Why Buying Property Near
A University is a Smart Move

You're looking for a sound real estate investment. But prices have peaked. Your favorite city or resort destination is played out. Too expensive, and too many ominous forecasts of corrections and oversupply. You're looking for a good, safe investment and I have one in mind, a real estate niche that plays defense and offense at the same time: college-town real estate.

College towns make sense now more than ever -- if you play your cards right -- for the long term.

Why college towns? Aren't they more expensive? And don't you run the risk of having your investment "partied" to death? You thought being a landlord was bad enough, but now for a bunch of rowdy twenty-year-olds?

Yes, yes and yes. College towns are typically more expensive -- as much as 20% or 30% more than nearby areas. And yes, students do party, and furthermore, many students aren't very experienced in the care and feeding of homes.

But I go back to core value investing principles, in particular the one about "margin of safety." Real estate prices, like anything else, are a function of supply and demand. In college towns, demand is at least steadier, if not more destined to grow, than the average real estate market. Second, supply -- and the quality of homes in the area -- is usually constrained by strict zoning and growth controls, common in most college towns.

Both factors work together to provide your margin of safety and. ultimately, your growth opportunity.

Let's take a closer look at the demand side:

• Student-body growth. We've all read about it -- the importance of a college education to succeed in today's economy. It's true, and that means more students than ever before. According to the Department of Education, college enrollments are expected to rise by almost 1.6 million students, or 15%, over the next 10 years. But are they building more universities? More dorm rooms? I haven't seen any.
• Graduate students. The number of graduate and professional students is growing even faster -- almost 25%. More of these students are married, come from abroad and/or look for the stability of a two- to three-year lease commitment. And they are less likely to host Saturday night keg parties.
• Not just students. Professors need housing too. And while many faculty members are permanent, many are so-called "visiting" professors, often from overseas. These folks need housing too.
• A place to retire? These days, college towns are getting a lot of play as retirement places. Not for everyone, but for mentally and physically active retirees. Many are younger and wealthier retirees seeking the intellectual stimulation, the "buzz" and clean small-town lifestyle of such communities.
• Collateral industry. Many college towns, like Ann Arbor, Mich., Boulder Colo., and Gainesville, Fla., have significant private research and technology industries nearby to take advantage of university facilities and to attract well-educated employees. Such industry further strengthens housing demand.

A place for your own?

Geoff Spiegel, of Spiegel, Inc, Realtors of Gainesville, home of the University of Florida, told me many of his clients are parents -- some from in state, some wealthy Northeasterner -- who buy housing for their kids attending school.

Are you kidding? You wouldn't buy the kid a car, let alone a house! But the strategy makes sense. First, these parents save the $5,000 or so in "room" fees they'd otherwise pay for a dorm or other housing. Second, it defends against price increases in these fees. Third, it holds a piece of real estate for a period of time, while serving a purpose and even collecting some rent if the kid has roommates.

Appreciation, combined with college cost savings, made these a pretty good investment. Especially if more than one kid was going to school. There is a built-in resale opportunity as well, marketing to a new set of incoming parents when your children have graduated.

And what if this home were to become your retirement home some day?

Strategy is important

Like most real estate markets, it's easy to make mistakes. "Have a clear purpose," says Spiegel when asked how to think about college town real estate investments. Too many people buy blindly. It's important to understand which subsegment you're looking for -- ordinary students, graduate students, professors, visiting professors, retirees, research professionals -- and where these groups are likely to reside.

"It's no different than any other real estate market -- you must understand location," advises Spiegel. If you're buying student housing 5 miles from campus, make sure there is transportation, or that students can get parking permits. "The closer to campus, the better."

Finally, make sure you know how the place will be cared for. Hire it out. As a rule, college students don't have the experience nor the time to do a great job keeping a place up. "The pitfall usually isn't the property, it's how it's taken care of," adds Spiegel.

Finding the right college town

There are dozens -- hundreds -- of college towns all across the country. Best bets are large, self-contained, attractive university towns with growing student populations, a strong international presence and lots of related businesses and research facilities.

I'd avoid urban areas, like Boston or Berkeley, Calif., as these markets are too complex and have lots of housing alternatives. Geoff Spiegel suggests looking where you went to school, because you'll understand the area better.

Also -- obviously--it's best to work with a local real estate professional.

I asked my friend and location expert Peter Sander, co-author of "Cities Ranked & Rated -- More Than 400 Metropolitan Areas in the U.S. and Canada," for tips on where to look for places to invest, and possibly even to retire. His list included Gainesville, and he also pointed me to Fort Collins, Colo., Columbia, Mo., Chapel Hill, N.C., Logan Utah, Charlottesville, Va., and Missoula, Mont.

And he said his list only scratched the surface.

Email your comments to rjeditor@dowjones.com.