Every February, CU students line up to "prelease" rentals for the fall term. Prices per bedroom start at about $700 per month for anything close to campus. If you want to live on the Hill, expect prices to start at about $800 per bedroom. Want your own place, not a shared house, expect monthly rent to exceed $1000.
The Parents' Dilemma
Most CU undergraduate students will spend their first year living in on-campus housing. After that, they'll want to live off-campus. If they rent a bedroom for the remaining three years, and you're looking at an expense of at least $25,200 plus rental insurance.
Rents may also continue to rise, as they have for the past 5 years in Boulder. Rents are rising because underwriting standards are tight. This means a huge number of potential buyers are renting instead. Meanwhile, CU increased Freshman enrollment by 500 students this year. It's supply and demand.
Instead of renting for $25,200+, many parents opt to purchase a condo near CU. Given ultra-low mortgage rates and the lack of return in other investments, this can be an attractive option. It gets even better if you have multiple children that might use the condo and you can extend your holding period beyond 3 years.
Peace Of Mind Isn't About The Numbers
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As I'm writing this, I realize that for most parents who decide to buy, it's not about the cost. It's about peace of mind.
Let's just say that certain parts of town, particularly near fraternities and sororities, are more lively than others. They also experience higher crime rates. Do you really want little Johnny living in that zone? And do you want to pay more for the privilege?
What about maintenance? Some landlords are very responsive. They own clean, well maintained units and if a problem arises, they are on top of it immediately. These are the good guys. Then there are the slumlords. The owners of these properties look at them as cash cows; every dollar not spent on maintenance is a dollar in their pocket. They ignore problems and do the least possible.
For the most desirable locations on the Hill, slumlords can do very little in the way of maintenance and still find a line forming to rent the property. And don't rely on the city's rental housing inspection to give you comfort. It doesn't take much to pass.
But what if buying were about the same cost as renting? Would it give you a reason to consider the option?
The Numbers
Here are what the economics of owning might look like. For $259,900 you can purchase a 2 bedroom, 2 bath unit at Gold Run (
example). Full disclosure; it's my listing. There are 9 other units currently available (
click here) with prices that start below $200,000. Keep in mind that the price depends on how many bedrooms, whether the unit was recently constructed, has elevator access, underground parking, views, and whether it over-hangs the creek (among other factors).
Historically, Gold Run has been a good choice for parents because it's directly adjacent to CU, on the bike path to downtown, and not in the party zone (i.e. the Hill). It also has a decent health club facility and reasonable HOA dues. There's a big grocery store nearby and plenty of other shopping/entertainment options. There are other options available in Boulder, of course, and you should see them before making an offer.
Taxes for this condo are currently about $1,700 per year and you'll want to buy some homeowner's insurance. So, let's estimate taxes and insurance at $2,100 per year. If you buy a unit with recently upgraded mechanicals (heat, a/c, water heater), such as
my example, you can expect little in the way of additional maintenance inside the unit.
Put down 30% and obtain a 4%, 30-year mortgage. Your monthly payment is looking like $1,044 (including insurance and taxes). Toss in another $286 for the HOA for a total of $1330. Rent one of the bedrooms out to a friend for $700/month and your monthly cost is $630. Over the three year period, that saves about $2,500 over renting. I'd consider that about a break-even.
When Your Kid Moves Out
Assuming a 1% rate of appreciation, conservative for the long run in Boulder, you're looking at a sale price of $267,812. That assumes your kid isn't on the "five year plan." If you choose Silver Fern to represent you again (repeat client), I will give you a big break on the commission. But let's say you didn't know better, chose one of my competitors and pay the full 6%. After paying the fees and the loan balance, you'll still end up getting about $80,000 in net proceeds, or drumroll... approximately your down payment.
So appreciation washes out, too. Again, the real benefit is in peace of mind. Your kid will be living in a clean, well-maintained unit right next to campus. They won't be dealing with a slumlord and because you chose wisely, they won't live on the Hill next to the greek houses, the pot shops, and the late night parties. Instead, they'll have a nice fitness center, volleyball and tennis options, and a fairly quiet place to live and study (especially if you buy on the top floor).
When you sell, hopefully the market will be in your favor, too. Location-wise, Gold Run is well positioned for downside risk protection (and upside potential). It's right where CU is growing the most, with hundreds of millions recently spent on new buildings. Of course, that doesn't make it immune to market forces. Annual appreciation could be greater than 1% during your holding period or it could lose value.
If the market is down when you want to sell, my advice would be to consider keeping and renting it. At $1400 per month, the rent covers the loan and the HOA nicely. Finding a tenant at Gold Run is also not challenging because of proximity to CU. After 3 years, you may even be able to bump the rent a bit.
What About...
I tried to keep it simple in the example above, but there are lots of additional factors you should think about. For example, you might qualify for depreciation during your ownership period, a potential tax shelter. Most of our clients don't qualify (they earn too much), you'll want to talk to your accountant about that. In this example, I assumed you don't qualify for depreciation. If you are claiming your child as your legal dependent to get the deduction, that might also influence how taxes and capital gains are handled on the property. Again, talk to your accountant.
I'm also ignoring various small transaction fees in my example above, adding them up and you'll probably end up at a wash. For example, when you sell, you'll pay for title insurance and the title company will also charge you a few hundred bucks to handle the closing. If little Johnny punches holes in the walls or otherwise trashes the place, you'll pay for a bit of clean-up in order to sell the unit. But you would have paid the slumlord damage charges too, so that probably nets out.
Final Note
Owning a rental unit in Boulder (or anywhere else) is not for the faint-hearted, but it can be a better return than your alternative. This goes especially for the parents of a CU student. If you rent, you'll pay the slumlord a guaranteed $25,200 expense. Buy intelligently on the other hand, you'll have expenses that are about the same but more importantly, you'll also have deep peace of mind.
It's true, prices could fall further. Anybody who tells you different either doesn't know better or is not being honest. However, after 5 years of downturn, I believe the big drop is over and downside risk is limited. To help you get comfortable, I'm happy to walk you through the price history at Gold Run, or any other development. You should know how a development fared during the most recent downturn and during the big upswings of the past. The past is not the future, but that analysis should give you some comfort.
Before you buy at Gold Run (or anywhere else), you should also do your compete due diligence. HOAs can be over- or under-funded with maintenance reserves. Management companies change. Development patterns can have a huge impact on appreciation. Some units are energy efficient. Others are horrible inefficient. At Silver Fern, we can't be legally responsible for the due diligence but we will do our best to help you along the way. When you call me (303.746.6896), ask about my due diligence checklist.
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