The Pros and Cons
Of Buying Near Campus

Munusamy, a retired cancer researcher in Darien, Ill., wanted to take some financial pressure off his son while the young man pursued his career in medicine at Midwestern University. He decided the best way to help out would be to eliminate his son's single largest monthly expense – housing.

Mr. Munusamy now is looking in the area around the Downers Grove, Ill. campus at condominiums that are going for upwards of $200,000.

Talk about a graduation present.

Some parents who once might have given their graduates keys to a new car are taking advantage of still-relatively low mortgage rates and sending them off to school with a new home.

"It's an affordability issue," says Walter Molony, an analyst at the National Association of Realtors in Washington D.C., who points out that rental payments these days often exceed mortgage payments.

It can also be an investment issue, if done right. "I know a more than a few millionaires who made their money buying up rental properties near campus," says realtor Duane Duggan of Re/Max of Boulder in Boulder, Colo.

Still, parents who look at the purchase of a home near campus as a short-term investment may get burned, particular if they feel pressure to sell immediately after their kid graduates. "Normally it takes at least three to five years to realize a return on your real-estate investment," says NAR's Mr. Molony.

There's no guarantee you'll make money on your investment at all. In fact, there's a chance you could end up selling the property for less than you bought it. Where you buy and when may greatly impact your ability to sell the home at a profit after the mortar boards have been packed away.

So avoid the potholes by looking at advantages and drawbacks of buying a home for your college-aged kids well before they prepare to fly the coop. Here are some key issues.

Is It a Good Investment?

Buying an apartment might be a boon for your kids, but is it the right investment for you? Mr. Duggan, the Boulder, Colo., realtor, says that as investment properties, homes located close to college campuses have a lot going for them – particularly a built-in stream of seasonal rental income.

"If you're buying the home as a rental property, and intend on holding that property and renting it out after your kids have graduated from school, it's a pretty good bet you'll do well," he says. He puts his money where his mouth is: Mr. Duggan purchased two town houses, one for each of his sons, near the University of Colorado at Boulder, where both of his sons attend school.

Studies show it can be a good bet over time. The average annual return for apartment investments, including price appreciation and rental income, over the past 10 years is estimated at around 12%, according to the National Council of Real Estate Investment Fiduciaries, an industry trade group in Chicago.

But while home-price appreciation in the real-estate market over the last few years is impressive, past performance is no indicator of future returns. Many factors will determine how successful you are at attracting renters and future buyers.

It's key to get in contact with a real-estate appraiser and a realtor who know the area well and can give you an accurate picture of rental trends and long-term home appreciation in the region.

Make sure you consider worst-case scenarios, particularly if you don't plan on keeping the property after your children graduate. While home-price appreciation is at eye-popping levels now, that wasn't the case a little over a decade ago, when the late-'80s housing bubble suddenly burst – leaving some homeowners with properties selling for less that the outstanding mortgage.

Jeffrey Koch, a certified public account with Koch Reiss & Co. in Hollywood, Fla., says he considered, and then bailed on, the idea of buying a second home for his college-bound kids because of real-estate market conditions in the late-'80s.

"I backed away from the purchase as an investment because the real-estate market was in such bad shape," he says. "I'm sure you'll find people who have been successful going this route in the last few years, but ask someone who bought homes in the late-'80s and early '90s and I'm sure they'll tell you a much different story."

Even if your child is only a year away from high-school graduation, it's impossible to know whether the interest-rate environment or the housing market is going to be as favorable five years down the road as it has been. Give me a break! In just the last few months, 30-year mortgage rates have leapt more than a percentage point, though mortgage-rate forecasters like HSH Associates are betting rates will stabilize at lower levels in the near term.

What's important is that you ask yourself whether you're prepared to hold onto the property five years from now, when housing-market conditions may make holding, rather than selling, a better option.

Don't Be a (Knee) Jerk

If you do conclude a campus home is a good investment, you then have to consider whether it's right for you and your family. Too often, bad financial decisions are knee-jerk reactions to life-changing events – like cashing out your retirement-savings account after you've lost your job, then getting slammed with penalties and a huge tax bill. To ensure that buying a campus home makes sense for you, you need to set investment goals and determine how the purchase might impact your overall financial health.

Robert Boog, a Newhall, Calif., realtor and author of "Real Estate Sales From Hell," advises a prospective home buyer first to sit down with an accountant or financial planner, and an insurance agent. "An accountant or planner can tell you whether or not a second home fits into your financial plan, and your insurance agent can go over all the potential areas of liability," he says. "You need to protect yourself against the unforeseeable."

Next, your family should discuss whether a campus home makes sense. Ask your kids about their educational aspirations, particularly if you have more than one child. What colleges or universities would they like to attend? Would they prefer to live on-campus or off? Do they plan on pursuing an advanced degree at the same school?

Most parents start looking for real-estate property near campus after the child has been accepted. But by grilling your kids about their first choices, and their backup choices, for schools they'd like to attend, you have more time to begin researching the investment and are more likely to make a wise choice.

You can compare room and board costs at the schools with what renters near campus are paying, and then research home prices in the vicinity and figure out what the mortgage payments might be. If your children seem uncomfortable committing to school in a particular region of the country, or even committing to one school for four years, it's a big red flag that a campus home purchase is probably not for you.

Financing That Puppy

Once you decide to purchase a property, you've got to pay for it. If you're thinking of letting your son or daughter be a co-signer on the mortgage (bad idea – there are less masochistic ways of risking your pristine credit record) in order to help them build a credit history of their own (credit cards are better training wheels), and possibly relieve you of the burden of financing the home down the road (fat chance), I'd strongly suggest you reconsider.

It's admirable to put so much faith in a child's ability to shoulder such an enormous financial burden at this age, but there are really only two good reasons for buying this type of property: to cut down on your kid's room and board costs, and to potentially feather your own nest through home appreciation and rental income.

As for mortgage shopping, buying a second home is virtually the same as purchasing your first, as long as your children will be the only occupants. If you intend to rely on renters to help you foot the monthly bill, your lender may consider the home an investment property and hit you up for a higher mortgage rate. According to financial information Web site Bankrate.com, you can expect to pay up to two percentage points higher on a mortgage for an investment property.

What's more, when a home is used solely as a residence for your child, and not as an investment property, you generally can deduct mortgage interest as you do for your first home. In contrast, there are a host of rules and restrictions on deducting interest on rental properties. For a rundown, see this mortgage-interest primer on the Web site of tax-software maker Quicken.com.

Speaking of which, if you're approaching the idea of buying a home with an eye toward renting out part of it to other college students in order to pay the bills, you've got a lot more than financing to think about. I went over the pros and very significant cons of landlordship in this column. Check it out.

Email your comments to rjeditor@dowjones.com.