Using Real Estate To Pay For College Tuition
Molly GraceDecember 30, 2019
It’s no secret that college tuition is expensive. To send your kid to a 4-year in-state public school in the 2019 – 2020 school year, you’ll spend an average of $10,440 on tuition and fees. The average private 4-year school costs more than 3.5 times that, at $36,880. And that doesn’t even account for the cost of keeping them housed while they’re away at school.
With the cost of a college education continuing to rise each year, parents are looking for creative ways to cover the expense. If you’re the parent of a college-age kid, you could use a 529 plan or take out student loans. But what if you could invest in real estate with the sole intent of using the equity to cover tuition costs? It’s an option, and we’re going to walk you through exactly how to make it happen.
Understanding Your Goals
Before starting, it’s important to lay out your goals. This will help you understand exactly what the result needs to be.
- Are you planning to send your child to a public or private school? Will it be a 2-year or 4-year school?
- Are you planning to cover the entire cost, or are you just going to pay for 1 or 2 years?
- Do you want to fund only the tuition and books or the entire cost, including room and board?
Once you’ve answered these questions, you’ll have a better understanding of how much you’ll need to save by the time your child heads off to college.
Crunching The Numbers
Vanguard has a great tool that will help you calculate the total tuition cost you can expect. Plug in the number of years until college, how many years of tuition you plan to pay, the current cost of tuition and the rate you expect tuition to increase each year.
As an example, let’s assume your child was just born and won’t head off to college for another 18 years. You’re also planning to pay 4 years for an in-state university where the current cost of tuition is $10,000 per year. If the annual cost increase is 3%, you’ll need to have $71,223 by the time you’re ready to make your first tuition payment.
“I bought my first investment property at age 25, just after getting married, for the specific purpose of paying for our future children’s college tuition,” says Avery Carl, a real estate broker. “We got a 15-year loan, so that the mortgage would be well paid off by the time any potential children started applying to colleges.”
How To Pay For A College Tuition With Real Estate
You might be sitting there thinking there is no way you can do something like this. But in reality, it’s very simple to do. All it takes is a little planning.
Finding The Perfect Property
The first step, and probably the most important, is actually finding a property to buy. You want something that’s going to be attractive to potential renters and eventually buyers. This could be something in the city in a walkable neighborhood with restaurants and bars close by. Or maybe you’re looking for something on a university campus that can make a great rental for students.
No matter what the location might be, you’ll want to look for something that needs a little love. Maybe it’s a house that has a kitchen 10 years past its prime. Or it could be a home that has an unfinished basement where you could add an extra bedroom or two. The idea is to find a property where you can quickly appreciate the value.
Once you’ve found a property, you need to make it appealing to potential tenants. By no means do you need to install high-end finishes. Instead, you need to choose items that are budget-friendly but still attractive. It’s also important to use materials that can handle wear and tear from tenants. This’ll help reduce the maintenance costs down the road.
Some of you might be turned off by the idea of doing any type of rehab. Rest easy knowing that you don’t need to do any of the work on your own. Find a reliable contractor and they’ll be able to oversee the job, making sure the work gets done right.
Keep It Occupied
Once the property is renovated, it’s time to bring in a tenant. If you live in the same city as the rental property, finding tenants is something you can do yourself. Alternatively, you can choose to hire a property manager who’ll assist with finding tenants and maintaining the property for you. Just keep in mind that this service will come off your bottom line each month.
Put Everything Back Into The Property
What if the percentage increase in tuition is greater than 3%? You’ll need to make sure everything goes right back into the property each month. This’ll help give you some breathing room if the cost of tuition increases more than expected.
Because you’re going to purchase a property that needs a little work, there’s a good chance you’ll already have a head start on the equity needed. Plus, your monthly expenses are most likely going to be significantly less than the market value for rental income.
Every month, put any positive cash flow you receive right back into the property as an additional principal payment on the mortgage. This will help add to the equity and reduce the amount you pay in interest over the life of the loan. By doing this you should have more than enough equity down the road even if tuition costs increase more than expected.
Sell Or Refinance To Cover Tuition Expenses
“The intent was to sell our first investment property when our daughter enrolled in school,” Carl says. “However, we made so much rent money on that first investment, that we’ve continued to buy several investments a year. Now we can pay the kid’s tuition with rental income rather than having to sell the property.”
Most of you might not want to continue buying properties and that’s fine. Once your child is ready to start college you can either refinance or sell the property. If you plan to sell, you’ll need to make sure you also account for the capital gains you will be realizing. The tax rate you pay will depend on your income.
You will also pay a depreciation recapture tax, which is based on your individual tax bracket and is capped at 25%.
Wrapping It Up
There are many ways to invest in your child’s education. And while real estate can have its headaches and does have a learning curve, it can be a great way to build equity while using other people’s money.