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In 2034 my 4-year daughter will be 18 and ready for college. With the evolution of online learning who knows what it'll look like or cost. At current inflation rates a 4 year private college may cost around $415,000 and I plan on paying $0 out of pocket through the power of real estate.

The Traditional Way

Before we get into real estate lets talk about the traditional way for parents to pay for their college. We are told to open up a 529 account, make regular deposits, and let the stock market compound returns. It would look something like this:

$75,00 starting deposit (more on this later)
$6,300/year deposit for 14 years
9% annual stock market return
$163,200 out of pocket spent cash between down payment + deposits
After 14 years we'd have $414,550 that would be liquidate to pay for college

This is an easy, “hands off” approach to save for college. Most people think this is the only way: Enter Real Estate

Real Estate: Better Alternative

I have to confess that having the tenants pay for my daughters college was not my idea. Tim Shiner discussed on BiggerPockets Podcast Show 221

The goal was to find a house that could be purchased at a discount, in a nice neighborhood that we would want to own for decades.

The concept was simple: purchase & renovate the house using a mortgage, get it rented, have the tenants cover all the expenses, pay down the mortgage & generate cash flow, all while the value of the house is appreciating. In 14 years we’ll have a house that's worth a lot more than we paid with very little debt.

Let's get into the numbers. We bought it for $275,000 and had $306,000 all-in after closing costs & renovations. Got a 75% LTV mortgage at 4.25% leaving $75,000 of cash into this house. (Same as our starting balance in 529 example)

After renovations the house got appraised at $450,000 giving us instant equity of $144,000.

This is a 4-bedroom house in a very nice suburbs outside of Philadelphia. We rent it for $3,000 per month. We have 3 types of expenses: variable, fixed & mortgage

Variable expenses: third-party management, vacancy cost, repairs & maintenance. Of the $36,000 per year collected budget 19%, or $6,840 to cover these expenses.
Fixed expenses: taxes, insurance & sewer. The tenants pay for electric, gas & water.
Mortgage: $1,274 per month, $15,288 per year. We have fixed-rate mortgage so this payment will stay consistent until we refinance.

Based on these factors we should cash flow $8,172 in year one:

Power of Time

Real estate investing is a long-term game. Every year the value of the house increases, the rent & expenses grow by 2+% per year. Our variable expenses will also rise because they are tied to the rent that's increasing. Our mortgage payment will stay consistent while the the principal balance is decreasing

Now after 14 years the house has appreciated to $582,123, the tenants have paid down the mortgage to $133,478 leaving us $448,645 in equity. Our cash flow will grow every year, accumulating to $159,758 from the property. In total we'll have $608,404 between equity & cash flow.

Paying For College

Now it's time to write the checks and we have a couple options:

1) Sell the house and walk away with $407,000 after paying relator & closing costs

2) Refinance the house at 75% LTV pulling out $436,000, pay-off our debt of $133,000 leaving us with $303,000. The new loan will continued to be paid by our tenants.

If we refinance we are short of $414,000 by $111,000 but we will save the majority of the $160,000 cash flow from the property so we're good!

The Comparison

Following the traditional 529 method we fund $75,000 into the account and are committed to another $88,000 in deposits. We pray that the stock market doesn't have a huge decline near the 14th year. Our investment is totally liquidated when it’s time to pay. We pay taxes all along the way on capital gains & earned income.

Using the real estate method we put some work into finding & renovating a house, fund $75,000 and put ZERO additional into the house. We save every penny it cash flows (or use extra cash to expedite the debt pay down). As long as we picked a good neighborhood have to worry about the appreciation tanking. In 14 years we don't have to sell. We can refinance, or "shear the sheep" as Tim Shiner put it, taking cash out and then having the tenants continue to pay down the debt. Our taxes? Minimal because of depreciation & rental income is taxed less due to its passive nature.

The Best Education Money Can Buy

Teaching my daughter about power real estate investing through a real-life property is the best education that money can buy. It will teach her cash flow, debt, appreciation & taxes. Lessons that will stick with her for a lifetime and serve as the foundation for her own investing.

Real estate doesn't have to be complicated. It takes time to learn the strategies. It takes discipline to execute & organization to put it all together. Anyone can implement this plan. Some books to get you started:

Buy Rent Rehab Repeat (this is what we did for this property)
BiggerPockets How To Invest In Real Estate
What Every Real Estate Investor Needs to Know About Cash Flow
The ABCs of Real Estate Investing

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