Using Real Estate to Pay for College

Last week, we talked about different ways to save for college and pay for your children’s college expenses. You can invest in a 529 plan or explore other college savings methods that may offer you steady funding when it’s time for your kids to start college. Or, the right investment plan may give you better flexibility should they choose not to go to college!

Is Real Estate a Smart College Savings Plan?

One of the options we mentioned last week was using an investment property (or proceeds from multiple properties) to pay for college expenses. We want to explore this concept further because it is a strategy that is often overlooked by parents who are planning for their kids’ college savings.

We all know that college—especially four-year universities—isn’t cheap. Unless your child is earning a major scholarship that covers everything, you have to be prepared to cover significant educational expenses. In most cases, we’re talking about hundreds of thousands of dollars. Putting a little money away in a savings account generally won’t suffice. You have to have a sound plan that invests your contributions for better long-term growth potential. 529 plans offer nice tax advantages, but they are generally fairly conservative investment plans and the funds are limited to qualified educational expenses.

Benefits of Real Estate Investment

If it fits within your financial plan, investing in real estate is a great way to save for your children’s college expenses. Real estate is almost always one of the safest investments around and it can benefit you in multiple ways:

• Cash Flow—If you invest in an income property (rental), you can be earning supplemental income that you can then invest elsewhere (including a 529 plan if that’s your preferred option) to make even more money over time.
• Appreciation—If you buy property when your child is born, we’re talking 18 years of appreciation. The value will most certainly go up during that time, perhaps by quite a large amount. When your child is ready to go to college, you can sell the property and use the profits to fund their education. Or, you may be able to cash out some of your equity in a refinance loan or home equity line of credit (HELOC) to hold onto the property while simultaneously covering their college expenses.

Real Estate is a Great Long-Term Investment

Real estate is a more predictable and stable investment than stocks or even IRAs because it is a real, tangible asset that will always be in demand. At the same time, it is more aggressive than 529 plans or basic savings accounts. It is a good, dependable source of future income. Managing the property as a rental will require extra work or extra expenses to hire a property management company. However, it should pay for itself with additional monthly income and the long-term appreciation.

If you sell the property to pay for college savings, you do have to expect your capital gains to be taxable. The same is true for any rental income you earn. This is one disadvantage compared to some tax-deferred investment plans, but the right real estate investments should be worth any tax liabilities that come when its time to cash out. Plus, there are some tax credits you can apply toward educational expenses and other ways to offset taxes with smart real estate investment management strategies. Even if the property somehow depreciates while you own it, you can leverage that in your tax returns.

Real estate offers multiple exit strategies (sell, refinance, pull out equity, investing earned income, etc.) and it’s generally a very solid investment. And, if your kid decides not to go to college, your money isn’t locked up in a 529 plan. You can just hold onto the property or sell/refinance it to help your child out in other ways. Maybe you even gift them the property when they are of age.

What About My Primary Residence?

In some cases, you might even be able to pull from your primary residence to help cover college costs. If you own the property outright or have gained a significant amount of home equity in the time you’ve owned it, you should have some financing options available to leverage that appreciation into cash that can be used for educational expenses.

Ultimately, there are many different strategies you can implement to save up and pay for your family’s college expenses. You want to have a financial plan that covers all future possibilities, including your own retirement. College savings is just one piece of the puzzle. For help with all your financial planning and real estate investment management needs, contact Illumination Wealth. Let us help you build a brighter future for your family!