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Off-campus housing pays off
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October 8, 2001: 7:00 a.m. ET
Buying condos close to college can yield big savings. But look before you leap.
By Shelly K. Schwartz
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Note: The mortgage rates in this story were updated as of May 31.
NEW YORK (CNNmoney) - You already invest in your child's college education. For some parents, ensuring their kids' future is payback enough -- but why not get a little something extra?
Investing in off-campus housing is one way to do that, and it is fast becoming a hot commodity among parents of college-bound kids. Such properties, when purchased as a second home, can help defray the cost of traditional room and board, provide tax breaks on the mortgage interest paid and allow you to accrue equity in an appreciating asset. They also enjoy the potential for future income, since campus-friendly condos can be rented to other students after your own kids move on.
The cost of living
According to the College Board, average annual living expenses at a four-year school - including room and board, transportation and personal expenses like laundry and recreation - are $6,553 at a public university and $7,358 at a private institution. Toss in tuition and you're facing annual bills of $10,000 to more than $20,000.
"University education has skyrocketed in cost and a large part of that comes from living expenses," said Rick Ellis, branch manager for Prudential Owens Realtor in Austin, home of the University of Texas and a half dozen other colleges. "Pricing is still very high for rentals so parents are buying properties near campus."
Ellis notes the trend is especially pronounced in recent months, as borrowing costs have plunged -- indeed, the benchmark 30-year fixed-rate mortgage fell to 6.76 percent for the week ending May 31, a six-month low.
"It's just good smart business to buy right now," Ellis said.
How much can you save?
Just how much parents can save depends on the purchase price of the property and the location.
In downtown Boston, one of the priciest cities in the country, studio apartments within walking distance of Boston University, Northeastern University and Harvard, rent for $900 to $1,200 per month - up about 25 percent over the last three years, said Ed Shanahan, chief executive of the Greater Boston Real Estate Board. That translates to anywhere from $32,400 to $43,200 for four years, not including summer months which may be required under the contract agreement.
A comparable apartment costs about $150,000 to buy. With 10 percent down and 30-year interest rates in the 6.7 percent range, that equates to a monthly mortgage of around $865 before property taxes and private mortgage insurance.
"If you've got the financial wherewithal to spring for a down payment, it makes eminent good sense to buy," Shanahan said. "Real estate has been an exceptionally strong investment and it's been even better in areas surrounding areas of higher learning."
That's true in many college towns. But it's wise to investigate the neighborhoods surrounding campus before making a decision to buy. Some areas, including those near Yale University in New Haven, CT. and the University of Pennsylvania in downtown Philadelphia, are less desirable and as such may lose their value, or may be difficult to unload on the resale market.
As for appreciation potential, the National Association of Realtors (NAR) notes condominium prices have been rising faster than single family homes for the last few years - at about 10 percent per year.
"We've had several consecutive years of record sales for condos and we expect the market will continue at strong levels because of demand from baby boomers and from first-time buyers," said NAR spokesman Walter Molony. "Whether it's a good buy [for the parents of college students] probably depends on what market you're in. If you're in a good location to a university that has a need for decent housing, the resale capability is going to be a lot higher."
Gimme shelter
Rick Darvis, a certified public accountant in Plentywood, MT., notes that off-campus condos can serve another purpose as well.
Students with trust funds or custodial accounts often get rejected for financial aid. In many cases, that's true regardless of the age at which they're able to tap that fund - usually 21, about the time they're ready to graduate.
To improve their chances of securing low-interest loans, Darvis said the child can use their trust fund money to purchase a personal residence. Home equity is not considered an assessable asset under most financial aid calculations - providing a shelter of sorts.
"If the kid has $100,000 in a trust fund, that'll cost him $35,000 a year in lost financial aid eligibility," he said. "But if you move it into a non-assessable asset like a personal residence, it's excluded."
Of the roughly 3,200 colleges across the country, Darvis said, that exclusion holds true at all but about 300, usually the most elite, private universities.
The rules are rigid though. Your child can not rent out extra rooms, for example, since the apartment would then becomes an income-producing asset.
By and large, Darvis said he believes apartments close to campus are a solid bet - or at least worth the risk.
"There are some who say, 'Well, what if my kid only goes to college for 1 year, isn't that risky?'" he said. "I say that's no more risky than paying dorm fees or renting for a year because that's a 100 percent loss guarantee." 
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