Buying off-campus housing makes sense, but watch the details
By Michael D. Larson • Bankrate.com

Patti Houlihan thought the numbers made sense.

Rather than let her son Ryan waste money on rent, she'd buy the 21-year-old student a house near James Madison University in Harrisonburg, Va. After installing him as property manager, she'd sit back and watch the tax benefits roll in.

"When I looked at the mathematics of it, I thought, 'This is a real possibility,' " said Houlihan, a certified financial planner.

Decision involves more than money
Then she paid a visit to campus and her enthusiasm waned. "I had seen the properties and the condition of the properties and I didn't want to be a landlord with college students."

The problems of tiny kitchens or beer-stained carpets are just a couple of things that parents face when looking to cut costs by buying their students a place near campus. The time-consuming process requires a lot of patience, a significant investment and a great deal of trust in one's child.

But running the numbers, for example, on one property worth $75,000 near the University of Illinois at Urbana-Champaign, shows that for some parents it can pay off in an era of soaring college costs. A few years ago, the dormitory living would have been a better deal, if this university is any indication of the national norm. In 1998 when we last looked at this topic, dorm costs were around $6,000. This year, the costs are upwards of $17,000.

"If the kids really know what they want, and they're going to be here for four years, then I'd say, 'Yes, then buying a home is a good idea,' " says Cindy Schmitt, the relocation director at Coldwell Banker Devonshire Realty in Champaign.

The payoff
Parents who bought a two-bedroom house with a $60,000 adjustable-rate mortgage in Champaign, for example, would spend $9,077 for housing during the three years that their student generally would be allowed to live off campus. And, if they sold the house at the end of the period, their total costs would end up at $7,712 or around $2,750 per year.

That compares with $14,880 in rent and renter's insurance the student would have to pay for an average one-bedroom Champaign apartment. There would be no resale value on the rental, either.

A dorm resident, while paying just $16,998 in three years for room and residence hall fees, would get to live there only nine months out of each year and would be left with nothing to show for it upon graduation.

Money isn't everything
The issue is far from cut and dried. Planners have a laundry list of situations where buying doesn't make sense.

"I normally ask them if they want to be running a business, because managing rental real estate is a business," says Marilyn Bergen, a certified financial planner with Capital Management Consulting in Portland, Ore.  "If they don't, then we usually don't have much more conversation."

The real estate market could sour during the student's short occupancy period, for example, leaving parents with a large enough loss on the investment to swallow up any tax benefit, Bergen says. The student could also transfer to another school, sticking mom and dad with the choice of either selling the property fast or hiring a management company for a fee. Then, there are the normal problems associated with buying a house.

"It's bad enough to have to pay the tuition," says Ron Kotick, a tax specialist. "They don't want to have to come up with a down payment at the same time."

That can be tougher when it comes to a second home, too, even if it's being used as a rental property, says John Bollman, a vice president and mortgage product manager for National City Corp.

Financing recommendations
Lenders typically want 20 percent upfront because of the significant additional debt that buyers have to shoulder on top of the mortgage on the home they are living in, Bollman says.

When buying, experts advise that borrowers consider an adjustable-rate mortgage, as it's the preferred option for people who plan to own a property for a relatively short period. One sensible choice, considering the fact that many schools prohibit freshmen from living off campus, would be a 3/1 adjustable-rate mortgage. A 3/1 adjustable carries a low fixed rate for its first three years -- the time it should take the student to graduate.

Monthly payments, calculated at 6.82 percent based on Bankrate.com's rates tables for Illinois, would come to $392. The borrower would pay $12,081 in interest over the ownership term. Closing costs would amount to about $2,100.

Take a long-term approach
Still, planners say people should take a longer-term approach to the process. Because of that, buying may make the most sense for households that sing the fight song at dinner and are planning to send all of their children to State U, rather than one-student families.

"The instances usually involve larger families where several children are 'stair-steps' -- kids who are not the same age but are coming along where there's a two- or three-year gap," says Jeff Henderson, a director in the Housing Information Office at the University of Illinois. Of some 36,000 graduate and undergraduate students at his school, only 20 or so have families that buy in any given year.

"Overall, that's a very small segment of the student population living off campus," Henderson says.