Invest in real estate to pay for college

Most people would like to be able to pay for their child’s college education but not many are prepared to do so.  According to a recent study by CollegeInvest, only 46% of families with children have any kind of fund set up for college and 38% of those with children ages 15-19 who intend to pay for all of their children’s college expenses have less than $1,000 set aside…which as we all know just won’t cut it today.  The College Board estimates the annual cost of attending a 4-year public university at $15,600 in 2005.  That is $60,000 for a typical degree earned in 4 years!  Who can realistically afford to cover that cost which is going to continue to rise each year?

What options are there?  Well one great option that my wife and I began 8 years ago is to invest in real estate.  A rental property can provide additional income to offset college expenses and increase your net income by reducing your taxable income through IRS tax benefits of owning rental property such as writing off mortgage interest and property taxes and being able to claim property depreciation.

A parent can buy a property when their child moves away to college and sell it when they graduate using the profits to put towards college loans or keep it as a rental property.

Here is a 10-year scenario similar to the one I created when we purchased our first of five investment properties.

Purchase price…………………………………………………………$225,000

Down payment………………………………………………………….$45,000

Tax benefit………………………………………………………………..$20,000

Principal reduction…………………………………………………….$25,000

Rental cash flow……………………………………………………..<$28,000>

Net proceeds (year 10)………………………………………….$114,000

Net additional cash to investor……………………….$69,000

Assumptions used for this example:

Interest rate = 7.25% amortized over 30-years

Rent = $1,200 per month

Rent & expenses increase 4% each year

7% vacancy rate

3% reserves

3.5% appreciation factor

7% property management expense

30% income tax bracket

15% long term capital gains tax

2% buying costs, 7% selling costs

Contact me to discuss the benefits of investing in real estate to help send your child to college.

As always, your thoughts and feedback are strongly encouraged.