Boston is a college town. In June and July, I get calls from parents who are thinking about buying a condo here, so that their college-aged child can save on rent. This is known as a โ€œkiddie condo.โ€ Sometimes, it makes sense. Most of the time, it does not.

Condo Pros:

If the mortgage is lower than the cost of rent, this saves money every month. (Maybe, sort of, see cons below).

If the property is big enough to have roommates/tenants, this saves money every month by collecting rent to help pay for the mortgage. (Sort of, see cons below).

Prices continue to rise in the Boston area, so purchasing here is a good investment. If you are confident that the student you are getting a condo for intends to live around Boston for the next 7-10 years, yes. In that case, the costs that eat into your profit on this investment are spread over a longer period of time. (Consider the cost of buying and later selling, see cons below).

Buying will have more choice for a quality living situation for the student. (Maybe, maybe not. It depends on which college area you are looking at).

Condo Cons:

Rentability:ย For a student condo purchase, if you canโ€™t cover the PITI mortgage (principal, interest, tax, insurance), you may be stuck taking a monthly loss.

  • Expecting your student to rent to roommate/tenants adds stress to your student/landlord.
  • Student housing demand goes way down in the summers, when large numbers of students leave. It is difficult to keep property rented for June and July.
  • What happens if your student decides to take a leave from college or quit altogether?

Your mortgageability:ย If you are getting a mortgage for this condo, your total mortgages (including any other property mortgages) cannot exceed about 33 percent of your income.

Your investment potential: If you are purchasing the condo with cash, as an investment, you need to calculate the cost of buying, maintaining, and selling the property. These costs cut into your profit. Short-term real estate investment is not as lucrative as you might think because of the cost of buying, maintaining, and selling real property.

These are typical costs. (They vary quite a lot. Ask your lenders, inspectors, and attorneys for typical fees):

  1. Brokerage fees:ย The commissions paid to agents come out of the purchase price (off the sellerโ€™s profit). Sellers feel like they pay it because it is subtracted from the sale price when they sell. Buyers are actually paying it as part of the sale price of the property. Either way, it is a cost of buying and selling real estate.
  2. Closing costs:ย There are three costs you need to cover at closing.
    • Yourย total depositย on the house. Most buyers put 5 percent down with their Purchase and Sales Agreement. If you are putting a total of 10 or 20 percent down at closing, that will be in the check or wire transfer you must have ready for closing day.
    • You willย pre-pay taxes and insuranceย to begin your escrow accounts; your lender will pay your insurance and taxes for you out of those funds. Most lenders will want three months taxes โ€“ figure that out from the listing sheet for a quick estimate. For insurance, most lenders want you to buy a year of homeownerโ€™s insurance before closing, then put three months into escrow for next year. Figure $1500 a year for insurance.
    • Fees to your lender.ย Most borrowers pay for application fees, surveys, appraisal, lenderโ€™s attorney, title search, and other administrative fees. Expect at least $3000-5000, sometimes more.ย The good thing about the current lending laws is that you will get an accurate list of your closing costs when you apply for your mortgage. Read your Good Faith Estimate carefully.
  3. You should get aย home inspectionย on any property you plan to buy.ย  Home inspections cost between $400-1500, depending on the size of the property and the testing you may want to have done.

4. You pay for the attorney who closes your mortgage for the lender. This fee is in those closing costs above. You may also need to hire an attorney to review your Purchase and Sales Agreement and to review your Condominium Documents. I have seen buyers pay as much as $1500 for this additional work, if it gets complicated. Most pay under $500 in addition to the closing attorney fees.

5. There will be repairs and improvements you are going to want to do when you move in. Save $5-10,000 for that, since most of the houses around here are old and will need something.

6. Then there will be moving costs, which vary depending on how much stuff you have. Put aside at least $1000 for this.

Some parallel advice, for when that student graduates:

In 2015, I critiqued a blog from Money Under 30 about starter homes. There are a number of financial pitfalls to buying a property and holding it for only 3-5 years.

That 2015 entry was aimed at first-time buyers under 30, but many of the factors that make a starter home economically bad for you are also true of buying an additional property for a child to occupy while they are in college.

For 30-somethings buying a starter home:

  1. Rentability:ย Before buying a starter, be clear what the prevailing rental rate is. If you canโ€™t cover the PITI mortgage (principal, interest, tax, insurance), you may be stuck taking a monthly loss.
  2. Your mortgageability:ย In addition, to trade up you will need the income to cover two mortgages. 33 percent of your income must be more than both the starter house mortgage and the forever house mortgage. You will find it very hard, if not impossible, to find a seller willing to sell his or her forever house to you contingent on you selling or renting your starter house.
  3. Your next down payment:ย In a hot market, higher down payment buyers are at a better advantage. Anyone with less than 20 percent down have to scale the additional hurdle of PMI (mortgage insurance) standards to get their loan. In our area, a forever house could be $700,000 or more. Thatโ€™s $140,000 youโ€™ll need, plus moving expenses.