It’s time to jump back into our Pay for College with Real Estate 101 Series (101, 102). Last time we covered the concept of buying a home and selling it to pay for college. This method offered a clean-cut experience with no residual stress from real estate.
But, you don’t keep any residual cash flow from your rental property when you sell it. You also have to move into the home to take advantage of the $250,000 tax break you receive from selling your primary residence.
Depending on your situation, you may want to keep your home, because of its excellent rental income. Remember, we paid off the house in 15 years, so when our child turns 18, we’d have been collecting three years of mortgage-free rental income.
Real Estate Investing 102
At this point, leveraging home equity may be a powerful alternative to selling your home. Let’s run the numbers and see if you can find a usable solution to keeping our home using home equity.
Let’s use the numbers from our last article. We bought the home in Phoenix for $538,000, and in 18 years, we assume it will appreciate to the value of $928,800. Since our house will be paid off, that amount is all equity, making it usable for our home equity loan.
We will also assume we can receive $3,000/month in rent payments for this home. Now, the amount we want to have for college is $150,000 total for the four years. The rates on home equity loans vary, but let’s assume it will be 7%, roughly double that of a standard mortgage.
How to Become a Land Millionaire
Using a simple loan calculator, we find a monthly payment of $1,740 on a $150,000 at 7% interest over ten years. Not too shabby. If you shop around, you can probably get this home equity loan down to 6%, making the payment $1,665.
One of the main concerns using this method would be that interest rates are unpredictable. What if inflation set in like in the 1970s and the interest rate was 12%? It could happen; that is why I am writing about all different kinds of scenarios and techniques. We will want to leverage the best one at the time of use.
Some other perks about this method are that our child could live in the home and collect the $3,000 in rent by hosting roommates. This will significantly lower their college receipts and set them up better for their futures.
Use Real Estate as a Wealth Generator
Don’t forget that we can use a home equity line of credit (HELOC) vice a home equity loan. The HELOC differs because you can continually draw cash as you pay it back, sort of like a credit card. We could use that if we had multiple children going to school over a short period.
There are some other options we could take advantage of with this method. Depending on how much we could receive for rental income, we may decide to withdraw more from our home equity loan.
This extra cash could be used as capital for other investments or businesses. Let’s say our child wanted to start a rental car business for extra income during college. How about converting the garage into a rental space. We can use the money to improve our current income situation better.
We could also take out some cash to put into a dividend portfolio. You would be borrowing money at 7%, so hopefully, you would attempt to get at least 8% annually in returns. But throughout your child’s lifetime, that investment at age 18 would have an immense effect on their wealth.
I like this method because I am a buy-and-hold style investor. I want to keep the chicken because it lays golden eggs. Because we did our due diligence, paid off our home in 15 years, and leveraged rental markets, we would be in a great position to not only pay for college but also tap other investment ideas.
What do you think of using home equity to pay for college? Compared to the other methods, 529 savings and selling your home, how do you like this idea?
Stay tuned for the next installment in the Pay for College with Real Estate 101 series, which will cover performing a cash-out refinance. It is similar to home equity, with some key differences as well. Enjoy and Happy Investing!
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