Written by guest author Brian Bain of Investor in the Family
Years ago when I got started in investing, a major thing on my mind was how to pay for my kids' college in the future. At that point, I had accrued little savings or investments and was working off of a very limited salary. I think many of you can probably relate to that.
As I sought to solve these problems, I began to learn as much as I could about investing. As a part of my training I wanted to learn about real estate investing specifically, so one day I sat down with a local real estate investor with the aim of learning his craft. I started the meeting by explaining that my desire was not to be amazingly wealthy or super rich, but to make sure my family never had to worry about school or medical bills.
His answer really surprised me. He said it's simple—when your kids are born, buy a $50,000 house and rent it out (that price would be a bit higher in many markets). You can use the rental income to pay off the mortgage early and then take all the income that comes off that property and set it aside for your kid's college.
That way you have an asset that is producing cash on a monthly basis to help pay for your kids college bills and needs. If for some reason, that money or fund runs out before your kid is finished with college then you can simply sell the house at a 20-year appreciated price. At that point the mortgage will have been paid and you would have no debt on the property. That means a very large amount of cash could be generated from the sale that could go directly to paying off your kid's college.
When I heard this idea I felt like I'd found the treasure at the end of the rainbow. It sounded so perfect. Perhaps you're feeling the same way. The idea of making a $10,000 investment today that could not only pay for your child's entire college tuition and fees for college but potentially pay for their room, board, and other expenses sounded too good to be true.
Now, I can imagine that many of you thinking, that this does sound way too good to be true. After all, if it were that easy, why wouldn't everyone be doing it?
Well, I have to admit that you're right and have a great point. The reality is that real estate investing can be a lot of work and can come with a fair amount of risk. With that established, let's walk through some things to consider as we move forward with the goal of real estate investing.
At this point, I will add a disclaimer that while I have come very close to purchasing a rental property, I have yet to actually do so. As I grew closer and closer to purchasing the real estate (I had an entity set up, a partner in place, and a specific property picked out), my wife and I decided that it would be in our better interest to purchase a home for ourselves before we entered into the world of real estate investing.
In hindsight, I'm very thankful for that decision. Now that I've been a homeowner for several years, my confidence level in being able to manage and oversee a real estate property is much higher.
Now, let's talk about some wisdom that I've picked up along the way that can hopefully help you in your own real estate investing endeavors in the future.
First of all, as with any investment I highly discourage anyone from making an investment that they do not fully understand. This is part of why I'm thankful that I purchased a family home before buying a rental property. Having been through the experience of purchasing and maintaining my own home, I can now better understand the process of purchasing, valuing, and maintaining one. If you're considering a real estate investment but have far more questions than answers, then you probably aren't ready to make the investment.
Second, I highly encourage anyone looking to invest in real estate to identify and connect with at least one person that can serve as a mentor in the process. Talk to some friends and family and try to identify someone who has experience investing in real estate, and who actually owns rental properties themselves. Most experienced realtors could connect you with a real estate investor, and most cities will have real estate investment clubs or meet-ups. I was fortunate enough that a co-worker was able to recommend a friend of his who ended up being my mentor.
Third, I think there is a lot of wisdom in entering into a venture like this with a partner. The reality is that investing in real estate brings with it a fair amount of risk (potentially a lot of risk). Things can go wrong with the house like pipes exploding and appliances breaking down. There may also be times when you have no tenant and are left paying the mortgage out of your own pocket. There are lots of things they can happen and having a good partner to stand with you can make a tremendous difference.
It's important that you make sure you and your partner have the same goals and expectations for the rental property. Your partner should be someone you can trust and, ideally, someone you also like. Think of this as as entering into an investment marriage of sorts, and don't do it lightly.
So, there you have it! A very unique way to potentially send your kids through college on zero debt.
My son is six months old and I have yet to purchase my own rental property, so for me this is all theory. On the other hand, for my real estate investing mentor and his father this practice has been a successful reality for decades. If the idea intrigues you, the next best step could be to find an experienced, local real estate investor and start learning the ropes.
I would love to hear from any of you who have experience with rental properties and particularly with using rental properties to help pay for college. It will be fun to learn together.
All the best,
Photo credit: lucahennig