College is on my mind. My son graduates from high school in 2 weeks and my daughter graduates a year from now. My son made a decision that is going to work out well financially for our family. He is going to the Honor’s College at the University of Utah. We are lucky to live in a place with an excellent in state university. But even in-state tuition exceeds $20,000/year, a cost we will bear for the next 4-5 years.
My daughter, on the other hand, wants to go out of state. This will cost at least $50,000/year, not including travel to visit her. If you have young children, the cost of tuition is expected to double over the next 15 years. That means an out of state education could cost almost $500,000. If you have two kids that means you are going to have to save close to $1 million just to pay for college. If you are paying for this out of ordinary income, add an extra 25%-35% to the cost for taxes.
I have seen what happens when people are forced to take out student loans to pay for college. I have clients in their 40’s who have trouble qualifying for home mortgages because they are still paying down student loans. I want something better for my kids.
How to Pay for College with a Rental Property
The easiest way to pay for a college education is to buy a rental property when your child (or grandchild) is young, and put the property on a 15-year loan. Here is how the numbers work for a $200,000 property with a 20% down payment and a 15 year amortized loan at 5.0%.
Equity in 5 years
$135,964 with 5% annual appreciation
Equity in 10 years
$258,731 with 5% annual appreciation
Equity in 15 years
In summary, a $40,000 investment today can pay for college in 15 years. This scenario does not include the potential added income from rising rents.
*Thanks to Larry Kendll, Ninja LLC for the statistics used in this blog.