Junior's College Planning, Part II
As a follow-up to Tom’s recent post on strategies for funding college expenses, I would add the comments below regarding the use of real estate as an option.
First of all, be advised that I like/am comfortable with real estate and am currently employing it myself in funding college expenses for our two sons. So, everyone has their own set of tastes and preferences and this certainly does “color” the acceptable options when making these types of active investment decisions – more on this below.
The bottom line when one chooses this path is to have others (a.k.a. tenants) shoulder a large part of the cost of housing. Keep in mind that this is one of the major expenses and can be equal to or greater than tuition.
The investment scenario I am personally looking for includes the following:
- Invest the minimum amount up front. The “down payment” required by your lending institution as well as the interest rate will vary based on whether the property qualifies as a personal residence or investment property. Financing terms are generally more favorable for a residence than those for “investment property”. If at the time of purchase, you have no more than one residence and your child is going to be living in the prospective home then you very well may be able to receive financing based on it being a second home. If the property qualifies for residence financing, I’d suggest being prepared to put up 20% of the purchase price in order to avoid private mortgage insurance “PMI” (Mortgage Guaranty Insurance Corporation, June 2018).
- I want rent payments from other tenants to cover my debt service. I will accept some lesser “coverage” depending on a variety of factors like the amount of the shortfall, what kind of appreciation rates in property values I expect, etc. Bottom line here is that I am looking to spend significantly less than I would if my child lived in the college dormitory.
- I do NOT want a deal that is acceptable only if I achieve a certain rate of appreciation in property value. In fact, I assume I will eventually sell for the same price I paid.
- In estimating my return, I include:
- Positive cash flow (if any)
- Objectively observed appreciation rates. These would include sales of like-kind property in same area that occur during the time of your ownership and of course the eventual sales price we experience. This last observation in the one that determines the rate of appreciation/depreciation that really matters.
- Savings versus what I would pay in college dormitory. This is observable every semester.
The above, of course, is not an all-inclusive list of factors that go into the investment decision.As I stated above, this is an active investment, meaning that you are going to be involved. Your involvement will cover anything from collecting rent, making repairs, shopping and paying for insurance, property taxes, etc. You may be able to job-out the management (i.e. collecting rent and finding new tenants) but this going to cost you and obviously reduce your return.
Ownership of an investment property for funding college is not for everyone but in my experience the returns certainly justify exploring the opportunities.
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