No surprise…..college education is expensive!
Forbes reported in 2015 the average public college cost $28,000 per year and a private university runs almost $60k. If you have young kids who will be attending college ten to fifteen years in the future, even the public college option might be running $240,000 for a 4-year degree.
Let’s look at a way to pay for it.
A rental property could be the answer.
Let’s say you have a 3-year old. You’ve made it through the terrible twos and you have 15 more years of sleep overs, family vacations, schlepping him/her to school and extracurricular activities and dealing with high school boyfriends/girlfriends before they’re off to college.
Here is one scenario:
- Buy a house for $250,000.
- Put $50,000 down and get a 15-year mortgage at 4.0% on the $200,000 balance for a monthly payment of $1,475.
- Add $275 for taxes and insurance and you have a total payment of $1,750 per month.
Right now, you get about $1,800 per month from a tenant on that kind of property. With tax benefits, you might even have positive cash flow of a couple hundred dollars per month.
However, you’ll go through some market cycles during the next 15 years.
- The rental market will go through ups and downs.
- You’ll have periods of negative cash flow.
- Rent may be less than the payment at times.
- You may have short-term vacancies. You’ll have some maintenance costs. It generally makes sense to pay a property manager to simplify your life and not have to deal with tenants directly.
Let’s be pessimistic and assume an average negative cash flow of $250 per month over the 15 years you own the property. That will add up to $45,000 over the 15-year ownership period.
Let’s further assume (again pessimistically) the house is still only worth $250,000 at the end of 15 years. In metro Denver, there has never been a 15-year period where you’d have no appreciation, but we want to be conservative for illustration purposes.
This means you will own a $250,000 house free and clear in 15 years for a total net “out of pocket” cost of $95,000 – your $50,000 down payment and the $45,000 you’ve put into it. You can sell it to pay for college.
You do have the potential for a much bigger win.
If the house appreciates just 1% per year, it will end up being worth $290k, fifteen years from now. At 3% annual appreciation, the property would be worth $392k.
Compare this to the alternative of investing that $95k in a college savings plan. You put in $50,000 initially and invest $250 each month for 15 years. You’ve now invested the same money in the savings plan as it cost you to own the house for 15 years. At a 3% return, you’d end up with only $135,115 in the account when the kid is ready to pack up the car and head off to college — $115k less than you have using the rental house approach.
You may do much better. Even a 3% average home price appreciation rate over the 15 years is giving you an asset of almost $400,000. This is 3x as much as you’d have from using savings alone.