Buy 10 Properties And Your Kids Could Get A Free Education

November 28th, 2007 Categories: Real Estate Investment Notes

You are now a proud parent looking at your son or daughter now lying in your arms and it dawns on you that they may want to go to college.

You are imaging that they may want to become a doctor, dentist, perhaps a veterinarian or pilot. To be sure schooling will be expensive.

And who is going to pay for this? Well….look in the mirror and you will see. How will you pay for this?

Buy One Property Each Year For 10 Years.

It may be quite simple. Buy real estate.

Each year for the next 10 years buy a rental property, recognizing that after every 7 to 10 years the property will appreciate about 50% and in some cases 100%. That appears to be the norm for the last 50 years and it is anticipated that this norm will continue.

Be Smart.

Purchase properties in developing areas and priced around $ 150,000. Purchase new properties. Try to limit the loan amount to $ 100,000 at 6% fixed interest, 30 year period. At this loan amount the monthly principal and interest will be about $ 600 per month.

Add approximately $ 50 per month for insurance. Estimate real estate taxes at about 2% of the purchase price (depending on State). Add 7-10% for property management and do not forget homeowner association dues which can range from $ 125/month on up.

Buy properties around $ 125,000.

With a real estate purchase of approximately $ 125,000, with 20% down per property you should be able to rent the property for most of your costs. You could end up with a small positive cash flow of $ 25-$ 50 per month. Be happy.

But circumstances may be such that you will have a monthly negative cash flow. Limit this to $ 100 per month or less.

The Good And The Bad.

Why is this good. It is good for the following reasons:

-First and foremost someone is helping you to pay off the property. You are building tangible equity.

-Your negative cash flow (if there is one) is limited

-The property is appreciating (which is what you want).

-During your ownership you will have some rental tax deductions on your personal return (limited to $ 25,000 per year).

Keep in mind that real estate appreciates about 50% to 100% every 7 to 10 years. So the math suggests that your first property could be worth $ 187,500 up to $ 250,000 in 7 years.

Keep it for 14 years and the property could be worth $ 281,250 to $ 375,000 or more. So in 14 years you will have approximately $ 181,000 equity in the first home for your child’s schooling.

Do this 10 times and your son(s) and daughter(s) education will be paid for because the pattern will be about the same for each property.

The bad side.

-Tenants move so there will be periods where you have no income from the rental but still must manage the monthly obligations.

-Tenants may damage the property.

-Mother nature may damage your property.

-You may not be land lord material. You must exam your own temperament. Can you be a landlord even with or without a property manager?

-Don’t forget future tax payments. If you sell the property the depreciation you deducted over the years will be added back as ordinary income in the year of sale unless you do a 1031 exchange (which is another story). You will also be exposed to capital gains tax of 15% if todays tax laws exist.

Be Smart. Understand the Risk versus Reward Scenario.

When looking to buy a property be sure you look all over and beyond your own State. There can be some excellent properties one can buy out of state.

But the option to buy rental properties for your childs (or childrens) education should be considered even before buying stocks or putting the money away in a bank account.

If your child (or children) don’t go to college you may elect to give them a home and set aside the other properties for your retirement. Now that would be something.

Keep in mind.

If today’s tax laws stay as they are you could move to the rental properties, make them your home for five years and possibly end up with a tax free transaction depending on whether you are married or single. Do that two, three or more times and you will have some serious savings.

Just start.

The earlier you start this saving type of plan the better off you are but it can be instituted at any time. The driving force in not doing it…..fear to act.

You do not want to later start thinking ” well I should of…….well I could of…….well I needed to…….well…” and opportunity has gone by the way side.

Think of the risk. Manage the risk. BUT DO IT!