When parents-to-be first find out that they are expecting a child, their range of emotions can run from excitement to fear and everything in between. Amongst the decisions around picking a doctor and sorting out childcare options, many savvy parents-to-be often start to consider saving for their child’s education.
Most of these parents will research their state’s 529 plans (DC can be found here, Maryland is here, and Virginia is here) which offer a tax-advantaged savings plan to encourage saving for future college costs.
Another option for parents to consider is investing in real estate when their child is born to cover the cost of college approximately 18 years later.
Owning real estate as an investment offers immediate tax benefits such as deducting property taxes and interest payments that may be comparable to the tax savings on a 529 plan (consult your tax advisor on your specific situation). More importantly, when done correctly, it can be a strategy for your tenants to effectively ‘pay’ for your child’s education by paying the principle down on a mortgage so the property is owned free and clear (or nearly so) by the time your little one is ready for college.
Consider this real-life example on a recent listing that we sold:
This one bedroom condo in Arlington sold for $149,500 and had been steadily rented out by the sellers for $1,225/month. Here are some fairly conservative calculations:
- Purchase Price: $149,500
- Down Payment: $37,375 (25% – required on all investor purchases)
- Loan Amount: $112,125
- Closing Costs: In this example, the sellers paid the full closing costs of the buyer
- Monthly Expenses: Principle and Interest at 4.375% on a 30-year mortgage: $560/month
- Property Taxes: $92/month
- Insurance: $30/month
- Condo Fee: $384/month
- Vacancy: $62/month (5%)
- Maintenance: $62/month (5%)
- Gross rental income: $1,225
- Total monthly cost: $1190
- Net Monthly profit: $35/month
At the end of 18 years, the approximate principle balance on the loan will be $63,000. So right off the bat, your tenant has paid down $63,000 of your loan balance.
Assuming a very modest 2% annual appreciation, the property would be worth just over $263,000 in 18 years.
- Sales Price: $263,000
- Closing costs: $21,000 (8% on the sales price)
- Loan Balance: $63,000
- Net Proceeds: $179,000
So effectively, a $37,000 investment today would equate to approximately $179,000 towards your child’s education in 18 years. Four-year public in-state total college costs are estimated to be approximately $50,000 by 2035 for a total cost of $200,000. A similar investment property to the real-life example above could possibly cover 89% of your costs with just a $37,000 investment today.
Of course, there are no guarantees that real estate will appreciate over time (although historically it has done so at a fairly steady pace of 6% per year) not to mention the fact that becoming a landlord is not for the faint of heart.
That being said, a rental property for every child, if executed correctly, could be a very savvy way to save for your child’s education while realizing tax benefits along the way and allowing for the money to be spent on other things if your child gains a scholarship or opts not to attend college.
Want to learn more? Let’s meet to discuss how homeownership can help you save for your child’s education. Or, call us for a confidential consultation today at 202.270.1081 or email us at firstname.lastname@example.org.
The Stokes Group is a team of dedicated professionals who have passion for the real estate business and will advocate for our clients with the utmost honesty, integrity, and confidentiality. We believe in building solid relationships with our clients and that starts by getting to know who we are. Follow us on Facebook and Instagram.