As many parents learn expensive lessons about college costs, they probably come to realize that room and board is no small expense. According to the latest statistics from the College Board, average housing costs in 2005 were $6,636 a year at public universities and $7,791 at private institutions.

This academic year, those averages undoubtedly will be higher, and some colleges are far above the norm. Stanford, for example, puts the cost of room and board at $10,367 for 2006 to 2007, UCLA charges $12,415 in its residence halls and Columbia publishes

a figure of $16,542. Thus, parents of college-bound students face the prospect of spending $35,000, $50,000,or more over the next four years, just to provide their children with a place to live.

Some parents have come up with an alternative: Buy a homoe for their young scholars. Breaking even on the real estate will save all those dorm fees or off-campus apartment rental costs, and parents might even catch some profits in a hot housing market. Moreover, when it's time to sell, near-campus houses and apartments will appeal to a steady stream of new buyers as parents of the class of 2014 or 2015 look to avoid those ever-escalating room-and-board fees.

At least that's the theory. Does it work in the real world? Definitely, according to Greg Weyandt, director of operations at the Welch Group, a wealth management firm in Birmingham, Ala. "We bought a duplex for our kids to use when they went to Auburn, and it worked well for us," he says. We had it for about six years before we sold it this spring. Two of our kids lived there and we had at least one using it for five years running."

Weyandt says that his calculations had projected he would break even, after tax, even without appreciation of the property. "As it turned out," he says, "the real estate appreciated by 3% a year, so we came out ahead."

Not every such housing venture gets a passing grade, though. "After going through the numbers, I advised a couple, who were long-time clients, not to buy a rental house for their two children who were going to college," says Frank Moore, founder of Vintage Financial Services in Ann Arbor, Mich. "They went ahead anyway and have regretted the decision.

The house required more repairs than they imagined, the tenants who lived there weren't good at paying the rent and the neighborhood price increases didn't meet their expectations. The last I checked, they were hoping a zoning change would help their property value so they could minimize their losses."

LOCATION, LOCATION, LOCATION

What makes the difference between an A and an F grade in near-campus housing? Real estate fundamentals, for starters. "We recently did a break-even analysis for a client whose son will be going to medical school in Houston," says Chuck Roberson, senior wealth manager with Greenbaum and Orecchio, a wealth management firm in Old Tappan, N.J. "He was interested in buying an apartment in a downtown high-rise building for his son to live in while he's there, for at least four years. His son would have a friend living there and paying rent."

The local real estate market has been booming, due largely to the surge in oil prices, according to Roberson. "Therefore, the potential for property appreciation is the main reason for our client's interest. Also, this apartment will provide his son with a nice place to live while he's in school. The income from the tenant would help him carry the mortgage. By leveraging the investment, even modest appreciation can make this a success."

Roberson's firm also pointed out the risks. "His son could drop out of school, forcing a sale after a short holding period," Robertson says. "Oil prices could drop sharply, bringing down the local real estate market. Our client has been weighing the risks and opportunities, and I think he'll go ahead with the purchase."

In contrast to Houston's boom, Moore points to the bust of Michigan's auto industry as one reason his client's investment didn't work out. Another: "The house turned out to be a money pit, requiring a new roof, water heater and so on," he says.

RIGHT PROPERTY, RIGHT TENANTS

The right way to make such an investment is to avoid falling in love with the property, says Bert Whitehead, president of Cambridge Connection, a financial planning firm in Franklin, Mich. "Buy a lazy man's house and don't put too much into it," he says. "Your total fix-up effort should be limited to new carpeting, cleaning, painting, basic landscaping and perhaps $100 worth of small repairs. You can fix broken screens but don't put in a new kitchen. If the house needs a new roof, don't buy it." Such a home may not provide luxurious accommodations for clients' children, but it can be a practical approach to rental property housing several college students, who may care less about the well-being of the property.

Moore relates that friends of his clients' children moved in and didn't pay the rent. Therefore, it would be beneficial for an owner of a near-campus residence that doubles as a rental property to have some form of control over tenants.

"We had the students' parents sign leases and provide guarantees that they would be responsible for the rent, with permission to sublet, if necessary," Weyandt says. "As it turned out, we never missed a rent payment. The tenants were usually friends of our children, so we had a comfort level."

Jim King, a financial planner with Balasa Dinverno & Foltz, a wealth management firm in Itasca, Ill., also reports that a careful approach when dealing with student-tenants can have positive results. "I manage a family-owned rental property, and I was having trouble getting good tenants," he recalls. "After placing an ad in a local newspaper, I received inquiries from students at Elmhurst College, west of Chicago. Now I rent entirely to college students."

Before renting, King checks out prospective tenants. "I call the parents and I call the students' employers. The parents agree to pay the rent. It has been a great experience."

Bringing in tenants may be well worth the extra effort it involves. Not only do they provide additional income, but tenants also make the home a rental property, which can deliver tax benefits.

"Our duplex had a total of six housing units," Weyandt says. "When one of our children was living there, we had five tenants. The rents totaled around $1,600 per month, and we'd pay our child $160 as a management fee. In this area, 10% is on the low end for management fees."

CHILD MANAGEMENT

To earn their fee, Weyandt's children collected rents, saw that leases were renewed and arranged for necessary maintenance on the property. "It was a legitimate expense, and it provided them with spending money," Weyandt says. In such ventures, the management fee is deductible against rental income, while the income may be tax-free to the children. (In 2006, single taxpayers may have up to $5,150 in earned income, fully sheltered by the standard deduction.)

In some cases, the client's child might be rewarded at the end of the deal rather than receiving a management fee. "One of our clients purchased a condo in the San Luis Obispo area when his son started at Cal Tech five years ago," says George Middleton, an advisor with Limoges Investment Management in Vancouver, Wash. During the student's stay at Cal Tech, the housing market in San Luis Obispo was torrid, so the condo's value went up. "Our client's son was allowed to keep the profits, so there was an incentive to keep the place well-maintained," Middleton says.

The student was able to live in a high-quality home in a good location; he also profited from life experiences, according to Middleton. "He learned some useful lessons, such as managing money and dealing with tenants."

In fact, the idea that handling off-campus housing may provide lessons not taught on campus is frequently raised by investors and advisors. "Our daughter decided she never wants to be a landlord," Weyandt says. "She had a run-in with one of the tenants who wasn't keeping the property up to her standards. My son had just the opposite reaction. He wants to own investment property."

Whitehead suggests that these lessons should begin at the beginning, when the property is acquired. "I've been talking with a client who has two daughters at the University of Michigan and a third who will start there," he says. "The kids are responsible, so they are thinking about buying a house near campus. They'll probably want a place where their children can live, along with a couple of rent-paying tenants."

If they do go ahead with the plan, Whitehead will urge the parents to get the kids involved in shopping for the house. "This can be a great education for the clients' children," he says. "They'll learn how to find a house and how to buy one. In many cases, a home will be the biggest investment of their life, so it pays to learn how the process works."

COMFORTABLE STUDENTS

Parents who invest in near-campus housing typically plan to make a profit or at least break even, but the money may not be the only thing driving the purchase. "One of our clients had a daughter at the University of Colorado," says Craig Carnick, a planner in Colorado Springs. "She didn't like the idea of living in student housing. She wanted a place that was more to her liking, so her parents bought a condo for her. They held it for four years and made a small profit on the sale."

In this case, the parents were able to pay $175,000 in cash for the apartment, so saving money on room and board wasn't a huge concern. "We've had others do similar things in the past," Carnick says. "Most of the time, it was because the child was particular about living arrangements. That seems to be the main motivation, rather than turning a buck."

Even when money does matter, it may be secondary to other issues. "Recently, one of my clients closed on a three-flat [a three-unit building]," King says. "He has two kids who are now in a six-year dental program and a third is likely to follow. There are a lot of dentists in this family."

Two of the client's children will live in the three-flat, while a friend occupies the other unit and pays rent. "Although my client is interested in a return on his investment, that's not the main reason for buying the property," King explains. "My client's father did the same thing for him. Now he feels it's his responsibility to see that his children are living in a good area while they're in school."

Having multiple children attend a long-term educational program increases the chances of investment success. "The longer the holding period, the greater your chances of benefiting from appreciation," says Hugh Smith, director of financial planning at the Welch Group. One of his clients just bought a near-campus house for a daughter who will be attending law school at the University of Georgia, where a younger daughter will be a freshman this year. If the undergrad stays there for graduate school, the holding period of the real estate will be extended.

TIMING IS EVERYTHING

On the other hand, if the home must be sold after only a few years, profits may be meager and are likely to be eaten up by selling costs. "One of our clients got burned," Whitehead says. "He bought a home near the campus, but his kid left school after two years."

Smith also recommends buying the necessary insurance, especially liability coverage, if the house is to be rented to tenants. Carnick advocates holding the property inside a limited liability company to reduce exposure to creditors.

Assuming the proper precautions are taken, owners of near-campus housing may enjoy rental income, tax advantages and the prospect of a ready resale market once their children are finished with school. For example, Weyandt sold his duplex, 10 minutes from the Auburn campus, to an investor. "Two or three parents of other students were interested, but the investor made the best offer," he says. "We had no trouble finding buyers. If I were in the same situation again, I would not hesitate to make a similar investment."

Senior Editor Donald Jay Korn has been writing about investments, and tax and estate planning for Financial Planning since 1985.

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