Most people think about investing in the stock market or opening an IRS Section 529 college saving plan to pay for your kids’ college, room, and board. Although these options and others have their benefits, when it comes to easing your financial burden, they fall far short. Why? You have no control – no control over wild stock market fluctuations and you’re capped on the amount you can invest in tax deferred college saving plans. There is a superior solution that will enable you to pay for it all, for significantly less money and with significantly less risk. That solution is owning rental real estate and this article will explain why it’s your best bet when it comes to paying for your kids’ college, room, and board.
What you’ll learn:
1. How to use rental real estate to pay for your kids’ college costs
2. The lesser-known benefits of owning rental real estate
3. Real estate markets in Texas where you can find cash flowing rentals
In about 3 months my wife and I will welcome our first child into the world. Before she’s even born, we already have her college tuition, room, and board completely paid for with an initial investment of just $4,500. The plan we executed was simple:
· Buy a single-family home in a solid location
· Use bank financing and put down 3%
· Rent the home to a tenant who pays the mortgage
· In 18 years, sell or refinance the home
· Use the proceeds to pay for my kid’s college, room, and board
In our case, we bought a duplex in Killeen, TX for $150,000. Its current estimated value is $160,000 and assuming its value and rent appreciates annually at a meager 3.5%, here’s what our return will be at years nine and eighteen:
Unlike investing in the stock market or in an online startup, real estate is leverageable, it’s consistent and predictable, it’s simple and understandable, it offers legal tax sheltering, and it gives you multiple exit strategies. In short, real estate is a superior investment vehicle because of one word – control.
1. The leveragability of real estate
Leverage is a fancy way of saying you can use just a small amount of your cash to buy something with a much higher value. For example, you can leverage bank financing to buy a rental home worth $150,000 with only $4,500 of your own money. Even better, did you know that many banks will approve a qualified individual or married couple for up to 4 mortgages? The bottom line is, through the leveragability of real estate, you control 100% of a property – yet you paid only 3% for that right.
2. Rental real estate is consistent and predictable
Unlike the financial markets which have massive up- and downward swings caused by some hedge fund manager in New York making gigantic stock purchases or selloffs, real estate is consistent and predictable because you control every aspect of it. You control your mortgage rate, when you refinance, when the yard gets mowed, who you rent to, and so on. With your property rented to a paying tenant, you know that your mortgage is being consistently paid down (by your tenant) while your property’s value and its rental rate are predictably increasing each year.
3. Real estate is simple and easy to understand
I bet you already can easily decide if a home is in a safe neighborhood, has everyday conveniences like grocery stores and entertainment centers nearby, and is situated in a quality school district. Other than your investment’s financial projections, these are the only other fundamentals you must know to make a quality rental investment, and, because we all have similar needs, each of these are inherently understood by all of us and are easy to control for.
4. Legal tax sheltering of rental real estate
The IRS requires rental owners to depreciate the value of 1-4 family buildings over the span of 27.5 years. Using our duplex in Killeen, this means that each year we’re required to depreciate $5,455. This is where owning rental real estate gets extremely interesting – despite a real-life cash flow of $986 in year 1 and $4,809 in year 9, on paper, we legally report a tax loss in years 1 and 9 of -$4,469 and -$646, respectively. How (legally) wonderful is that? Even better, the paper loss can be used to control/offset gains on other rental properties you own.
5. Options abound for exiting rental real estate
Growth is good but only if you can access your gains. When disposing of properties, Good Vibes Homebuyers relies on 3 different exit strategies which are listed in order of preference below:
a. Refinance to pull out cash: Two wonderful things are happening every month that you own rental real estate: 1) the tenants are paying down your mortgage and 2) your property’s value is consistently increasing. By the time my wife and I need to pay for our kid’s college tuition, room, and board, we’ll have nearly $217,000 in equity. At this point, we’ll refinance to pull out the equity (tax-free) and start over with letting our tenants pay down the mortgage.
b. Become the bank: Did you know that you can sell a property and keep your existing mortgage in place? Here’s how it works: buy a rental home using bank financing that has a low interest rate, hold the rental property for (optional) 2-18 years, sell the property by offering seller financing with a 6%+ interest rate and requiring a large down payment. The buyer then makes monthly mortgage payments to you, and you continue making payments on your existing mortgage. The result is that you receive a large down payment and pocket the “spread” between the interest rate of your existing mortgage and your seller financed note.
c. Sell and cash out: This is our least preferred strategy because you give up all control when selling. Moreover, selling costs about 10% and you must (typically) pay taxes on capital gains and depreciation recapture resulting in a net of just 80%. Why not instead refinance for 75% and keep total control plus continue to enjoy all the benefits of owning rental real estate?
This is where owning rental real estate gets extremely interesting – despite a real-life cash flow of $986 in year 1 and $4,809 in year 9, on paper, we legally report a tax loss in years 1 and 9 of -$4,469 and -$646, respectively.
Good Vibes Homebuyers is based out of central Texas and our rental home portfolio stretches from San Antonio to Temple. We’ve found that between these two markets it’s nearly impossible to find cash flowing 1-4 family investment opportunities. However, if you’re willing to work at finding them, both San Antonio and Bell County offer plenty. They’re not easy to find but the payoff will set you up to be able to pay your kids’ college, room, and board for only $4,500. We couldn’t think of a better reason to make your first investment!
1. What is a good rule of thumb to quickly figure out if a rental home will cash flow?
a. Many investors follow the 1% rule which says that monthly rent received should be no less than 1% of the purchase price. For example, if you buy a $150,000 rental, rents should be $1,500/month. Good Vibes Homebuyers investor Phil Anderson says his team follows a 1.28% rule.
2. How can I buy my first rental property?
a. First, get preapproved for a second home mortgage. Second, find a realtor or investor to work with. Finally, start making offers. The biggest key to buying your first rental is simply taking action (most people don’t).
3. How else can I make money in real estate?
a. A great option is loaning your cash to a trusted, proven investor who is willing to share their knowledge and experience with you. The knowledge you gain will far exceed the actual interest payments you earn.
Would you like help figuring out how you can use real estate to pay for your kids’ college, room, and board for just $4,500? The investors at Good Vibes Homebuyers have analyzed thousands of investment opportunities and can quickly size up winners and losers. Reach out to us today to discuss your real estate investing goals!
Free closing costs. Free Local Move. Zero fees. Sell in 5 days. Sell and stay for 180 days. No equity? Still get $10,000 cash!
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