Saving for College Education through Investment Properties
Student education, especially college education, is one of the most important phases of life. Saving for a college education however can be quite daunting. There are plenty of vehicles out there to help parents and potential student start saving, such as the 529 college savings plan, and the potential for a multitude of scholarship and grant opportunities.
Have you ever thought outside of the box however, and investigated how investment properties could potentially fund your child’s higher education costs? Let’s looks at a simplified example.
Say you purchase an investment property for $150,000 with 10% down on the home in the year your child was born. You rent out the property for a measly $100 positive cash flow after all expenses are paid to maintain and manage the home. Then you sell the home on your child’s 18th birthday just in time to start funding college education expenses. If we assume a very conservative 4% growth rate, here is how the situation looks.
- Initial money invested $15,000 (10% of $155,000 purchase price)
- 18 years of 5% annual growth rate results in a home price of $305,000, this is a $155,000 gain ($305,000 – $150,000).
- Rental cash flow (at $100 per month) income over the 18 years results in $21,600
- Net Gain after home is sold: $155,000 + $21,600 – $15,000 = $161,600
So, the question now becomes, do you think you can fund your child’s college education with $161,600? Actually, you would have quite a bit more funds available since you would also have to include the principal amount paid into the loan over the 18 year span, as well as the initial $15,000 invested in the home for purchase. On the flip side, you would have to deduct real estate sales commission, and other closing costs fees as well as taxes on the capital gains. As mentioned earlier, this is a simplified example, but it does make the point that it’s feasible to fund a college education through investment properties.