So what does your kid’s college fund have to do with real estate? A whole lot if you’d like to have more control and leverage your money to reap a greater return on your investment.
When you say the words “College Fund” what usually comes to mind is the 529 plan. The 529 plan is an education savings plan that is managed by a state or educational institution that is designed specifically for families to save money for future college costs. These plans are simple to set up and as long as the plan meets certain qualifications there are some tax benefits. Your financial advisor or the 529 plan manager can help you set up the account.
Now let’s talk money. If your child is 1 today, you will have 17 years to sock away money every month. How much do you need to pay for 4 years of college in 17 years time? This number will vary depending on the college that your child will attend and if you plan on paying for room and board. To get a more accurate number visit http://www.savingforcollege.com/college-savings-calculator This tool will help you calculate the future costs of attending university and will allow you to base the calculation on your school of choice. When I did a calculation of $17,336/year which is the national average for an in-state school including room and board and transportation, for 4 years, the amount that I’d have to save monthly was $432. We would invest $88,128 over the next 17 years and at 7% interest that would yield us $204,215. And that is for just one child. We have two so to make it easy, let’s double that. Yes $864 each and every month for the next 17 years or a whopping $176,256. That’s another mortgage payment that we would have to pay for the next 204 months. Yowch! But it is a good return, right?
If that number is just as staggering to you as it was to me, and expect it to be more if your child is older or if you have multiple children, don’t stop reading just yet. The 529 plan is a good plan but it’s not the only way to fund your child’s education. There has never been a better time to buy real estate than today. With the amount of foreclosures, short sales and just plain motivated sellers on the market coupled with historically low mortgage rates your child could have a much brighter future.
The typical home will double in value every 10 years and since we are at the bottom of the market, buy now and you could be the one laughing all the way to the bank. Let’s say you found a property for $50,000, the bank is going to want to see 20% down if this is an investment, so that’s $10,000. Let’s assume it needs some work for another $10,000. So you’re now at a $20,000 investment, but you decide to rent the property out and have someone else pay the mortgage on the remaining $40,000. Only buy a property that will give you a positive cash flow. So now your putting money into your pocket, there are tax benefits to owning real estate and you can expect that property to double in value every 10 years. In 17 years time you’ll be sitting on a property worth $150,000 or more. If you took that same $20,000 and invested it into your 529 plan you would only get about 5 years into the plan and you’d still be on the hook to pay for the next 12 years. So let me ask you, would you rather invest $20,000, make some additional money every month and enjoy the tax benefits or would you rather invest $88,128? Although, you end up with a $90,000 return at the end of 17 years if you were to sell the property, the initial investment and the other benefits along the way is true leverage of your money and time.
You obviously want to consult with a financial advisor, an experienced Realtor, have the home inspected thoroughly as well as speaking with a rental management company to find out what you could rent the home for before you buy. And whatever number you’re told that repairs will amount to add 20% as a buffer for the unexpected. No matter how good of a home inspector you have it’s always a good rule of thumb to plan for the unexpected.