Should you buy a house for your college student?

As student housing rental prices skyrocket and condo sales stagnate in major cities, many parents are contemplating whether buying a condo or house for their college-bound child is a better financial move. However, it involves evaluating several financial and practical considerations.

Make your money work for you instead of someone else

Depending on where you are in Canada, you’d be hard-pressed to find a one-bedroom apartment for less than $1200 a month – to say nothing of places in larger cities such as Toronto fetching $2,500/month on average.

Over a four-year degree, that’s $57,000-$120,000, give or take. But what if, instead of paying a landlord through the teeth for a place close to campus or forking over $6,000-$14,000+ a year for a campus dorm room, you built your own equity?

With the median sale price for a condominium in Toronto around $640,000, a down payment of 20% ($128,000) would be required to avoid paying mortgage insurance fees. At an interest rate of 5% on a 5-year fixed mortgage, monthly payments would be in the range of $3,000.

Compare this with interest rates just five years ago around 2%, monthly mortgage payments would have been around $2,200.

The case for buying a property somewhere gets even stronger for families that have multiple students in the same city.

Considerations for ownership

There are a few significant questions to think about when deciding whether to co-purchase a home with your child. Here are just a few of them.

Whose name is on the mortgage?

If parents do decide to buy a property, they must consider whose name the property should be under. Placing the home under the child's name may allow them to benefit from first-time homebuyer credits and new 30-year amortization rules for new builds, but is not without its challenges.

Jackie Porter, a certified financial planner and advisor based in Ontario notes that students typically lack credit history, which means they aren’t likely to qualify for the property on their own. This makes it necessary for parents to co-sign and prove they can afford to maintain two properties, still places the financial burden on the parents.

“The mortgage is a long-term commitment, so you have to really know your child to know if that's really even something that you should be contemplating at this juncture,” says Porter. “Ultimately it's a decision you need to make with a very clear head.”

Related: How to buy an investment property as a first-time homebuyer in Canada

Are you ready to be landlords?

One potential advantage of buying a property near campus is the opportunity to generate rental income by renting out extra rooms to other students. However, parents and their college-age children must be prepared to handle the responsibilities of being landlords or property managers.

Managing a rental property requires time and effort. Finding reliable tenants is crucial to ensure the property is well-maintained and rental income is consistent. You’ll also need to comply with local rental laws and regulations, which can vary widely depending on the location. And if you’re renting to other students, consider what happens between school years.

“Can they afford to have the property sit for a few months in the summer with no income from that person [renting] and still afford to carry it?” notes Porter. “These are the things the bank is considering as well. At the end of the day, they want to know you can pay for the property if you have students renting it, and that you can afford to carry the property if there's nobody in it.”

After all, even if the property sits vacant when class is not in session, property owners will still have to keep up with expenses like utilities, property taxes and/or condo fees, and maintenance to get the most from your investment.

Can you afford it?

Purchasing a property for a college student has become increasingly challenging, especially over the last couple of years, due to higher interest rates and more stringent financial requirements, says financial planner, Porter.

“That option isn't as attractive to parents just simply because the costs are becoming more prohibitive,” she notes, adding that she’s seen fewer parents even considering the option of buying a property for their college-age children.

“Too many things have gone up, including their own mortgage, for it to be a viable option,” she says. “I suspect more children are either going to be applying for larger student loans to cover housing costs or going to school closer to home so that there’s one less expense for themselves and for their parents.”

She says that parents need to consider the substantial down payments and higher mortgage amounts that come with owning a second property.

These additional commitments can be a significant financial burden, especially if parents already have their own mortgages and other financial commitments to worry about.

How to decide if you should buy a property for your college student

Make sure it fits in your budget

“People's cost of living has significantly increased and may significantly increase more as their mortgages renew,” says Porter. “A much more sober conversation needs to happen about whether or not you can even afford it.”

Parents should carefully assess their finances, including their current mortgage, retirement plans, and the stability of their income, she adds.

They should also weigh the total cost mortgage payments, property taxes, utilities, and maintenance with the potential income from renting out the unit.

Think about the future

Parents need to understand their child's long-term plans and commitment to their chosen school and program. A sudden change in the child's plans, such as transferring schools or even dropping out, could affect the practicality of owning a property near a specific campus.

“This can only really happen when the child decides where they want to go to school,” says Porter. “And then, is the child eligible for OSAP or some financial aid? What would that generate for them based on where they're going to live? It's a very huge part of the discussion.”

Seek professional advice

Given the complexity and potential long-term impact of this decision, Porter says parents considering buying a house for their college student would be wise to consult with a financial planner or mortgage broker.

“These professionals can help run scenarios, evaluate best and worst-case outcomes, and ensure that the decision aligns with the family's overall financial goals and stability,” she says.

While buying a property for a college student can offer potential benefits, such as rental income and long-term investment opportunities, parents must first consider their financial capacity, potential risks, and the practicality of managing an additional property – potentially one in another city or even another province. Ultimately, a well-informed and clear-headed approach, supported by professional advice, can help you to ensure you’re making a decision that benefits both you and your child in the long run.

Read more: How much mortgage can the median household income afford in these cities?