When parents buy the dorm

When Emily Overturf was just 19, she sat in a restaurant and watched with confusion as her stepdad carved the number "235" into a pumpkin with a butter knife. It was the address of the house he and her mother had just bought for her, he explained as he handed her a small box of keys.

It was Halloween, but mom and dad weren't too scared. The house was just a few miles from their own, and Emily wouldn't be moving in until the next year, 2001, when she'd be a junior at Ohio's University of Dayton.

Buying real estate near campus has strong appeal for parents, even the ones whose kids go further afield for college. Rather than write a check for rent or dorm fees, families who can muster the down payment see an opportunity to build up equity. And with college-cost increases outpacing inflation, more are feeling pressed to make every education penny count.

"In previous years, it was real savvy-type parents who were more interested in helping their kids make an investment ... [but] in recent years, interest rates have really driven the trend more than anything else," says Christopher LeVally, a developer and real estate agent in Scottsdale, Ariz., near the teeming campus of Arizona State University.

Interest rates for mortgages still hover near 30-year lows. Add to that the dismal stock market, high returns in certain housing markets, and high rents in crowded college towns, and suddenly a home purchase for a student starts to look like the yellow brick road.

For many families, the plan works with no more glitches than an occasional call home for advice about finding a plumber. But experts caution parents against expecting to quickly turn a tidy profit after graduation.

"If you only want to own property for four to five years, that's a short window for it to appreciate in," says John Sestina, a financial planner in Columbus, Ohio, who has seen the popularity of these purchases come and go in his 38-year career.

"The real problem with real estate, and with these units in particular, for college kids, is that most people have no concept as to how to evaluate whether they are making money or not," he says. Mr. Sestina sees a tendency to underestimate the costs of upkeep and the risks that the property might lose value. Often, he says, "the reward is not worth the exposure."

Nevertheless, if parents don't go into it thinking they're guaranteed a big return, they may be able to save some money, or at least break even.

The practice may also have the added benefit of giving their child a leg up in the "real world."

For Ms. Overturf, the Halloween house has been a living laboratory for the business major she'll be finishing later this year.

"A lot of people in accounting classes didn't understand what was going on, because a lot of them had never paid bills or even balanced a checkbook," she says in a phone interview during a break from her camera-shop job. "I could understand it a lot easier because I had done it."

At first, she says, she wanted everything in the cute yellow house to be fixed up "now, now, now." But she learned to be patient as she split her time between studying, working, and tending the yard.

Her stepdad helped her remodel the basement right away so she could bring in two friends as roommates. Their rent checks covered the mortgage, and the roommates got a deal, too, says Overturf's mother, Jeaneen Parsons, who works in public relations at the university. Instead of paying $4,200 per school year to live in a large house in the neighborhood affectionately known as the "ghetto," each roommate paid $2,250 and had her own bedroom on a quieter side of campus.

"We thought it was the best way for [Emily] to learn about handling money - just do it. It's not really a sink-or-swim thing when your parents cosign for you," Ms. Parsons says. Yes, there's been an occasional nervous call from the small, local bank as the due date for the mortgage check was approaching, she says, but never any real problems. And the place has turned out to be a good starter house for Overturf and her new husband.

In some university towns, parents find that they're far from the first ones to decide it might be time to buy.

"Right now I call it a feeding frenzy," says Danny Henecke, a Realtor in Tempe, Ariz., where 47,000 students attend Arizona State. "Parents are tripping over each other trying to find housing.... We did a sale last year sight-unseen."

That's the extreme, but most clients are drawn to the convenience of the Internet real estate agency Mr. Henecke works for, ZipRealty, in Emeryville, Calif. One family recently made two trips to Tempe from California, on consecutive weekends, to settle on a home for their son and his friend, soon to be juniors at ASU.

Between 1997 and 2002, home values near ASU climbed nearly 50 percent, says Mr. LeVally, the developer in Scottsdale. The best prospects for resale, he says, are generally within a two-mile radius of campus or near the entertainment district, where students congregate on weekends.

Converting property back into cash is made easier by the fact that "there's a captive audience of buyers there," he says.

It's the entertainment draw he's counting on as he converts an old hotel to condos four miles from ASU. He plans to market the $85,000-to-$110,000 units directly to students.

Financing a parent's condo purchase for a student can be challenging because many lenders shy away from condo projects with low owner-occupancy rates, according to Mark Orr, a manager at Colonial National Mortgage in Austin, Texas.

He has worked with what he dubs the "kiddie condo market" for 10 years. Given 10 percent down and verification that the occupant is a student at the University of Texas, he's been able to approve loans for parents without analyzing the owner-to-tenant ratio in the buildings.

A common choice for financing is a seven-year balloon note, because interest is generally about 1 percent below the market rate and most parents don't intend to keep the property much longer than the time their child is in school.

For a price comparison, Mr. Orr cites a one-bedroom apartment four blocks from UT that recently rented for $450 a month. The same place would sell for about $55,000. By his quick estimate, the monthly payment - for mortgage (at 4.25 percent interest for the first seven years), taxes, and insurance - would be $470.

Some families have extra incentives - or added complications - in their quest for off-campus housing.

Establishing residency in order to qualify for lower tuition at a state university is one motivation. Having a house in a student's name is not all that's required, however.

Each state has its own regulations, but they typically require one or two years of residency plus other actions that show intent to live full time in the state.

Other parents dream of buying a place that will house their student during the school year and then serve as a summer home for themselves.

That's proving difficult for Dorie Brodie Baker, a Connecticut resident who's searching for a place in Burlington, Vt., where her son attends the state university.

It looks as if they'll have to choose between quaintness and proximity to campus. Besides, she says, "what's habitable for students isn't necessarily what I would consider habitable."

The key is for people to weigh all the tradeoffs, experts say.

"Housing decisions are some of the most stressful you make, and add to that a child leaving the nest and wanting to be independent - that can cause decisions that are less than prudent," says Stephen Roulac, a real estate consultant and author of "360 Housing Mistakes and How to Avoid Them," to be published in September.

When their son Benjamin was ready to move off campus for his junior year, Michael and Susan Leitner bought a condo near the University of California, San Diego.

"It [cost] maybe a little more than if we had paid just for his housing and school, but given the tax deductions and other benefits of real estate ownership, it made sense to do it," Mr. Leitner says in a phone interview from San Jose, Calif.

As an unexpected bonus, their younger son, Daniel, chose the same school. He'll be moving into the place this fall when Benjamin leaves for graduate school.

The condo is in the parents' names, but they have given their sons responsibility for collecting rent from roommates and using that money to pay for all their school costs.

Benjamin has also had to make a bit of a lifestyle change - becoming the go-to guy when something needs fixing.

"When I was living on campus and something was wrong, I would just call Res Life [the Residential Life Office]," he says.

And what about when mom and dad come to town and, in effect, do a landlord's inspection? Not a big deal, Benjamin says.

"My mother always complains that the carpet's not clean," he says, "but it was a mess before" he moved in.

Dad admits to having to bite his tongue at times. "There are things that landlords can't do but you want to do as a parent, like questions about liquor or [comments like] 'You've decorated this in a funny way.' " Leitner says with a laugh. "You just have to separate the roles, and it's not always easy."

But it's been worth it, he says. "As long as property values are holding up, it's a great way to put your kids through school."

Before buying housing for your college-bound child (one expert calls them "kiddie condos"), here are some steps experts say you should take to determine if it's a wise investment:

• Research the strength of the college town's housing market and its prospects for staying strong. Consider whether you're willing to find renters after graduation if the market goes south and you need to wait for a turnaround.

• If more than one of your children is likely to attend school in the area and use the property, then you'll probably save more money. But also consider the implications if your children fail their courses or decide they want to transfer to a different school.

• Examine the rental market closely. If you are counting on renters to help pay the mortgage, make sure that you can keep the unit occupied year-round.

• Factor in the cost of upkeep and liability insurance. Such costs can run higher than you're used to, especially if some party-hearty students end up living at the house.

• Decide if the purchase fits in with your overall investment portfolio. If you put money into a second home, for instance, will you still have the right proportion of liquid assets in case of emergency?

Also, when shopping for a house or condo for a student:

• Keep in mind that because of the school calendar, early spring and December are the best times to buy in many college towns.

• Consider paying a consulting fee to an appraiser or broker in the area - separate from anyone trying to sell you a particular place - to advise you on the value of properties.

• If you don't plan to keep the house beyond graduation, an adjustable-rate mortgage may be a good financing option.

• Consult with a financial planner about whether it's best to cosign for the house in the student's name or buy it as a second home yourself. If it's in the student's name, it helps him or her build up good credit history. And if it's an owner-occupied house instead of a rental property owned by parents, the student will be able to shield any profits from the sale (up to $250,000) from capital-gains taxes.