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Student Home Purchase Plan
Tuition costs are climbing, housing costs are climbing, it seems like all the costs for students are climbing these days. Students can afford cost increases less than any other demographic in Canada. Because of this, parents and students alike are looking for new ways to offset the costs of education.
Student loans can be used to defer these costs to some extent, but they need to be repaid after graduation. Its difficult to climb the corporate ladder or get ahead in life when you have $30,000 worth of debt before your first job is even found!
Bursaries, grants, and scholarships are another great source of funding for a student. However, the amount of money available is thinning, and the competition is growing stiffer for this money each year.
The average student, over a 4 year degree, pays over $16,000 in tuition and books. Housing costs approximately $38,000 for a 4 year degree. This is based on rent of $800 per month for 48 months.
This means the total cost of education for a student is over $54,000 before paying for any clothes, food, or recreational expenses. Given that the average student doesnt qualify for more than about $9000/year in student loans, this means an average student needs to find over $18,000 during their 4 year education career to be able to go to school. Not to mention the cost of food and clothes.
So how does a student get ahead in life, avoid massive student loans, and still get an education?
Many parents have been turning to Real Estate as a solution for a solution. Let me explain what theyre doing?
When their first child enrolls in university, the parents purchase a small home with easy access to the University. The more bedrooms the better! This opens many possibilities for the parents, as well as the students.
First, the property will likely appreciate in value, presenting the parents with equity that can later be used to repay student loans or their own personal use.
Second, the rent the student would have paid to a landlord or dormitory is being used to repay the mortgage, creating more equity in the property.
Third, being a rental property, the tax benefits of the property are fabulous. Any interest paid on the mortgage is a write-off. Maintenance and improvements, as well as taxes and often utilities, are expenses that can be written off.
Fourth, there is the potential for additional tenants. Suppose you were to purchase a 3 bedroom bungalow for approximately $150,000. The cost of the mortgage would be approximately $900; based on a 5.5% 25 year mortgage with 5% down payment. Thats just $100 dollars more than rent on a typical 1 bedroom apartment close to the University of Alberta right now.
Your child finds 2 roommates to share expenses with. They each pay you $600 per month; the tenants are then saving $200 per month over the cost of renting an apartment. A good deal for them!
Your total revenue on the home is $1200 per month. Your child lives for free, and clears $300 per month, which can be put towards living expenses and spending money. Now your child can go to school, not work, and focus on studying.
What if you were to finish the basement with an additional 2 bedrooms? That would essentially double your income, or allow you to clear $1500 per month. Your child gets $500 per month for expenses and living, and theres an additional $12000/year ($100/month) to be put towards tuition, books, and other university expenses.
Lets look at this again, using 2 family as examples. The Smiths and the Jones.
The Smiths send their son, Steve, to university for 4 years. He rents an apartment in residence for $800 per month while going to school. His tuition, including books, is about $4000. Spending money, clothing, and food costs are approximately $500 per month. So Steves annual costs are approximately $20,000 annually.
Student loans and scholarships (assuming Scott qualifies) cover approximately half of this, leaving him and his parents to cover the rest. Scott has to get a part time job to pay for some of it, and work full time in the summers to help.
The Smiths struggle through, using their savings and hard work to get through a tough 4 years. When Scott graduates, he has to start repaying is $30,000-$35,000 in student loans. Hell be making that payment for the next 10 years?
Now lets look at the Jones.
The Jones purchase a home close to the school for their daughter Sally. They make a 5% down payment ($7500) on a home worth $150,000. It has 3+2 bedrooms. Their daughter lives in 1 room, and manages the rest of the tenants in exchange for free rent and a monthly allowance of $500 to cover her living expenses. Each of the additional 4 rooms are rented for $600 per month including utilities and laundry. A great deal for ANY student.
Each month Sally collects the rent from her 4 roommates, totaling $2400. She keeps her $500, and deposits the rest into a bank account dedicated to the property. The mortgage and taxes get paid each month from that same account. Together, these cost $1100 ($900 for the mortgage and $200 for the taxes). That leaves an end-of-the month profit of $800 for the property. That money just sits in the account in case of emergencies, repairs, or other unforeseen expenses.
Remember, the taxes and interest on the mortgage are tax write-offs at the end of the year for Mr. & Mrs. Jones.
At the end of the first year, September to December, there is $3200 worth of cash in the bank account, or roughly 50% of the initial down payment. Sally is happy because they can use that money to pay for Sallys 2nd semester tuition without any student loans, not to mention that she hasnt needed to work a job while going to school.
Mr. And Mrs. Jones are happy because of the great tax write-offs they get from the property, plus Sally has no excuses for not getting good grades.
Over the summer, the house pays for Sally to take some extra curricular courses, or perhaps do some traveling. Maybe she even just lounges around the yard and does nothing. She has options because she doesnt have to work.
By the start of September of the next year (beginning of Sallys 2nd year at university), the Jones have collected $6400 in revenue from the property. Sallys tuition for the next semester is paid, so are her books and shes living for free. The cycle continues for the rest of her time at university.
At the end of the 4 years, they have profited over $20,000 in cash after all expenses. They have also been paying down the mortgage and the property has likely increased in value.
Sally hasnt worked a single day while at school, she has absolutely no student loans, and is fresh and ready for the work force. Shes carrying no debt, so she quickly gets ahead in life.
Sally graduates with honors because she could focus on her studies and not worry about making money for school. Total investment from the Jones: $7500 in the initial deposit plus Sallys first semester tuition of approx. $2000.
Total profits; $35,000 in cash and equity. Is it any wonder why were all trying to keep up with the Jones!
But it doesnt stop there?
The Jones now have to figure out what to do with the property. Sell it? Sure. They would net a tidy profit from the home. Remember, the mortgage has been paid down for the last 4 years, as well as the value increases of the home over those 4 years.
But lets say they keep the home and rent out the entire property to students. Their total revenue could be as high as $3000 per month, or $1900 after mortgages and taxes. And thats assuming that the rental rate hasnt gone up over the 4 years?
If you were the Jones, you could go to www.mercedesbenz.ca, pick out his and hers Mercedes convertibles, and not pay a dime for them. The leases would be covered every month by the $1900 in revenue.
For being such great parents, and paying for your childs entire education, you deserve a couple of convertibles dont you?!?
All figures are approximate, and provided as examples only. Some properties may not perform as well, while some may perform better. To select a good investment property, contact a real estate professional like John Carle and Sharon Gregresh. We do not guarantee good grades for your children at school.
Refinancing Your Home - How and Why?
Chances are you may need a little extra money to get some work done around the home or perhaps your current interest rate is 7.5% and the prime interest rate is 6.0% there is a benefit to restart the clock on an existing mortgage and save thousands of dollars over the life of the loan. The first thing you must realize is that refinancing your home can also be tax deductible, meaning that you will receive an extra tax advantage for the closing costs associated with a refinancing no matter what the condition, even in bankruptcy!
The first step of refinancing your home is finding a reputable lender that will get the job done right the first time. Think of refinancing similar to purchasing your home, as the same information is necessary in order to get started. You will need to produce the same documentation that verifies who you are, how much you make and what you currently owe. A reputable finance company will shop your loan around to several lenders and get you an acceptance in a matter of days and in some conditions in a matter of hours.
Once you set the ball in motion, you will have to get your current mortgage holder to provide a statement of payoff that shows how much you owe at this point in time. Your home will need to be appraised in value and an interest rate will be locked in for a period of 60 days. You will be asked to sign several pieces of paper to release this information from the mortgage company. You may also have to turn in the cover page of your homeowner?s insurance policy to show the break down of your coverage.
Should all the paperwork be in order, you will be given a tentative closing date by a registered title company. It is the title company?s job to make sure that all documentation and title pass from the current bank to the new one at the settlement table. At the close, you will resign your paperwork and title documentation over to a new lender. In some cases, it may be the same lender as the mortgage company that you currently have. Should you have asked for some cash back a check will be presented at this time.
Home Loan Applications Made Easy
You have finally found the home of your dreams. You have searched all over and are ready to purchase it. Before you even make your offer you should seek out the financing first. In some cases, it is easier to have a pre-approval in hand before making any financial commitment through a contract. Why get your hopes up after you purchase the home when you can buy with assurance and wait by the settlement table. Before you can buy anything, you will need to get accepted by a reputable lender. There is much you will need to know, as this will be the largest purchase you will ever make. You will need to fill out a mortgage application first.
As with any mortgage application, you will need to provide the necessary information to the lender so they can weigh the option to grant you the loan. This information is based upon your financial picture. It consists of your social security number, date of birth, and where you have worked for the past 3 years. This information will give the lender a good picture about your spending habits through a credit score. Depending on the score itself, the lender will make a financial decision to grant or deny your request. You may also have to explain certain circumstances in your life such as a job loss or credit rating should they not be up to par.
Upon completing the mortgage application review, you will be given an amount in which you can afford. Usually the sales price of the home is based upon 3? times your annual income. It is also equivalent to the percentage of debt to income ration determined by FHA (Federal Housing Authority). Should you meet these guidelines you will be given a green light to go and look for a house in this range. You may be able to afford more should you have a sizeable deposit. There are also programs that you can use to get into a house with only 3% down. Some lenders ask that you fill out the home loan application in person rather than online so that they can answer any questions during the process.
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