There is the conventional way of socking away money so that you’re prepared to help your kids afford their post high school education…and then there’s the way that I advocate. It involves using someone else’s housing expense to save up the money over time. Here’s how:
1. Purchase an investment property.
When your child is born, instead of starting a savings account in hopes it’ll grow enough by the time he/she is 18 years old…buy a simple house that you can rent out. Try to guesstimate how much money you’ll want to give them to help with their education, and choose a home that is around that value. Lets say you want to contribute $20,000/year to their expenses…then you should buy an $80,000 property.
2. Collect rent.
Your tenants will be thrilled to have a nice home in exchange for their monthly payment to you. You’ll be thrilled to use that monthly payment to cover the cost of the mortgage, other expenses, and a rate of return. Now you are building equity – in other words, savings – without using any of your own money.
3. Plan to pay off the mortgage within 18 years.
Your can do a calculation to discover how much you’ll need to pay on your principal each month in order to own the property free and clear by the time your child is ready for school. A mortgage lender can always help with this type of information, and I like to recommend Mark Pontz, with loanDepot.
4. Decide how to best use your equity.
It’s time for college, and you own a house for which tenants are writing a monthly check to you. You have two great options. One would be to sell the property, and you now have a lump sum (with the example we used earlier, probably around $80,000) that you can use to easily finance a college education. The other options is to continue collecting the rent payments (probably around $1000/month) and use that to make incremental payments on the college tuition.
5. Rinse and Repeat.
Acquire a new property for each child that you have, so that you’ll have a tangible “college savings account” for each one, and not have to worry about it. A savings account that grows on its own, without you having to add to it…it’s your tenant that is adding to it.
It’s simple. And worth it. People may fear getting started because they don’t want to be bothered with repairs or issues that may arise at the property. I urge you to weigh out the alternative: avoid owning a rental so that you wont be bothered with issues, and in turn find a way to save up $80,000 on your own. To me, it’s a no brainer. I’ll go fix a leaky toilet any day, if it means someone else is paying off the mortgage on a house of mine.
Make sense? Contact me if you’d like to discuss this concept if further detail.