Compounding in Action <-- Update on The Best Way to Pay for College

MoneyMachineSketch(This sketch is by Joe Mercadante)

Around this time last year, I wrote an article highlighting ideas for paying for your child’s college education. One of the best strategies to pay for college is to actually use rental real estate. This will be an update including the steps we’ve used ourselves.

1. When our daughters were very young, we decided to buy rental properties in order to fund their monthly college savings plans. We bought these homes with mortgages and our goal was to create $250 a month of positive cashflow for each of them after paying taxes, insurance, and the mortgage payment. This $250 a month would be invested into a brokerage account for their future college expenses. We followed this plan for years and over time their college savings compounded slowly. During this time the savings account for my oldest daughter grew to a little under $60,000. This included the $250 monthly contributions and the increase in market value of the various investments.

$250 invested per month turned into $60,000 in 16 years.

2. Last year, when my oldest daughter was a sophomore in high school, we used $40,000 of her college savings to buy a single-family rental home for cash. This home is within 2 miles from our home. It was a foreclosure and we needed to invest another $5,000 to make repairs, paint, and install new flooring. After completing the renovations, she was left with around $15,000 in her college savings account.

This home was then rented out for $1,000 per month and all of the net income is flowing back into her college account. As of today, this investment has added another $8,000 to her college account. She still has another year of high school before we have to start paying for college. This rental home should add another $12,000 of income throughout her senior year.

$45,000 invested 2015 will provide $20,000 over 24 months. Plus, she still owns the home free and clear. This home is easily valued at $60,000 today.

On a high level, it took around 15 years of saving monthly in order to buy a home for cash. If the home were simply rented out and the income saved, she would have enough to buy another home for cash in just 5 years shaving 10 years off the time needed for the first home. A third home would only take 2 or 3 years.

It still amazes me that a monthly investment of $250 will become a $60,000 single family home, $35,000 in cash, and an annual income of around $10,000 in just 18 years.  Compounding is truly magical.

Unfortunately this little compounding machine will be shut off when she starts college. This is because the income and all of the cash will be used to pay for college expenses. Depending on which school she goes to, she may have student loans upon graduation. If so, she will have to use the monthly rental income from the rental home to make these student loan payments. If she doesn’t sell this home, she will be able to turn the compounding machine back on at some point in the future.

All of this was started by creating a $250 a month positive cashflow from ONE rental property.
Real estate is a magical compounding machine.

 

 

1 Comment

  • Tracy

    Reply Reply April 21, 2016

    It is really really cool reading this from a real life experience, I wrote a similar article about getting my kids to pay for their education using real estate (I talked about getting their ears wet managing or overseeing the property as an example) with a rental property.

    It is simply amazing to hear how your rental has grown to now a mortgage free property:)

    Very cool.

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