Business Schools

Campus Condos: The Payoff Is Shrinking


The calculus of owning off-campus housing has changed as home sales have slowed and expectations of fast appreciation have disappeared

David Maier, a junior at the University of Colorado at Boulder, wanted to live on campus this fall but housing officials didn't have enough room even for the freshman class—the largest in the school's history—and were forced to temporarily book dozens of students into a local hotel. So Maier's parents turned to another option. They bought him a one-bedroom condo that's just a short bike or bus ride to campus. The cost: $147,000.

It might seem like a risky time to buy a home, with real estate prices around the nation tumbling and the economy sinking toward recession. But the Maiers have years of tenants lined up for the condo: Maier has two brothers in high school who are planning to attend the university. And the real estate market in Boulder, like many college towns around the nation, has held up well so far. It's also one of many schools with bulging enrollments and limited campus space. "Mostly we bought it because we didn't want to pay rent," said David's mother, Jeannine. "He kind of did want to be on campus. But now he's happier than he was before."

During the housing boom, parents who purchased college-town condos for their children often did so with an eye to "flipping" the property after graduation. But the math has changed a bit after the housing bubble burst. Prices have dropped, which is a good thing for buyers. But home sales have slowed, and expectations of fast appreciation have disappeared. Still, there are situations where buying campus real estate is doable.

"You can still justify the purchase in terms of what you would pay for your kid to go into a dorm or rent an apartment," said Greg Ghodsi, senior vice-president for investments at the 360 Wealth Management Group of Raymond James in Tampa. "Now the big question mark is on the back end: 'Am I going to get appreciation on it? If I can't, then I am sitting on a property that I have to rent out from a distance.'"

Tight Supply of Dorm Beds

An off-campus home purchase can still be a smart investment beyond just the profit motive. A student living in his own home can avoid the one-time costs and inconvenience associated with renting an off-campus apartment for nine months—such as buying furniture and kitchen utensils, setting up utilities, and finding another student to sublet the pad for the summer.

On-campus housing might be cheaper, but room and board costs typically increase about 7% a year. Plus, dorm beds are increasingly hard to come by, and space is often guaranteed only to freshmen. Demand for on-campus housing is increasing along with enrollments—especially at large public universities—as the offspring of baby boomers (so-called echo boomers) graduate from high school. More and more students these days want to live on campus in part because universities have made themselves more inviting, bringing restaurants, stores, modern gyms, and apartment-style living inside their gates.

"Generally for those campuses that have no [on-campus] residency requirement, three things are going up," said Norbert Dunkel, assistant vice-president and director of housing at the University of Florida in Gainesville. "More first-year students want campus housing, more students who live in campus housing want to stay after the first year, and students who choose to live off campus after the first year want to come back."

Glut in Gainesville

Demand for off-campus housing, on the other hand, is mixed. In Gainesville, for example, so many off-campus apartments have been built that landlords are convincing students to sign leases by offering free refrigerators, laptops, and rent discounts, Dunkel said.

Schools with rising enrollments and limited space for off-campus housing such as the University of California at Riverside could be good places to look, said Jim Arbury, senior vice-president government affairs for the National Multi-Housing Council in D.C., a lobbying group for apartment owners. Towns with an oversupply of housing such as Gainesville, home of the University of Florida, are riskier bets. "The first rule is to look at whether the student body is increasing," said Allen Cymrot, chairman of Netgainrealestate.com. "If the student body is decreasing it's like investing in an area where jobs are leaving—that's not a good thing."

It's best to choose a home close to campus, not just for your child's convenience but because it's more valuable as both a rental and for-sale property. Of course, you'll need to pay a premium to buy a house on the edge of campus. Another option is to buy a house in a neighborhood where professors live. Faculty are often good tenants and well-qualified buyers.

Collecting Rent

It's also important to take a hard look at your own finances, especially in today's tight credit market where lenders often require a 20% deposit for a conventional 30-year loan even if you have solid credit.

Buying makes most sense when at least two students—a few years apart—are planning on attending the same school. It also helps to have mature children who can be counted on to maintain the house and collect rent from friends occupying the spare bedrooms. Ilyce Glink, publisher of ThinkGlink.com, a real estate and personal finance site, recommends working with the parents of the tenants to set up automatic bank withdrawals each month to cover the rent.

Duane Duggan, a Realtor with Re/Max of Boulder who owns 40 rental units that he leases to college students, said some parents simply pay a property manager to collect the rent to avoid housemate tension. (A student's roommates might not even know that his parents own the place.)

But it can also be a good lesson for students to learn how to maintain a home, hand out leases, and collect rents, Duggan said. "It's a great start for the kids. The parent can do it as an investment for themselves or a learning experience for their children."

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

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