The New College Savings Plan: Real Estate!
In the last couple years, student loan debt has received a lot of media attention. College costs are steadily rising, and students are graduating with more and more debt. The class of 2014 graduated, on average, with more than $30,000 dollars worth of debt. For millennials an beyond, these huge debt numbers are delaying major life events, such as marriage, purchasing a first home, and more.
For many parents, easing the burden of the costs of education for their children is a major priority. However, parents are finding it harder to set aside enough money to meet the rising costs. According to Trends in College Pricing and Trends in Student Aid reports for 2014/15, the average cost of attending a public rose about 3% to $23,410.
To meet the rising costs, many parents are investing in real estate as a unique way to save for their child’s education. Ultimately, investing in real estate as a college savings plan can pay for itself!
The idea is to purchase a house as an investment property when a child is born or very young. The investor then rents that property out, letting the cash flow generated from rent pay off the mortgage on the property. By the time the child reaches college age, the parents own the property outright, and can sell the property in order to fund their child’s education.
For example, let’s say new parents purchase a $100,000 house with $20,000 as a down payment. They take out a 15-year mortgage for the balance at 4 percent interest. Their mortgage payments would be around $600 per month, or $7,200 for the year.
If they rent the house out for $1,200 a month and have around $325 per month in expenses (taxes, insurance, repairs), they should see about $3,300 in cash per year from rental income for the first 15 years. After the first 15 years, the mortgage is paid off, resulting in even greater cash flow. In this example, the resulting cash flow for years 16 and 17 could be up to $21,000!
Over 17 years, the cash flow from this property would add up to $70,500! Keep in mind, however, that this example does not account for rent increases or appreciation for the property!
While it is difficult to determine what future tuition will be, the generated cash flow in addition to the appreciated value of the home should more than pay for most four year universities.
You can see why more and more parents are taking advantage of this opportunity. Real estate investing for college savings is a powerful strategy.