Let Your Tenants Send Your Children to College
It can be hard to save for your children’s college so why not leverage your savings. With home prices and mortgage rates at all time lows, now is the best time to consider using a rental property to help pay for their college tuition.
A relatively small down payment on a rental property can control an asset that will easily rent, generate positive cash flows and pay for itself. The borrowed funds create leverage that earn a return on investment on the TOTAL value of the home and not just the amount of cash you put down. To clarify, if the rental property is worth $100,000 and appreciates 3% in one year, you will have gained $3000 in equity on the TOTAL, not just the $600 on your down payment (the equivalent cash outlay to purchase the property)
The strategy is simple. Find a slightly below average priced home that will rent well. It will appeal to a larger group of people while it's rented and when it's ready to be sold. If you are looking for Oswego, Naperville or Plainfield rental properties in this condition, there are many!
Rent the home and maintain its condition over the years. As the loan balance declines (thanks to your tenant) and the value increases, your equity will grow. When your child is ready to start college, you will actually have several options.
You can sell the property, pay the tax on the gain at the reduced capital gains rate and fund the education. Another option would be to refinance and take the proceeds to pay for the tuition. This would allow you to continue to own the asset but would free your equity and under current tax laws is a non-taxable event.
You can even take this a step further. You can perform a 1031 Tax Free Exchange and purchase a rental property in your child’s college town. Your child can live in the property, you can pay them to be your property manager (which is a tax deduction for you) and you can write off your college visits since you will be checking on the status of your investment property! (ie airfare, hotel, food, etc).
Regardless of whether you're trying to plan for your children's education or your own retirement, rental properties offers many solid investment opportunities.