Good day, and welcome back to the Pay for College with Real Estate Series (101). Today, we will start our technical analysis of ways to leverage real estate to cover the escalating prices of college.
Let’s review our assumptions: we will need $150,000 profit, our child is going to an in-state school, the house will be a rental, and we will pay for the house via a 15-year mortgage. For today’s scenario, we will be buying a home the day our child is born, with the intent of selling the house entirely upon them entering or graduating college. Let’s dive in.
The most crucial part of buying a home to pay for college is how we acquire the home. If we overpay in the beginning, we reduce our chances of coming out on top later. So, let’s review some ideas from the Creative Financing in Real Estate Series (101, 102, 103, 104, 105, 106) or Maximum Leverage 1 and 2.
We already own our primary residence, so now we need to buy a rental. Programs like the VA loan only work when acquiring a primary residence, so we may need to move into the new home. We can use our old primary as the rental. We have to be creative. Creativity is the difference between paying out of pocket for college or having someone else pay out of pocket for your child.
From the financing side of the house, we can leverage home equity from our primary residence to fund the down payment of our new house. If the price of our current mortgage goes up, we will need to find ways around this property to support the difference. Read Mortgage Zero for ideas on this front. We do not want to have out-of-pocket expenses. Someone else can pay the difference.
Remember, we will also be getting a 15-year mortgage, which will make it even more difficult to cash flow our rental property. Cash flow means having money left over after paying for all expenses on your rental property.
Let’s plug in some numbers for context. We are going to buy this expensive house in Phoenix, Arizona. The house price of $538,000 is a lot of money to me, but this is chump change in some areas. But look at the price appreciation between 2010 and 2021 (12 years)—$280,000. We need to get down on numbers like these.
Use Real Estate as Your Wealth Generator
First, we need to decide how to fund the $108,000 down payment. Looking at the rental estimate, we could probably get around $3,000/month in rent. This will help us decide if we need to pay the down payment or use the VA loan.
In this particular case, let’s use home equity in our current home to pay for the down payment in our new house. The market is absolutely crazy right now, but we have to get into the game. It is only going to get worse from here on out. That is why it is essential always to follow housing, stocks, business, and crypto trends.
With a $108,000 down payment and a 15-year mortgage, the total cost would be roughly $3,300 a month. So, we would not be cash flowing. But we must become a TOTAL VISION investor. Look at all of your assets and see if you are profiting somewhere else.
Remember, the goal isn’t to cash flow this home; it is to pay for college. If we take on a roommate in our primary residence for $1,000/month, and the new mortgage after the home equity line of credit goes up to $300/month, we cash flowing there $700/month. Do not get tunnel vision.
We want to make intelligent decisions that capture everything that we are doing in life in one complete picture. Now, it will be hard to repeat the type of home appreciation that we saw earlier. They bought the home at the bottom of the market (2009) and are selling at the top (2021). By my calculations, the house appreciated at a rate of over 9.3% a year for a total of 112% over 12 years. Just amazing.
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However, we want to predict something more reasonable, perhaps 4% a year. 4% a year multiplied by 18 years will equal a 72% increase on top of our $540,000 home. That would give us $388,800 in estimated capital gains and a total home price of $928,800. Nice!
But we also will need to beat the taxman. We will need to consider moving into the home for two years before college. This will allow us to be eligible for the $250,000 tax break on the first $250,000 of profits. Also, our house will be entirely paid off as well. So, if we move in and get a roommate for $1,200/month (rents go up!), that is pure profit that we can put towards a college fund.
Keep in mind; college expenses will have gone up considerably. We may need to consider our child going to community college for the first two years to save a ton of money along the way.
It is not a bad way to use real estate because it helps us keep up with inflation in college prices. We will need to be creative to pay the house over 15 years, but with education comes excellent ideas. I know we can do it. The hardest part will be acquiring a place at these outrageous prices. However, we have to do it! Leverage is the name of the game.
The benefit of using this method is that we can make a clean break from home. Every decision that we make can be to sell the house. If we know this, then we may not have to invest as much in capital expenditures (renovations, etc.) as we would if we were keeping the home.
It is a simple, one-and-done transaction. Yes, we predicted the house going up 4% a year—the stock market could have higher returns. But real estate will give us much better options over the 18 years. If times are good, we may extract home equity, fund another home, etc.
I think that buying this home will give us infinitely more decision points than putting our money into a 529 plan. A 529 plan will require less education and less stress, but we are on this Earth to make the tough decisions. We are a sum of the hard choices we make throughout life.
I hope you enjoyed this first technical dive into Using Real Estate to Pay for College. It may seem unreasonable for us in our current situations, but we may be using these techniques for our grandchildren. In 103, we will cover using a home equity loan to pay for college. Until next time, Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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