Mike Cooke February 22, 2017 Buying Improvements Selling

No surprise… 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.