Over the last 20 years, tuition and fees at private colleges have jumped 126% according to US News and World Report. Public universities have raised pricing even faster, at 133%. That puts the average cost to live on-campus for a year of private college at $58,628, per the Education Data Initiative.
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Find Out: How To Get Rich in Real Estate Starting With Just $1,000
What’s a parent to do, if they want to help their kids with the soaring cost of college?
Start early and get creative, that’s what. Try these creative ways to help fund your children’s college education with real estate investments — and perhaps help your own retirement savings in the process.
Let Tenants Pay for Tuition
Over time, renters can pay off the mortgage balance on a rental property.
Consider a quick example. Ingrid Investor buys a rental property for $360,000, the year her son is born. She puts down 20% ($60,000) and borrows the other $300,000 as a 30-year mortgage at 6% fixed interest.
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Based on historical data from the Case-Shiller U.S. National Home Price Index, Ingrid assumes she’ll earn an average of 4% over the next 18 years.
That leaves her with a property value of $729,294 by the time her son goes off to college, with a mortgage balance of $174,424. She has $554,870 in equity in the property — and that says nothing of the cash flow she pocketed over those 18 years.
If she took out a 15-year mortgage, she’d now own the property free and clear. She could take out an entirely new mortgage, which at 80% loan-to-value would give her $583,435. Her tenants could then pay down the mortgage for her all over again.
A decade or so later, the property has once again built both equity and significant cash flow: just in time to help Ingrid with her retirement.
BRRRR Strategy: Recycle the Same Down Payment
In real estate investing, the “BRRRR strategy” is an acronym for buy, renovate, rent, refinance, repeat. The premise: investors create equity by renovating, and then pull out their original down payment when they refinance.
Imagine Ingrid used this approach instead. She buys the same property for $250,000, puts $50,000 of renovations into it, and drives the value to $360,000. She refinances the property and borrows the same $300,000 loan — and now she has none of her own cash tied up in the property.
She takes her initial down payment and repeats the process again and again and again until she gets bored of buying and renovating rentals.
Real estate investors often refer to this model as generating “infinite returns,” because they keep earning cash flow and appreciation on a property even though they have $0 invested in it. There’s no limit to the return on investment they can earn on that same down payment that they keep recycling into new investments.
Infinite Returns on Real Estate Syndications
As powerful as the BRRRR strategy and its infinite returns are, it ignores a crucial piece of the puzzle: your labor.
It takes a massive amount of work to find good deals on properties, pull permits, make renovations, hassle with city inspectors, and go through two rounds of loan closings. And that says nothing of the enormous headaches of becoming a landlord. I should know — I used to use this strategy myself.
Today, I only invest passively in real estate. And I can still take advantage of a similar investing model targeting “infinite returns.”
Hands-off investors can put money toward real estate projects called syndications. The operator finds a large property that needs renovations, such as an apartment complex, and they raise some of the capital from passive investors (known as limited partners or LPs). They renovate the property over the course of a couple of years, then refinance and return investors’ capital to them.
Limited partners keep their ownership interest in the property, however. They keep collecting cash flow and earning appreciation, and when the property eventually sells many years later, they get paid out their portion of the profits.
The same concept applies as with the BRRRR strategy: investors can recycle the same capital into multiple deals, as the old ones refinance to return the initial capital.
Partner with Your Teen to Flip Houses
Your teenager could lounge around the house all summer playing video games — or they could partner with you on a house flip or two to help pay for the college costs.
In the process, they learn valuable skills such as negotiating home prices, managing contractors, and how to navigate government red tape such as permits and inspections. They also learn the concept of leverage: paying for assets with other people’s money.
You can even put them to work swinging hammers alongside the contractors to learn hands-on home improvement skills.
If they sweat for several summers to help pay for their college tuition, they might even show up for their early morning classes come the fall semester. And if you flip one house each summer for four years, the profits could cover the entire cost of their college education.
Kiddie Condo House Hacking
In real estate, house hacking refers to buying a home, moving in, and renting some of it out to pay for the mortgage. That could include renting bedrooms, other units, or accessory dwelling units (ADUs).
To qualify for an owner-occupied mortgage, you have to move into the property. You — or your grown child, whose name also appears on the deed.
Imagine you and your college kid buy an off-campus house with four bedrooms. Your child moves in and rents out the other three bedrooms to buddies. Their rent covers the mortgage payment and your child scores free housing.
When they graduate, you can either sell the property for a profit or keep it as a cash-flowing rental property.
Private Real Estate Investments in Your Roth IRA
When you open a self-directed IRA, you can invest in almost anything with it. And if you opt for the Roth option, your investments compound tax-free.
Investments that you can withdraw penalty-free to put toward education expenses such as tuition, fees, books, and equipment required for attendance (read the IRS rules for details).
The year your child is born, say you invest $50,000 in a real estate syndication targeting infinite returns, through a Roth IRA. After three years, it refinances and returns your initial $50,000 to your Roth IRA, even as it keeps paying you monthly cash flow. You recycle that same $50,000 into a similar investment. The process repeats for 18 years, and by the time your child attends college, you’ve bought into ten different syndications. Half of those have sold and paid you out the full profits, which snowballed your investment capital in your Roth IRA.
That’s the power of compounding — especially tax-free. You can withdraw some to help your child out with tuition, and let the rest continue to compound for your retirement.
You don’t need to be rich to help your kids with college. But it does help to start when they’re young and to get creative.
Learn the more obscure rules of the game, and you’ll find yourself winning in no time.
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This article originally appeared on GOBankingRates.com: 6 Creative Ways to Cover Your Kids’ College Costs with Real Estate
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