If you’re like me, your house is a cluttered jungle of toy-parts sprinkled haphazardly throughout. Bikes to the left, toy cars to the right, and of course the pointed block right in the walking path! I call this the Good Morning, Dad block. If you think coffee is a stimulant, try a Melissa and Doug block to the arch-of-the-foot at 6AM. That, my friends, will get your blood pumping.
While parenting has its share of trials, I feel most of us would agree that it’s worth every minute. We all want the best things for our children. These days, whether college is the best direction for children is debatable. Does college lead to a fulfilling career driven by happiness but also yielding a living wage? For some, absolutely. College can still be a fabulous investment. For others, it will be an utter waste of time.
I’m not writing this to defend the merits of higher education. Quite frankly, I think it’s a broken system. However, for many careers, college is a necessity. It’s an EXPENSIVE necessity. In this article, I will discuss our plan of using real estate to fund college for our children.
There are numerous savings vehicles for college. Most notable are the 529 and ESA accounts. With a quick google search, you will find many well-written articles on these accounts. These accounts can have significant tax advantages-- especially at the state level. I am currently working on my Master’s Degree. Since I am a full-time student, I can put money into a 529 account, immediately withdraw it for qualified expenses (after my 14-day window for my Illinois 529), and pay for the qualified expenses. By doing this, I can deduct up to $20,000 from our Illinois taxes (married, filing jointly) for costs I was already going to pay! To my point, it is worth learning more about these accounts.
So, how can are we going to use real estate to pay for college? I’ll start by saying there are multiple ways to achieve this goal. By either selling or refinancing, you can use a lump sum payment to pay for college expenses. That is a viable option, but not our plan. We plan to cashflow college with debt-free real estate. Now to the fun part--the numbers!
Let’s start by estimating college expenses. Our kids are 2 years old and 6 months old. R brings us to a paradox: we have plenty of time to plan for college, but is it possible to predict college costs that far in advance? Not really. But, we know a few things are certain--first, colleges are not going away. The supply of colleges is healthy. Secondly, many career fields will depend on college indefinitely (doctors, lawyers, teachers, etc.). Therefore, the demand for specific degrees is also healthy.
Yet, there are some major confounding variables. The most significant variable is the student loan industry. If the federal government stopped guaranteeing unsecured loans for college; the entire cost structure of higher education would change immediately. The second major variable is you guessed it-- Blippi. Wait? Blippi? I know what you’re thinking right now, “this guy has listened to wheels-on-the-bus so many times that he’s losing touch with reality.” You may be right-- but, follow along with me for a second:
Blippi is an orange-hat-wearing, high-pitched squealing, super-successful YouTube creator and educator that captivates children. Blippi--with his clown suit and positive attitude, will influence the lives of more children than most teachers will ever impact in the classroom. I mean no disrespect to teachers-- teaching in a traditional classroom has many benefits. However, mass influence and outreach are not one of them. Technology is radically changing the ecosystem of education. We can stream how-to-guides, tutorials, and full-blown courses right to our computers. If the pandemic has taught us anything-- it’s that in-person attendance is largely voluntary. That holds even more relevance at a college level. Online learning and remote meetings using platforms like Zoom are here to stay.
I apologize for the tangent, but it’s relative to my point. Colleges will be here, and they will remain necessary. What college looks like in 15 years is completely unknown. For planning purposes, we use historical data. Using a college cost calculator (there are many available online), we can project that by the year 2037 (my son is currently 2), in-state tuition would be roughly $200,000 if college continued to increase at 5% per year. That’s $50,000 per year to attend a 4-year public university. I’m sorry, kids, but that’s not happening without significant grants or scholarships. Meanwhile, by attending a community college and using the same projections-- the cost decreases to approximately $120,000-- which is $30,000 per year.
Now, let's show you how to use real estate to pay for college and why we are doing it. We currently own 10 rental doors. If you think that sounds crazy, I assure you with patience, persistence, discipline, and mentorship, you can get there too. Before you know it, you’ll buy an 80-unit complex and realize that in the real estate world, 10-doors is teeny-tiny.
We use the "Profit First" accounting system (It’s not truly an accounting system, but is an easier way to do bank-balance accounting. You still need to keep the books). This system has allowed us to predict better after-tax profit numbers. My prediction using today’s dollars without rent increases (I’m being very conservative), is that we could cashflow about $4,000 per month if the properties were debt-free. To get there, we will have to invest $1,000 per month to debt-snowball the mortgages over our given timeline (there are calculators for this, as well). Remember, we are projecting that a year of community college will be approximately $10,000, while a year at a 4-year university will be closer to $50,000 (using the same 5% increase as before).
Here’s the math: If the properties are mortgage-free, we will have $48,000 annual cashflow to put away for college. Since my son will be at a community college (or finding another way to pay for the tuition bill)-- that leaves $38,000 extra from year 1. Repeat that for year 2. At this point, we are at $76,000 in the college fund with $48,000 pouring in annually. In year 3, things get interesting. Now our son will transfer to a 4-year university. Additionally, my daughter will be starting college--and Daddy’s princess will get an all-expenses-paid trip to junior college!
In my opinion, community college is the best value for the same education. Some will argue with me-- and that’s fine. In my experience, it makes no difference to your success. My wife and I are both dentists that attended community college. My closest friends from that community college are a High School Principal, Family Medicine Physician, and a Brain Surgeon. Successful careers with a fraction of the debt-- I like that equation.
In year 3, I project total college cost to be roughly $60,000 (one child at a 4-year university, one child at a community college). Our real estate is producing $48,000-- meaning we have a $12,000 deficit each year. However, we still have the $76,000 from before. For simplicity, let’s assume that $76,000 is all cash. At the end of year 3, the remaining balance ($76,000 - $12,000) is $64,000. At the end of year 4, the balance is $52,000. At this point, our son graduates. If he chooses to spend extra time in school or continue his education, we will expect him to support himself. We believe at that point in your life, there is something to be said for having some “skin-in-the-game.” Again, we can disagree, that’s fine. That is simply our plan.
Now my daughter is at a 4-year university. It’s still approximately $50,000 per year. Our real estate pays $48,000 per year, leaving a $2,000 gap. At the end of her third year, our “college savings” balance is $50,000. At the end of her fourth year, it’s $48,000. Now what?
This is the fun part! Since this account is all after-tax cash, we can do whatever we want with it without penalty. If we have more kids, we can continue funding college. If we want to take a trip, we can do that. Want a new car? Go buy it. You can do that; because it’s your money.
If you are still reading, may God have mercy on your soul. You have spent a lot of time reading through my madness. However, here is your gift: THE MOST AMAZING, SUPER COOLEST, MOST AWESOME PART: Remember the real estate that’s producing $48,000 per year? It still is! It is generating income perpetually. The college bills are gone, but the income is still there! Cha-ching! In a typical savings plan, you spend the money, pay for college, and that’s it. Poof! The money was saved, spent, and traded for the degree. There’s no recurrent income stream after college.
Again, this is not a one-size-fits-all type of plan. If you are someone who dislikes all forms of debt-- then you may not like this plan. On the flip side-- if you are someone that hates the idea of equity sitting dormant, then you may hate the idea of having paid-off properties. It’s the debate of good debt, time-value of money, and ROE versus risks of leverage and maximizing cash flow per unit. Truthfully, I understand both perspectives, which is likely why this plan is somewhere in the middle. Ultimately, what matters is this: Our course fits our perspective. Your plan should form from your perspective. Happy planning!
If you would like to talk more, feel free to reach out. I can be contacted through my Facebook page, Travis Cripps DMD, or by email, [email protected] If you love your career, I want to talk to you! I host the Career Day LIVE podcast where I interview guests who love what they do. Our mission is to help guide children and young adults to make intelligent career and life decisions by focusing on Legacy, Impact, Vision, and Empathy.