, assuming a 5% property value increase per year, your investment property would appreciate $75,000 in value!

Total Equity built up over 4 year term = $108,585

So if you take your total equity of $108,585 built up in your investment property over the 4 years, minus the $19,200 in housing expenses, you are actually up $89,385 in equity versus renting a room and having nothing to show for it!

If you consider the fact that, after 4 years, your initial investment of $75,350 would give you a net (equity) return of $89,385, which is a 119% return on investment, you would be effectively investing your money at a rate of 29.75% return on investment per year! What other investment option gives you that kind of return, plus houses your child for 4 years?

If you don’t happen to have a lump sum of cash just lying around for a down payment on a student rental, you could consider re-financing your current home or borrowing on a line of credit to come up with the necessary funds. You will have to pay a little bit more per month in interest, but it will still likely be much more profitable than renting.

Now, before you go hopping into your car and driving down to Guelph to visit some of the open houses with your cheque book out, there are still many things to consider when buying a student rental in Guelph such as; When is the best time of year to buy? How do I advertise to other students? How do I arrange the leases? Are they all on one lease, or are they all on separate leases? Do I go for an 8-month lease, or a 12-month lease? Do I have the lease start in May or start in September? What about the summer months when no one is living there? Do I ask for first and last months rent, or only charge first months rent because they are University kids? How do I qualify the tenants? Is it worth buying condo or should I go freehold? What is the maximum number of rooms I can legally rent in the City of Guelph without needing special designation? For the inexperienced University of Guelph parent investor, the list can go on and on.

Fortunately, all of these questions and more can be answered by finding a knowledgeable and professional Realtor that not only knows the Guelph Real Estate Market and investment properties, but also understands the Guelph Student Rental Market and can help you find the best investment property that suits your needs.

Combine this with a willingness to take on just a bit more responsibility than renting a room and you have yourself an amazing opportunity to build equity for yourself and your family, diversify your investment portfolio, and teach your son or daughter some valuable life-lessons around home ownership.

For many of the University of Guelph parent investors that have been patient enough to see this plan through to the end, they have looked back on their decision to buy a student rental and, when all was said and done, they wouldn’t have done it any other way!

Until next time, Happy Investing!

Kyle

*Disclaimer: Although every attempt has been made to provide accurate information in this article, I am not representing myself to be a professional accountant or financial advisor of any kind. All figures are deemed to be reasonable estimates of realistic figures based on past trends in the local real estate market. Actual results may vary. Buyer should take due diligence regarding specific expectations of investment performance.

1 Response
  • Jeremiah Tamburrini
    Jeremiah Tamburrini
    February 7, 2016

    Another fantastic article Kyle! So good to see what the actual numbers can be when you purchase an investment instead of just renting a room. You’re not only investing in your child’s future but your own as well!

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