Should You Go Condo for College?

Rampant speculation in real estate has its downside, as recent events have made quite clear. But don't assume that buying real estate is always a bad move. One popular real estate play -- buying a condo for your kids during their college years -- may still make sense.

During the housing boom, many parents chose to buy homes for their kids to live in while they were in school. As a substitute for paying room and board at dormitories, which average between $7,400 and $8,600 per year, parents saw owning a home as an opportunity to save on housing costs immediately while gaining price appreciation on their investment.

The rosy past
This strategy certainly worked well in the recent past. According to the Office of Federal Housing Enterprise Oversight, home prices in five university cities rose between 23% and 103% over the four years ending in March 2006. As you'd expect, the highest price increases were in hot real estate markets like Los Angeles and Miami.

Yet those markets have been hit particularly hard by the recent downturn. Miami-based Lennar (NYSE: LEN) and Los Angeles homebuilder KB Home (NYSE: KBH) are among many that have been forced to offer incentives to prospective buyers to keep sales levels up. As a result, it's probably unrealistic to expect similar appreciation in the near future.

Settling for smaller gains
But even if you can't expect to double your money by buying a condo for your kids, there are still upsides. With interest rates low and prices falling, parents are in an enviable bargaining position to scoop up a place for their college students to live.

Moreover, you don't need to have much price appreciation to show a potential profit. If you can get a 6% mortgage on a $200,000 condo, you'll pay about $12,000 in interest each year. That's well above typical room and board costs, but if your child finds a roommate -- just like in a dorm -- splitting those costs can get you to breakeven cash flow, without even considering appreciation.

Dealing with a rental
Of course, once you bring in roommates for your child, you'll have the responsibility of acting like a rental property manager, with all the legal obligations and responsibilities that entails. If your child picks somewhere far from home to go to school, that might be tough to do.

Ideally, your child could handle those responsibilities -- but that may be expecting too much from young adults on their own for the first time. In essence, you're competing with professional residential property management companies like Equity Residential Properties (NYSE: EQR), Apartment Investment & Management (NYSE: AIV), and UDR (NYSE: UDR) on their home turf.

Yet those responsibilities bring potential advantages as well. Including your child on a mortgage can help build a strong credit history. Some parents even put their kids on the property deed, giving them an economic interest in the property. After all, a student is more likely to take care of a home when they have something to gain from it.

Run the numbers
Overall, buying a home for your college kids to live in isn't the slam-dunk path to quick riches that it once was. As a way to keep costs down and introduce students to the realities of adult finance, however, it's still worth considering. If you can save money by putting up your kids in their own place, give it a closer look.

Check out these articles to learn more about:

• Why reported housing numbers are a bunch of bull;
• The easy way to get into your next home; and
• How foreclosures in your neighborhood can hurt you.