Many parents dont realize the potential advantages of investing in college-area real estate with a kiddie condo loan. A “kiddie condo loan” is the term given to FHA loans in which two blood relatives (most often parents and adult children) co-sign. The property doesnt have to be a condominium. Several investment strategies can prove to be lucrative when purchasing a kiddie condo. Keep reading to learn about the pros and cons of the three most common kiddie condo rental strategies.
Buying your first rental property can be an exciting yet daunting endeavor. As real estate investors, we know one of the biggest obstacles is often coming up with enough cash for a down payment. That’s why FHA’s “Kiddie Condo” loan program can provide a unique opportunity for both new and experienced investors.
In this comprehensive guide, I’ll explain what FHA Kiddie Condo loans are, who they are designed for, and how investors can utilize them to purchase rental property with just 3.5% down. I’ll also cover the pros and cons so you can determine if this type of financing aligns with your real estate investing goals.
What Are FHA Kiddie Condo Loans?
First, let’s clarify what we mean by “Kiddie Condo” loans. This is an informal term used to describe a certain type of FHA-insured mortgage loan.
Specifically, FHA guidelines allow parents to co-sign a mortgage with their adult children. As long as the child lives in the property for at least one year the loan can be structured as an owner-occupied purchase. This provides access to FHA’s low down payment options and owner-occupant interest rates.
The “kiddie condo” designation comes from the fact that these loans are commonly used by parents to help their kids buy a condo or townhome. However, the program can finance any owner-occupied property up to 4 units.
It is not an official FHA product, but rather a creative application of existing FHA policies. Mortgage lenders market them under names like “Kiddie Condo” or “Parent-Child FHA loans”
Who Are FHA Kiddie Condo Loans For?
These loans are primarily targeted at first-time homebuyers who don’t have enough cash to make a large down payment. Parents co-sign the mortgage to boost their kids’ buying power.
However, real estate investors can also utilize this financing strategy. If you purchase an investment property with your adult child, they can live on-site for one year to satisfy FHA’s owner-occupancy rule.
Meanwhile, you collect rental income from any additional units. This allows you to buy a property with just 3.5% down while qualifying for low FHA mortgage rates.
The program does require careful coordination with your child. They must be an owner-occupant for at least 12 months and should have the skills to manage the property. However, it can be a win-win for families looking to partner on an investment.
Pros of FHA Kiddie Condo Loans
Let’s explore the biggest advantages of financing investment properties with FHA’s Kiddie Condo program:
Low 3.5% Down Payment
The biggest appeal is that FHA only requires a 3.5% down payment from qualified borrowers. For a $200,000 property, that’s just $7,000 upfront versus $40,000 for a 20% down conventional loan.
FHA mortgage insurance is required, but overall this drastically reduces the cash needed to enter the market. Parent co-signers can also provide additional assets to strengthen the loan application.
Owner-Occupied Rates & Terms
Your adult child living on-site for one year allows the purchase to be structured as an owner-occupied FHA loan.
This gives you access to lower interest rates and mortgage insurance compared to non-owner occupied loans on rental properties. The savings can amount to 0.5% – 1% on your interest rate.
Purchase 2-4 Unit Properties
FHA allows Kiddie Condo loans to finance properties with 2-4 units. Your child lives in one unit, while renting the others provides cash flow.
You don’t have to occupy the property yourself. As long as your adult child resides there for at least 12 months, you can buy a multi-unit rental remotely.
Build Credit History
First-time homebuyers can build credit history through on-time mortgage payments. Just be sure to consult your child before applying for any loan on their behalf.
Cons of FHA Kiddie Condo Loans
While these loans provide excellent financing options, there are some limitations to consider:
High Mortgage Insurance
FHA Kiddie Condo loans require both upfront and annual mortgage insurance premiums. This is charged for the full duration of the loan.
On a $200,000 loan amount, this can tack on $200 – $250 per month. Carefully crunch the numbers when comparing to conventional loans.
Not Indefinitely Scalable
As the co-signer, the number of mortgages you can obtain is limited. Too many loans on your credit will make it difficult to qualify for additional financing.
Utilize a few strategically, but don’t plan to buy dozens of properties using the Kiddie Condo strategy.
Contingent On Child’s Cooperation
Your adult child must be an owner-occupant for one year and properly manage the property. Make sure you have open communication and set clear expectations before purchasing.
If your child is unable or unwilling to fulfill their duties, it could derail the entire investment. Protect yourself by drafting a detailed partnership agreement.
Entangled Finances
Comingling family finances can get messy if conflicts arise down the road. Consider how you’d handle issues like an inability to refinance into one party’s name or if one owner wants to sell.
I recommend hashing out an exit strategy upfront before buying together. Be cautious about relying entirely on verbal agreements.
Tips for Investing with FHA Kiddie Condo Loans
If you determine this type of financing aligns with your investment strategy, here are a few tips:
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Thoroughly evaluate potential neighborhoods and properties to ensure they cash flow. Run ROI projections on rental income.
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Make sure your child has the credit score and debt-to-income ratio to qualify. Review FHA requirements.
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Consult multiple lenders to compare interest rates and fees. Apply with the lender offering the best overall value.
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Set clear expectations about your child’s responsibilities. Create a written partnership agreement detailing each party’s rights.
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Discuss exit strategies for resale or refinancing in case your investing priorities diverge down the road.
Final Thoughts
The Kiddie Condo program allows investors to purchase rental property with just 3.5% down by involving an adult child occupant. FHA mortgages provide affordable financing options, but shouldn’t be entered lightly.
Thoroughly evaluate your real estate strategy and risks associated with co-owning property across generations. When executed responsibly, FHA Kiddie Condo loans can help both new and experienced investors build wealth through rental property ownership.
Co-Owning with a College-Aged Child
The first strategy parents often explore with a college-aged child is simply co-signing a loan on a one-bedroom property, most often one of the condo communities near campus. Parents then pay the mortgage on the property, and their student/child has a place to live rent-free while attending college.
College dorms are expensive, and rent near campus can be even worse. Co-owning a home with a child means that the money paid for housing during their college years goes into the equity in an investment property rather than rent in a landlords pocket. In this example, the child would live in the “kiddie condo” without roommates since its a one-bedroom unit. Theyre responsible for daily upkeep, and the parent receives appreciating property value for those years that the child is in college.
If the parents qualify for an FHA loan on this home purchase, they can do so for a down payment of as little as 3.5 percent (as opposed to 20 percent on a traditional home loan). FHA loans for kiddie condos also receive slightly better interest rates, and the family does not need as many assets for collateral to satisfy the terms of obtaining a loan. While neither party will earn passive income during the students college years, the investment can pay off down the line if the parents and student sell for a profit or decide to rent it out after the student graduates.
Pros:
- Paying into home equity as opposed to paying rent
- College student receives a place to live free during school
- Better than renting an investment property to a stranger, less likely to have property damaged
- Sell for a profit or rent out after the student graduates
Cons:
- Unlikely to turn a profit if the property is sold after just four years
- Requires an extra-responsible student who can handle DIY home maintenance
- If child transfers to a different school, parents are stuck with an investment property they may not want
Buying a Multi-Family Property as a Kiddie Condo
If parents want the whole landlord experience and make a more significant investment, a multifamily property could be the way to go. In this scenario, the parents buy a duplex, triplex, or fourplex property in the college town. The student lives in one unit, and the other units are rented out. Per FHA multi-family regulations, investors can not buy any property larger than four units.
This counts as an “owner-occupied” property and qualifies for favorable FHA loan terms. That means a down payment of as little as 3.5 percent. Plus, a lower interest rate on an FHA loan for the property will almost always translate into a cost savings of hundreds of thousands of dollars over the life of the loan.
Heres another vital thing to know about FHA kiddie condo loans for a multifamily property: even the theoretical income from the extra one, two, or three apartment units can be applied to help the parents qualify for the loan.
This scenario could mean increased income over and above the mortgage price on the property. However, it is the complete “landlord” experience. There are increased responsibilities and increased liability insurance payments on a multifamily property.
Pros:
- Multifamily properties qualify for FHA status if “owner-occupied”
- Potential for renters to pay the full mortgage plus profit
- Attractive 3.5 percent down payment plus a favorable interest rate
- Theoretical income can be used to qualify for the loan
- Income could be enough to budget for a property management company
Cons:
- Increased landlord responsibilities
- Property size limited to the maximum of a fourplex
- Higher liability insurance requirements on a multifamily property
Mortgage Tip: Intro to Kiddie Condo Loan
Is a kiddie condo House hacking deal right for your kids?
And while a kiddie condo collaboration is a great way to go in on a deal with your kids in their 20s, don’t expect them to jump for joy when they’re 40 and you propose a kiddie condo house hacking deal to them. Not only does it require your kids’ cooperation, but their responsible caretaking of the property.
Is there an FHA “kiddie condo”?
Now is a good time to mention that there’s no official FHA loan program called “Kiddie Condo.” That’s a term that mortgage brokers came up with as a marketing label. Like many marketing labels, it has a nice ring to it, so we’re using it here. Here’s the basic premise: FHA allows parents to co-sign their children’s mortgages as joint owners.
How does the FHA kiddie condo program work?
The FHA Kiddie Condo program allows non-occupying co-borrowers to help a relative qualify for a loan. Keep in mind the keyword, co-borrower. This differs from being a co-signer. As a co-borrower, your name is on the loan and the title. If your relative defaults on the loan, you become liable for the payments.
What is the down payment for a kiddie condo loan?
If you are familiar with FHA loans, then you know they allow a down payment as low as 3.5%. This is also the case with the Kiddie Condo Loan. Just as with a standard FHA loan, the 3.5% down payment requirement pertains to single-family homes, condos, and townhomes. Click to See the Latest Mortgage Rates.