By Jeffrey Steele
From Barron's
Most parents don't have much choice about their children's college living arrangements. When the kids gravitate to dormitories, fraternity or sorority houses or off-campus apartments, their parents get stuck with the tab, which can be $10,000 or more a year. It is an outlay that is never recouped. But some lucky parents, particularly those of students attending schools in major cities, have given themselves a crash course in beating the high cost of college housing. Call it Condo-Buying 101.
These folks have purchased condominiums and installed their fledgling scholars in them. The parents can write off mortgage and loan interest costs, providing a nice tax benefit. More important, prices of most urban condos have been rising steadily in recent years. By the time their offspring leave the costly groves of academe, the apartment's market value might have risen considerably. The parents can then sell the unit or keep it for use as a pied-a-terre.
Of course, there are dangers. The student might drop out or decide to attend a college elsewhere. Or the property market might decline. But even if prices do fall, the parents might not be any worse off than they would have been paying for a dorm room for four years. In any case, it's a gamble many people are willing to take.
In Chicago's Loop, parents of students at DePaul, Columbia College, Roosevelt University, the University of Illinois at Chicago and other schools have been snapping up condos.
Perhaps the best example of a Windy City structure being developed for this market is the rejuvenated Woolworth Building at 20 North State St. Begun in April 2002 and completed in late August 2003, a $35 million renovation has turned the ancient retail emporium into a 250,000-square-foot, 106-unit condominium building with 90,000 square feet of retail space on the basement, first and second floors.
An L-shaped structure that angles around the Hotel Burnham, 20 North State was developed by a local firm, Smithfield Properties. In a downtown Chicago market where many new condos easily top $300,000, the developer offered smaller units at preconstruction prices that had scarcely been seen in a decade, starting at $119,000 and topping out at $200,000. No surprise, then, that 20 North State was completely sold out before the first jackhammer tore into the old Woolworth Building.
Robert Bono, a principal at Smithfield, says that although his firm hasn't tracked how many of the units are occupied by students, "our sense is that a significant percentage was bought either by students or by parents of students attending one of the universities in the downtown area."
Bono says that Smithfield became aware of pent-up demand for affordable condos when it built a "residential student facility" -- a.k.a a dormitory -- nearby for the school of the Art Institute of Chicago.
The condo-turned-dormitory room phenomenon is by no means limited to Chicago. In big college towns from Boston to Austin to Miami, parents are purchasing condominiums to serve as their college-bound sons' and daughters' living quarters.
In Miami, parents of students at the University of Miami and Florida International University have purchased residences at places like the Mutiny Hotel, a luxury all-suite condominium hotel in the Coconut Grove neighborhood, and the Skyline on Brickell, a soon-to-open 38-story high-rise just south of downtown. Says Gaby Garcia, a spokeswoman for Skyline: "Instead of throwing money away on a dorm room, [parents are] saying, 'Why not make it an investment?'"
In Boston, with perhaps the nation's largest concentration of students, Joe Pucillo, zipRealty's district director for Massachusetts, calls the condo-buying phenomenon: "one of the hugest trends we've seen." In this low-interest-rate environment, a parent can purchase a $150,000 condominium in the Allston and Brighton neighborhoods between Boston College and Boston University and pay just $1,300 to $1,500 a month in mortgage and condo fees, Pucillo says. With units in those communities appreciating at 8% to 11% a year, "if you look at the cost to own, it's almost a wash," he observes. "So it's a no-brainer."
Compare that with paying for student housing at BC, BU or Northeastern University. "Depending on the building and how close it is to the main campus, it can be $2,000 to $4,000 a month in rent," Pucillo says -- a hefty sum even when split among two or three roommates. "Welcome to Boston, my friend."
Many Boston-area parents opt to keep their condos after their kids move out. Or "if the students stay in the city, it's their graduation present," Pucillo adds.
In Austin, Texas, where there's a chronic student-housing shortage near the centrally located University of Texas campus, condos have been purchased for use by undergraduates for a number of years, says Mark Orr, manager of the Colonial National Mortgage office in Austin. "A lot of parents see it makes sense to purchase a condominium, which gives them the ability to write off mortgage interest, plus the property taxes," Orr comments. "And, depending on the cost of the condominium, it may be less expensive to put them in a condo than in a dorm."
Another benefit: the parking spaces that come with many Austin condos. Normally, UT students pay about $850 a semester to park their cars on campus, according to the university's Website.
"Kiddie condos," as Orr calls them, have bucked a recent downturn in Texas home values. Mid-$100,000-range homes actually declined in value by about 10% over the past year throughout Texas. In contrast, condos near the university continue to appreciate, with a two-bedroom rising from about $135,000 to $145,000 in the past year, according to Orr.
Back in Chicago, the Loop isn't the only area in which parents are purchasing condominiums for their college-age children.
Michael Capozzi, a Buffalo, N.Y., businessman, bought a one-bedroom apartment at Park Place on Chicago's North Side in June 2002, just before his daughter, Jenna, enrolled in a bachelor's degree program in fashion merchandising at the International Academy of Design and Technology. In addition to the $160,000 condominium, he bought a parking space in the building for $20,000.
Capozzi then converted the "too large" dining room into a second bedroom. That allowed Jenna, 19 years old, to share the condo with a roommate. With the rental proceeds, Capozzi figures he's paying $550 a month for the condo, rather than $650 or $700 for student housing. Moreover, he believes the Windy City's rapid price appreciation will turn his original $180,000 investment into $250,000 by the time his daughter graduates. Then, he plans to sell the unit.
Another example: Ken and Gerry Kutz, who live in Roselle, Ill., about 25 miles from the Loop, bought a $180,000 one-bedroom condominium for their son, Marco, to reside in while he pursues a degree at Columbia College. The 20-year-old graphics-art major would have had to pay about $775 a month for college housing. Instead, the Kutzes signed an incentive-laden deal with River City Condominiums that eliminated the association fee and reimbursed his tax and mortgage payments for the first year.
"Sometimes, I think we'll sell it after Marco is through with it, and sometimes I think we may keep it as rental property," Kutz says.
Of one thing he's sure. Investing in a condo for a college student's housing, is "better than renting." And that lesson is being learned by an increasing number of parents throughout the nation.
