Using a Real Estate Rental to Pay for College

I am a new father and have been thinking of the best way to help my daughter with college.  It seems challenging to come up with enough money for college by investing in a 529 plan or mutual fund.  If college is expected to cost $30,000 per year or $120,000 in today’s dollars, it may cost $280,262 in 17 years with costs rising 5% per year.  To save this much, I would have to set aside $649.06 per month at 8% for 17 years.  If my wife and I have another child…..  You get the picture.

We are thinking of taking a different route.  Purchasing a $250,000 rental property with a small positive cash flow can provide a hedge against inflation and an opportunity to fully fund our daughter’s education.  We will set aside the profits to create a reserve account for repairs and improvements on the property.  Once that is funded, we will use the excess cash flow to pay down the mortgage.  We will also get an immediate tax deduction for the depreciation to help offset our income taxes.

The current real estate market provides many opportunities to purchase a property that will appreciate over the next 17 years.  3% annual appreciation will make the property worth $416,057 in 17 years.  With a mortgage paid off or close to it, this makes for a large amount of money that could be used to pay for college.  We may also be able to use the monthly cash flow after the mortgage is paid off to fund our daughter’s college out of the profits while never selling the real estate.  This is our ideal scenario.  After college, the income stream would contribute to our retirement.

 

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