College Towns: Still a Smart Investment

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But Zaransky says parents should try to take their children out of the equation when deciding whether to buy. It's generally good to buy in college towns with low-cost real estate, rising enrollments, and a shortage of dorm beds, he says. And it's best to look outside of large, expensive cities where colleges have less influence on the housing market.

Risks for Investors

But like any real estate investment, buying in a college town comes with risks, particularly for investors. Think Animal House. Students are known to drink, punch holes through windows, spill beer on carpets, or just not be very responsible. Of course, it's possible to protect your investment by requiring tenants to provide security deposits and parental guarantees.

And though the pool of tenants in a university town is large, it's harder to find renters after the semester begins; the risk is that an apartment could go empty for a few months—though there's always summer school.

A larger risk is that the subprime mortgage crisis could spread and the economy could fall into a deep recession. In that situation, home prices in college towns might not drop as much as other places, investors say.

In Austin, home prices near campus are already so high that investors can't necessarily expect to cover a mortgage with rental income unless they come up with a significant down payment, says Jay Carter, a Realtor with Livinginaustin.com. But buying a home can still make a good investment in terms of appreciation.

Carter says enrollment is growing, but there's a risk that the credit crunch could spread to the student loan market, pushing up interest rates and making college more expensive. "The area around the University of Texas campus is tighter than ever, and demand will always be there no matter what the economy is doing," he says. "UT students are competing [for apartments] with a large number of non-UT students who just want to live in that area of town. There's a huge urban boom in Austin."

A Tight Market

Home prices next to the University of Florida campus in Gainesville have been strong despite Florida's real estate downturn, says Dave Ferro, a Realtor with Bosshardt Realty Services. Foreclosures are more common farther away from campus, he says, but finding a good investment property close to campus is difficult because sellers are few and prices are relatively high.

"When the market is hot, it's difficult to buy a property that you can break even on in terms of renting," Ferro says. "Things have changed a little bit, but properties around campus are like waterfront."

If you want to invest in college towns but don't want to get involved with buying real estate, Zaransky suggests buying shares of real estate investment trusts. REITS that invest in student housing include American Campus Communities (ACC), Education Realty Trust (EDR), and GMH Communities (GCT).

Check out the BusinessWeek.com slide show to see how well the housing markets in 25 U.S. college towns have fared.

Gopal writes about real estate for BusinessWeek.com in New York .