This guest post from Robb Engen is part of the “reader stories” feature at Get Rich Slowly. Some reader stories contain general advice; others are examples of how a GRS reader achieved financial success — or failure. These stories feature folks from all levels of financial maturity and with all sorts of incomes. Robb writes about personal finance at Boomer & Echo, where he and his mom (she's the Boomer, he's the Echo) offer their perspectives on saving, investing, and personal finance.
It's that time of year when high-school students are thinking about their future plans and what they're going to do for college. Most will be leaving the nest to live on their own for the first time.
My brother attended college in our home town, so he lived at home, saving on housing expense. However, I decided to get my college experience in another city and, after a long good-bye, set out to live in the campus residence during my first year of school.
Buying a House
Before year two, my parents and I decided to purchase a house for me to live in. We found a five-bedroom house and, since my parents had saved and invested all the family allowance payments they received over the years, we had a nice down payment. (“Family allowance” is the former name for the Canada Child Tax Benefit, which is sort of like the Child Tax Credit in the U.S.)
I assured my parents that I could handle the landlord duties and that I could easily find four students to rent the extra rooms. We opened a joint checking account for depositing rent money and paying the mortgage, utilities, and other bills. To this, we added $2000 overdraft protection in case all the rooms weren't rented year-round or other unforeseen expenses came up.
Good Decision Gone Bad
Unfortunately, much to my parents' dismay, I thought this “house account” could be used for my own personal spending. The overdraft quickly reached the maximum and was never entirely paid the whole time we owned the house!
I'm sure it was horrifying to my mom (who was a banker) to have a child with such poor money-management skills. Luckily, all of our bills managed to get paid on time, there wasn't much tenant turnover, and we didn't wreck the house too badly. After five years, we sold the house for a modest profit.
Since the money was originally earmarked for my education, my parents allowed me to keep the sales proceeds, which I used to pay off my student loans and purchase a new house. (I still own this second house; I live in it with my wife and daughter.) My money management skills are much better now, and I've taken steps to improve my finances since then.
Teaching Real-Life Experience
Despite the recent real-estate market turmoil, I still think this — purchasing a home together — is a great idea for parents who have children moving away to attend college. Buy a house and let your child act as the landlord, managing the bills, finding tenants, collecting rent, and keeping the house properly maintained.
While it's true that I wasn't really a fiscally responsible landlord (that was a huge responsibility for a nineteen-year-old!), this experience taught me many valuable lessons.
Before all of you parents out there are scared off because you think your child will destroy the house and leave you in financial ruin, let me highlight some of the benefits of this rental property venture:
- Establishing a good credit rating for your child. As a partner in this venture, I got my name on the title of the house (co-signed by my parents). It felt pretty good to call myself a home owner at the age of nineteen, but the real benefits were in building up a credit rating at an early age.
- Keeping tabs on your investment. Buying rental property in another city can be risky when you aren't around to check on things. And hiring a property manager to look after the place can be expensive. Although our rental property was located in another city, my parents could still keep tabs on what was going on with the house since their child was acting as the live-in landlord. We shared a joint account for bills, and we could chat any time about any maintenance or vacancy issues.
- Setting up your child for success. Again I was only nineteen when we started this venture. I learned a lot during my five years at this rental property. True, some lessons were learned the hard way…but that's what life is all about — learning from our mistakes. I managed the household expenses, took care of the lawn and simple maintenance (I stress the word simple), found roommates, replaced roommates, evicted roommates, and really figured out a lot about people and how to be a good judge of character.
While I was in school I managed to work 30 hours a week in the hospitality industry. I advanced fairly quickly, using many of the skills I learned while managing this rental property. The senior administration also held a perception of me as being more responsible and professional than my peers. Whether or not that was true, it certainly helped me stand out from the crowd when it was time to be promoted.
A Creative Solution
For all of you parents out there who are thinking about saving for your child's education, remember that there are alternatives to just handing over your money and hoping they make the best decision.
Since the money my parents saved ended up being used for a down payment on our house, I still had student loans to pay off. We didn't come out any further ahead financially, but it was the residual benefits that paid off the most for me.
I know our example wasn't perfect, but I'm thankful for the opportunity my parents gave me. The experience helped develop some tangible skills that I wouldn't have learned by staying at home or living in the college dorms.