Buy your college kid a condo?

By Liz Pulliam Weston

So far, Cindy and Jay Kasin say, the Seattle townhouse they bought for their law-school-student son seems like a good deal. The Kasin scion gets to live in a nice place, and the property has been appreciating in value.

Former student Shawn Vita also has good things to say about the house his mother bought for him while he attended Purdue University in the late 1980s and early 1990s. He eventually purchased the home from his mother and later sold it at a tidy profit.

"It transcends just helping you with school," said Vita, who's now a software engineer for Microsoft. (Microsoft is the publisher of MSN Money.) "I got to learn to be a responsible homeowner. I learned about paying bills and taxes and about credit. . . . I learned to be pretty handy, and (when the house sold), it was the basis for a down payment on a really sweet place."

But San Francisco financial planner Tim Kochis typically tries to talk his clients out of buying real estate to house their college students. He finds parents often:

• Overestimate the possible savings.

• Overestimate the potential appreciation.

• Overestimate their children's ability to serve as landlords.

"We don't think it's a really good idea," Kochis said. "It's often not clear (homeownership) is going to be better than renting, and it's likely that it could be worse."

Many parents are tempted by the idea of buying their college students a place to live rather than paying for dorms or apartment rents. Whether it makes financial sense depends on a number of factors, from living costs in a particular college town to the emotional makeup of the kid.

If you're thinking about making such a real-estate buy, here's how to make sure your investment gets a passing grade:

Understand the risks

Everyone knows now, if they didn't before, that real-estate prices don't only go up. If you own the home for just a few years, it's possible you won't get enough appreciation to offset the considerable expenses of buying and selling the property. You'll face fees for getting a loan and potential broker commissions of 6% when you sell.

"With a home, it can take six to seven years to recoup the costs," said financial planner Deena Katz of Coral Gables, Fla. "Presumably you're only going to own a kiddie condo for four years."

What's more, neighborhoods and towns that cater to college students often experience less-than-average appreciation. The transient nature of students -- and their casual treatment of homes or apartments -- frequently make those areas less appealing than more stable neighborhoods.

"Remember when we were in school?" Kochis said. "How much care did we take of the places we were living?"

Here's what's happened in college towns where student enrollment is equal to at least 25% of the local population:

Housing appreciation in 5 big college towns*
City	University	1-Year	5-Year
Ann Arbor, Mich.	University of Michigan	-7.09%	2.43%
Athens, Ga.	University of Georgia	3.92%	25.72%
Champaign-Urbana, Ill.	University of Illinois	4.08%	30.57%
Columbia, S.C.	University of South Carolina	6.38%	29.04%
Provo, Utah	Brigham Young University	14.35%	50.61%
National Average		1.79%	46.92%

*For periods ending Sept. 30, 2007

Source: Office of Federal Housing Enterprise Oversight

You can offset the college-town effect somewhat by choosing properties that aren't right on the campus border. Vita's home, which cost $44,000 when his mother bought it in 1989, was about a half-hour bus ride from Purdue University, where he was studying computer science. He sold the house in 1995 for $65,000.

Think about cash flow first

Kochis likes to see deals that make sense from a cash-flow perspective. In other words, all the costs of owning the home, minus any rent paid by roommates -- are less than what the parent would pay for a dorm or apartment. Some costs to consider:

• Mortgage

• Property taxes

• Homeowners insurance

• Additional liability coverage (see below)

• Homeowners or condo association dues

• Maintenance and repair costs

In low-cost South Lafayette, Ind., the $200 rent Vita charged each of his two roommates covered his monthly mortgage. He shouldered the property taxes, insurance, maintenance costs and upgrades, which he believes still worked out to less than the $255 a month he'd previously paid for a rental.

Many parents, however, may find that a property doesn't make financial sense once they factor in all the costs, Katz said. They may still opt to go ahead, of course, just to provide their progeny a nicer place to live.

"Maybe your child hates the dorm and wants to choose (his) own roommates," Katz said. "You should understand that's why you're doing this . . . not because it's a good investment."

Get the right financing

When buying your personal residence, it often makes sense to opt for the certainty of a fixed-rate loan and to make extra payments to try to build up as much equity as possible. That gives you a big cushion in case of financial emergency and reduces the overall interest you pay.

When buying a place for a college student, though, you should think more like a professional investor and keep your monthly nut as low as possible. A couple of options:

• Adjustable-rate mortgages. These loans are fixed for a certain period -- typically three, five or seven years -- before going adjustable. They can become expensive if rates rise suddenly, but they can be a good solution for short-term real-estate ownership. If you plan to own the home just long enough to get your sophomore out of school, a five-year hybrid would lower your payment a little compared with a 30-year loan and give you some wiggle room in case graduation takes longer than expected. Your monthly payment on a five-year ARM for $100,000 currently would be about $535, compared with $570 for a 30-year fixed-rate mortgage.

• Interest-only loans. These typically offer monthly payments that are a fraction of what you would pay for a traditional principal-and-interest mortgage. The downside, of course, is that you're not building equity with your payments. If housing prices drop before you can sell the home, you might well find yourself owing more than the house is worth. You can opt for adjustable, fixed or hybrid rates, just as with a regular mortgage. A five-year interest-only loan would shave another $100 or so off the payment on a five-year ARM.

Continued: Is your kid responsible enough?

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