A year ago, Jeff Shea began buying up rental properties around the University of Illinois at Urbana-Champaign, from which he had only recently graduated with a business major. Shea, 23, who lives in Chicago, owns three rental homes near campus, including a four-bedroom house he bought for $138,000 and rents to four students for $1,800 a month.
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"It's the best time ever to buy houses," Shea said. "The rent is inflated because so many people go to school here."
Shea said he'd be happy if Champaign-Urbana prices took a dive so that he could buy even more. But college towns have remained relatively stable in this slumping real estate cycle. Students, university employees, and faculty keep apartments filled and form a steady stream of home buyers. And retirees and professionals flock to college towns because they're attracted to the lifestyle and cultural activities.
Recession-Resistant Markets
Enrollments -- especially at large public universities -- are growing as more children of baby boomers (so-called echo boomers) graduate from high school. At cash-strapped public universities, dorm beds are limited and students are often forced to find private housing after freshman year, says Michael Zaransky, author of Profit by Investing in Student Housing (Kaplan Publishing 2006) and co-CEO of Northbrook (Ill.)-based Prime Property Investors, which invests in student housing.
"It's a resilient market and seems to be fairly recession-proof," Zaransky says.
BusinessWeek.com worked with OnBoard, a local real estate information specialist, to find out how college towns are doing in this slumping housing market. We selected towns with long-established, first-rate colleges and found that 17 of 25 college towns outperformed their respective states in terms of home price appreciation last year. Four towns performed as well, and only four towns underperformed.
In Palo Alto, Calif., which is home to portions of Stanford University, median home prices increased 15% in 2007 compared with 2006, according to OnBoard. (Overall real estate prices in California dropped 9%.) The area benefits not only from the university but also from its proximity to Silicon Valley. Similarly, Austin, Tex., home of the University of Texas, saw a 6% price increase in 2007, while home prices in the rest of the state remained flat.
But not all college markets have weathered the housing slump as well. Williamsburg, Va., the home of the College of William & Mary, which has restrictions that limit off-campus rentals, saw a 16% annual home price drop in 2007. Virginia's overall median home prices fell just 3%.
Not Just for Students
Zaransky says the houses located just steps from campus are seeing the most appreciation because that's where students typically want to live. But other areas of college towns also benefit from local academic institutions.
Sandy Wentworth, a Realtor with Jones Group Realtors in Amherst, Mass., says retirees -- especially former academics -- like the Amherst area, which is home to four liberal arts colleges and the University of Massachusetts Amherst. "They want access to the culture and all the great libraries," Wentworth says.
Mark Waldhoff, a Realtor with Keller Williams Realty in Champaign, Ill., says the market around campus is stable in part because the university brings buyers and renters to town from more affluent urban communities. "It brings well-paying jobs into the community and brings a lot of diversity," he says. "Professors are often surprised about what the average sales price is here compared to the community they came from. You can buy a single-family home for $155,000 to $160,000."
For those parents of college students who can afford it, buying a house close to campus often makes good financial sense because their children need a place to live for four years, after which the property can be sold or turned into a rental home. But Zaransky says parents should try to take their children out of the equation when deciding whether to buy. It's generally good to buy in college towns with low-cost real estate, rising enrollments, and a shortage of dorm beds, he says. And it's best to look outside of large, expensive cities where colleges have less influence on the housing market.
Risks for Investors
But like any real estate investment, buying in a college town comes with risks, particularly for investors. Think Animal House. Students are known to drink, punch holes through windows, spill beer on carpets, or just not be very responsible. Of course, it's possible to protect your investment by requiring tenants to provide security deposits and parental guarantees.
And though the pool of tenants in a university town is large, it's harder to find renters after the semester begins; the risk is that an apartment could go empty for a few months -- though there's always summer school.
A larger risk is that the subprime mortgage crisis could spread and the economy could fall into a deep recession. In that situation, home prices in college towns might not drop as much as other places, investors say.
In Austin, home prices near campus are already so high that investors can't necessarily expect to cover a mortgage with rental income unless they come up with a significant down payment, says Jay Carter, a Realtor with Livinginaustin.com. But buying a home can still make a good investment in terms of appreciation.
Carter says enrollment is growing, but there's a risk that the credit crunch could spread to the student loan market, pushing up interest rates and making college more expensive. "The area around the University of Texas campus is tighter than ever, and demand will always be there no matter what the economy is doing," he says. "UT students are competing (for apartments) with a large number of non-UT students who just want to live in that area of town. There's a huge urban boom in Austin."
A Tight Market
Home prices next to the University of Florida campus in Gainesville have been strong despite Florida's real estate downturn, says Dave Ferro, a Realtor with Bosshardt Realty Services. Foreclosures are more common farther away from campus, he says, but finding a good investment property close to campus is difficult because sellers are few and prices are relatively high.
"When the market is hot, it's difficult to buy a property that you can break even on in terms of renting," Ferro says. "Things have changed a little bit, but properties around campus are like waterfront."
If you want to invest in college towns but don't want to get involved with buying real estate, Zaransky suggests buying shares of real estate investment trusts. REITS that invest in student housing include American Campus Communities (NYSE:ACC - News), Education Realty Trust (NYSE:EDR - News), and GMH Communities (NYSE:GCT - News).
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