Accommodating your post-secondary student - does buying make sense?
Each year thousands of new high school graduates head off to other cities and towns for their post-secondary education. Some will stay with relatives; many will find accommodation in residence. You may be considering other options like renting or even purchasing a condo or house for your child. If so, how do you make the right decision for your situation? Start by checking out these purchasing pros and cons.
Crunch the numbers - don't let them crunch you
Anyway you look at it, financing your child's post-secondary accommodation will be expensive. That's why you should consider helping out only if you have a solid financial plan and available resources. If you are certain you can cover the costs, be sure to factor this into your decision: All the money you spend on your child's rent or mortgage payment is no longer 'available' to save or purchase an alternative investment. For example, $500 a month invested over four years in a diversified mutual fund portfolio could grow to over $68,000 in 20 years, assuming an average 6% pre-tax rate of return.* Your return for the same amount 'invested' in rent - zero.
Why should you rent
It can be challenging to find suitable property in a distant location. Renting is simpler and you don't have to worry about paying for repairs if things break down. Renting can also be a sensible alternative because students typically do not plan to stay in the same place after graduation. The cost of buying and selling property can total up to 10 per cent or more of the property's value and it can take several years to recoup those costs - meaning that a purchase decision makes the best financial sense when you plan on holding a property for at least five or ten years.
Why shouldn't you rent
Renting seems to be the cheaper alternative, but real estate enthusiasts will tell you that's untrue because you're not building equity.
Why should you buy
Rent is expensive; a property purchase is an investment that should increase in value over time, depending on market conditions.
Why shouldn't you buy
What if your property price does not go up? It's very difficult to 'time' the housing market. And although it's easy to be dazzled by the magic of leveraging - being able to put down just $25,000 on a $100,000 property for example, consider this: If that property drops in value by $15,000, the return is not a negative 15 per cent, but rather a negative 60 per cent - and the mortgage, utilities, taxes and maintenance still have to be paid!
Making the right decision
If you've weighed the pros and cons and are leaning towards purchasing a property, here are three basic questions you should be able to answer 'yes' before proceeding:
- Is this a good real estate decision? Check out the local economy, the quality of the neighborhood and, most importantly, the location of the property. Make your investment decision based on a solid financial case, not solely on 'accommodating' your student.
- Will the property generate a secure rental stream, regardless of what happens in the future? Your student will move out one day. When that happens, will your property still deliver enough income to cover expenses?
- Is this purchase consistent with your comfort level with investment risk? Real estate holdings should generally make up no more than 10 per cent of a total investment portfolio. Review your existing portfolio with an Investors Group Consultant to see if a real estate investment makes sense.
You want to give your children the best start in life and covering their student accommodation costs will certainly help. To be sure you're making the right decision for your children and your own financial well-being, you can get help too - call an Investors Group Consultant today.
*The rate of return is only to illustrate the effects of the compound growth rate and is not intended to reflect future values of the mutual fund or returns on investment.
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This article, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
© Copyright 2007, Investors Group. All rights reserved. Do not reproduce without the express written consent of Investors Group.
