• Alan Corey

Pay for College With Just One Rental Property!

The 529 Savings Plan is one of the most popular ways to pay for college. But is it the best way to save for college?

Let's first talk about how much college costs as it varies widely between public and private university. The following averages are provided from US News & World Report:

Ok, based on these numbers let's try to plan for the future.

Let's say you have $25,000 and you invest it in a typical 529 Plan that earns about 8% interest on your money tax free. If you start when your child is 2 years old and make no other contributions, then by the time they reach the age of 17 you should have roughly $79,000 earmarked for college tuition and fees. See below:

This $79,304 saved in a 529 Plan would pay for 7 years of public university tuition ($11,171 a year) or 1.9 years of private university tuition ($41,411 a year).

Pretty good options. But what if we spent that $25,000 on rental real estate instead and wait 15 years?

Well, we could use the $25,000 for a 25% down payment on a $100,000 property. Let's assume we find one that breaks even with a 15 year mortgage at 5% interest rate:

The model purposely budgets for maintenance and repairs and expected expenses to break even every month. You can find deals that are profitable within these ranges, but this is just for illustration purposes. If you find one that cash flows, the returns in real estate are obviously more generous.

Let's fast forward 15 years on this one rental when the mortgage is paid off and you are helingp move your child into their first dorm room.

If you have 1.5% rental increase each year for 15 years, your rental property will give you unlimited public tuition paid since the rental income with no mortgage will offset the majority of your tuition cost. Alternatively, you property would have an expected increase in value of 3% a year that you could sell or cash out refi your home in order to pay for 3.9 years at private university.

Either scenario, a non-cash flowing rental performs better than a 529 College Savings Plan. Imagine one the cash flows $50 a month? Over 15 year that's an extra $9,000, even if you never increase the rent.

But want to know that best thing about a rental when compared to a 529 Savings account? The rental house will still being be paying you money even after your child graduates. That is infinity-times better returns than depleting a 529 Savings Account and then just running out of money, isn't it?

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