Published 5 October 2018
Las Cruces is a college town. According to the New Mexico Higher Education Department, so are 22 other communities in the state. What do they all have in common? College kids who need a place to live. In many cases, parents or grandparents pick up the tab for their offspring’s housing. Some shell out hundreds each month for rental payments, while others purchase a home and assume the role of their kid’s or grandkid’s landlord.
One of the most common obstacles that deter parents and grandparents from purchasing is the amount of cash required to swing the deal. That’s because lenders often lump parents who don’t intend to occupy the property into the same category as investors, who are typically required to make a down payment of at least 20 percent of the purchase price.
Another common obstacle is the fear that the property won’t increase in value enough over the term of their kid’s educational journey to allow for a profitable exit. And then there’s the horrifying possibility that their youngster will quit school after one semester, even if it’s for a cause as noble as joining the Peace Corps. Peace Corps possibility notwithstanding, it’s been years since market conditions have provided a more favorable atmosphere for overcoming the other two hindrances.
The large down payment requirement can easily be defeated through the use of an FHA Kiddie Condo loan, which requires a down payment of just 3.5 percent of the purchase price. The basic premise is that the parent and kiddie cosign, with the kiddie occupying the property. It’s the strength of the parents’ credit that makes the deal work.
The Kiddie Condo name is misleading because the loan can be used on just about any single-family home, townhome, condo, or doublewide (or larger) mobile home that’s taxed as real estate. In addition to sons and daughters, eligible co-borrowers include brothers and sisters, stepchildren, grandparents, nieces and nephews, and unrelated people who can demonstrate a “family-type, longstanding and substantial relationship,” according to FHA. The ages of the parties are not an issue. For example, a 25-year old grandchild can cosign for a 75-year old grandparent, and vice versa.
Overcoming the “Will I be able to make a profit?” anxiety is also possible, according to the National Association of Realtors Rent vs. Buy calculator (https://www.realtor.com/mortgage/tools/rent-or-buy-calculator/). The site reveals that a person purchasing a $150,000 home in the Las Cruces 88011 ZIP (pretty much everything east of Interstate 25 and south of US 70 to University Avenue) would gain an advantage after owning for just under three years. Other ZIP codes produced similar results.
The software assumes among other things: a down payment of 3.5 percent ($5,250), closing costs of 2 percent (around $2,600), a 30-year fixed interest rate of 4.75 percent, an annual appreciation rate of 4 percent, an income tax rate of 25 percent, a monthly rental fee of $1,050, and real estate selling costs of 8 percent. The data also indicate that the longer the buyer holds on to the property, the more profitable the endeavor. Bring aboard a couple of roommates paying $300 to $400 per month each in shared rent and utilities, and the cost of ownership diminishes significantly.
If you do decide to take a closer look at the Kiddie Condo possibilities, you may want to begin by having a serious discussion with your young‘un about that Peace Corps thing.
See you at closing.
Gary Sandler is a full-time Realtor and owner of Gary Sandler Inc., Realtors in Las Cruces. He can be reached at 575-642-2292 or Gary@GarySandler.com.