Investment May 8, 2020

Paying for College the Right Way

School is challenging. It is challenging to get accepted, stay motivated, study, mid-terms, finals, research papers, not party too much, and finally reach graduation. But the hardest part of all, is paying for it. According to the University of Colorado’s tuition and fee structure for in-state full time (12 credit hours per semester) students starting in the fall of 2019, students can expect to pay between $14,758 – $20-062 per year for tuition alone. Add in room and board fur $14,778 – $16,786 per year and you can be over $36,000 per year. Oh yeah, then there are books and other expenses not included in these figures. It’s in the news cycle, how college students in 2020 will get their degrees and join the workforce only to drown in their student debt. In 2019, 69% of bachelor degree recipients left with an average debt of $29,900. There is a better way. It’s not a new mutual fund or state sponsored savings account, but real estate.
Lots of people use their real estate to help fund their kids’ college education. They just don’t do it the right way. They use their personal residence. When their child goes to school, they will refinance their home and take equity out to pay for college. All that hard work and money to pay down their home and build their nest egg is now spent. Furthermore, to a lot of people, that means their hopes of retirement are now pushed further into the future as they pay off all of that new debt.

Use investment property instead

Just like there are many types of properties, there are also many ways to be a real estate investor. It depends on what your goal is for that particular piece of property. If your goal is raising capital, you may consider wholesaling or rehabbing properties. Money can be made with these strategies, but it is a one-time payout and not necessarily going to make enough money to foot the college bill. Proficient fix and flippers could repeat the process several times and earn enough for college.
There are many advantages to buying and holding an additional property as an investment. With an investment property, someone else will pay for it while you own it and reap the capital benefits. Your tenants receive clean, safe, affordable housing and you may receive cash flow as well as build equity in a property that isn’t your primary residence. The rents coming in should sufficiently cover all your expenses and, in many cases, will leave a little profit left over.

Time is your ally

If you can, the best thing to do is to start early. Time will forgive a lot of the mistakes made earlier on as well as maximize the potential for appreciation. Real estate values, like any other investment, can go up and down in value. Historically it has a very strong track record. The Denver metro area has appreciated an average of 5.27% over the past 10 years. When comparing that to modern savings accounts where the top paid interest rates are around 1.5%, real estate comes out on top. To put real numbers to that, the median sales price across all residential real estate in December 2010 was $257,000 compared to May 2020 at $503,231. So start as early as you can.
Let’s say that your child is 3 years old and you buy a 2,000 sq. ft. home with 3 bedrooms and 2 bathrooms for $350,000 with 20% down at 4.75%. Depending on the area, market rent for such a property would be around $2,100. After all expenses, this property would cash flow around $212.80 per month. Almost no one is excited about that. That is a 3.38% return on investment. The formula gets much better the longer you own it. By the time your child is 18 and graduating high school, assuming 2% appreciation your original $70,000 investment would now be worth $283,306 in equity. Factor in tax savings and cash flow profits, you now have a nice return of 338.1% on your initial investment.

Options in the exit

Considering the scenario above, you now have options. The property can be sold to capture the equity outright. You may also consider pulling cash out in a refinance which would allow you to continue renting the property for income and still allow your child to go to school. The cash flow from the property may cover any student loan payments so essentially, the tenant is not only buying your investment for you, but also paying for college for your child.
Another option would be to deed the property to your child and let them decide how they want to use it. Before choosing any of these strategies, it would be wise to consult a tax adviser. To summarize, there are a lot of options out there but a small investment in real estate now, can lead to a huge payoff in the future.Be sure to consult you tax advisor to find out how these strategies would effect you before moving forward with any of them.