How to Use a Rental Property to Pay for Your Children's College
TL;DR - Buy a rental property when your kid’s 3. Get a 15-year mortgage. Let your tenant pay off your mortgage and stack up cash flow. When your kid’s 18, your rental property will be paid off and generating a lot of rental income. Then choose between selling the property, a cash-out refinance, rental cash flow, or a combination of the three to pay for your child’s college.
You’re looking ahead. Far ahead into the future. And you see something…
Something so dark and menacing that it scares you.
Before you know it, it’s pulling you in and you can’t resist!
Massive amounts of debt caging you and driving you wild! Make it stop!
…
Yeah…
That’s what paying for your children’s college can feel like. Planning for the massive tuition costs, room and board, books, food…
It can seem tough. But it doesn’t have to be!
There are plenty of options to help you save for your children’s education.
And one of the best methods is by investing in a rental property.
How to use a rental property to pay for your children’s college
Rental Property vs. The Other Options
While investing in a rental property is an amazing way to pay for your children’s college, it isn’t the only way.
Let’s go over some of the other options and compare them to real estate.
529 Plan
A 529 is a great way to save for your children’s education.
They’re tax-advantaged accounts that can be used for any education expenses. From kindergarten, all the way through graduate school in college.
Not only that — there are two types of 529 plans:
Savings plans grow tax-deferred and any withdrawal is tax-free if used for approved education costs.
Prepaid Tuition plans let you pay in advance for qualifying colleges and universities. With this plan, you can lock in current rates to avoid inflation and such.
Coverdell Education Savings Account (ESA)
An ESA is another option when planning to pay for your children’s college expenses.
This type of account is a tax-deferred trust. Similar to a 529, an ESA can be used for K-12, as well as college.
With a Coverdell account, the maximum a family can contribute is $2,000 a year.
In addition, the funds in an ESA must be used by the time a student is 30. If they aren’t, tax, fees, and penalties will follow.
Stocks
The most traditional way to invest, stocks are a tried-and-true investing method.
Essentially, stocks allow you to purchase a share of ownership in a company.
Once you have a stock, it’ll either increase or decrease in value depending on the market and the performance of the company. Some stocks even allow you to receive dividends based on your amount of ownership in the company and its profits.
One of the best ways to invest in stocks is through index funds. Index funds are portfolios of stock that aim to mimic the financial market indexes. This means that they perform more or less how the overall stock market does.
Rental Property
Real estate is one of the best financial tools available to people who want to be financially free.
This means that it’s a great way to plan for your children’s college expenses!
What’s great about real estate is how you can leverage debt to purchase an amazing investment — a rental property.
Comparative to other investments, the amount of liquid capital you need to make big bucks in real estate is laughable.
For example, let’s say you want to buy a $100,000 rental property. It’s generally best to put a 20% down payment on a rental so that you can lower your monthly payments.
For that $100,000 property, all you need is $20,000! What other investment vehicle lets you leverage so much safe debt?
Plus, real estate has a ton of tax deductions to take advantage of.
And to top it off, real estate has advantages over the three other investments we mentioned.
Unlike a 529 plan, real estate income doesn’t have to be used for education expenses. So if your child decides to forgo college, your investment wasn’t for nothing.
An ESA has too many restrictions. You can only contribute $2,000 a year AND the funds must be used by the time your child is 30.
Stocks are much more liquid than real estate. Which can be a great thing! Unless the market starts to crash and you panic, selling your portfolio and losing a ton of your money in the process.
Simply put, rental property is the way to go when saving for your children’s college. It gives you the freedom to pick your investment and choose where the funds go.
And we haven’t even gotten to the best part…
How To Do It
The super simplified version of this process goes as follows:
Buy a rental property for your child when they’re 3 years old
Put it on a 15-year mortgage
Let your tenant pay off the property for you
When your kid’s ready for college, the property will be paid-off, have massive cash flow, and appreciated in value
To better understand how this will help you pay for your child’s college, let’s go over an example.
Let’s say you purchase a turnkey property for $150,000. You put a 20% ($30,000) downpayment on the deal.
Your kid is 3 years old now, so you get a 15-year mortgage. That way, when they’re 18 and ready to go to college, the property is fully paid off.
You rent the property out and your tenant pays your mortgage down, year after year. You don’t need to invest an extra cent — unless you want to reinvest your cash flow to pay off your mortgage even sooner.
As the years creep by, your home is appreciating at a very fair 3% per year.
By the time your child is 18, your $150,000 rental property is completely paid off. Except now, through appreciation, your property is worth $233,695. That’s a profit of $83,695! In other terms, it’s an ROI of almost 279%.
With the new value of your home, your rental income alone will be anywhere from $1,870-2,570. A month!
Now that you’ve done the hard work and stayed patient, your child’s education is all but secured…
But now you need to figure out how you want to use your rental.
You Have Three Options (Or a Combo)
You have a completely paid-off rental property that’s raking in cash flow and a child that’s ready for college.
How do you use your rental to pay for college?
Well, there are three main options available to you.
1. Cash-Out Refinance
Normally, you’d take 80% of your home’s value minus your loan balance. That’s how much cash you could get for your equity.
Since your loan is paid off, we’ll just take 80% of your home’s value.
You could get $186,956 to put toward your child’s education through your equity.
And the loan you’d take up because of that cash-out refinance would once again be paid off by your tenant.
2. Rental Income
Another way to pay for your child’s college is through the rental income you’ve made over the years.
Assuming you haven’t touched your rental cash flow, and assuming a meager $400 a month, you’d have made $72,000 over 15 years.
Once the property is paid off it will generate much cash flow which can also be used towards paying for college.
Add this with the pure rental income you’re making with a paid-off property and you have a big chunk of change to pay for school.
3. Sell the Property
Finally, if you just want to be done with the rental property, you can sell it.
You’d bring home a nice $233,695 before selling fees, taxes, and such.
4. Combo
Another route you could take is combining a cash-out refinance plus rental income.
With this method, you’d be keeping your rental property (and its cash flow) while also getting that huge pay-out from the refinance.
This is a best-of-both-worlds scenario.
Whichever way you choose to use your rental property to pay for your kid’s college, you can rest happy that you had the foresight to plan ahead!
Happy hunting!
How We Can Help You
Does investing in real estate sound intriguing to you? Would you like to learn more? We’d love to be of value!
At Undoor, we pride ourselves on teaching new and experienced investors how to maximize their gains with minimal stress. Our goal is to help you fall in love with real estate and real estate investing. What we’re most passionate about is maximizing investment gains for people like you.
Do you want to get key insights and advice that’ll help you get ahead of the game? Don’t hesitate to contact us for any and all real estate wants or needs.
