College is crazy expensive. For the 2023–2024 school year, the average private college tuition was $42,162. Yikes. Fortunately, there are plenty of ways to get creative if you want to help your kids with their college costs. Try these outside-the-box ideas to use real estate investments to cover the costs of higher education.
Imagine you buy a rental property within the first few years of your child being born. You take out a 15-year mortgage on it, which only generates modest cash flow in the first year or two, but cash flows better as rents rise and your mortgage stays fixed.
After 15 years, your renters have paid off your mortgage for you. You own the property free and clear, and it’s appreciated handsomely. You could sell it for a tidy profit to cover tuition — or you could refinance it and keep earning cash flow, appreciation, and tax benefits.
So you refinance it with another 15-year mortgage and do it all over again. The cash out from the refinance covers your child’s university tuition. And when the next 15-year cycle ends and you own the property free and clear once again, you can decide whether to sell, keep the property for a retirement income, or refinance again.
Either way, it can help fund not just your child’s college education, but also your retirement. You don’t have to choose between the two!
You save up $50,000 for a down payment, closing costs, cash reserves, and initial repair costs. You find a great deal on a fixer-upper, buy it with a hard money loan, and renovate it to force appreciation.
Then, you refinance the property with a long-term mortgage, pulling out enough cash to reimburse your initial $50,000. Congratulations: you now own a cash-flowing asset without having a single penny invested in it.
You take the same $50,000 and repeat the process again… and again… and again. After a few years, you’ve recycled the same $50,000 to build a portfolio of a dozen rental properties.
Known as the BRRRR strategy, the acronym stands for buy, renovate, rent, refinance, repeat. Some investors think of the strategy as generating “infinite returns” by reinvesting the same capital in many assets.
They probably won’t generate much cash flow in the first year or two, and novice investors
sometimes find themselves with negative cash flow. Andrew Helling of Helling Homebuyers and I just chatted recently about this. He said, “While I love the BRRRR strategy because it allows you to recycle your capital, don't get too aggressive with your leverage. I've seen more than one investor lose their portfolio due to unexpected vacancies, bad tenants, or downturns in the rental market.”
As long as the property cash flows positively in the first year, time should help grow that margin wider. Cash flow improves as rents rise and your mortgage payment stays fixed. By the time your kids reach college age, they should generate strong annual income for you. Perhaps enough to cover your kids’ tuition. They also should have appreciated by then, so you can sell one or two if you like, or refinance.
Do the active real estate investing strategies above sound like a lot of work to you?
They do to me, as a busy entrepreneur, father, and expat frequent flier. Which is why I invest passively nowadays and leave the landlording, loans, tenants, and toilets to someone else.
But that doesn’t mean I can’t take advantage of infinite returns similar to BRRRR investors.
Some real estate syndications follow a similar model: they buy a property, force equity, and then return passive investors’ capital to them. As a limited partner (LP), I get my money back, but I keep my ownership interest in the property. I can recycle the same investment capital again and again, just like the BRRRR strategy.
On the plus side, I don’t take on a side hustle of renovating houses. The downside is that it typically takes longer to get your investment capital back — often a few years rather than a few months.
But if you invest in your first syndication when your child is born, and they return your capital every three years on average, you can recycle it into six real estate syndications by the time your child turns 18. Each of those generates cash flow for you, and you never have to lift a finger beyond the initial deal vetting.
Oh, and you don’t pay capital gains taxes either, since you never sell any of these for a profit.
Want your kids to help pay for their own tuition while learning skills from negotiation to financing to managing people to home improvements?
Flip a few houses with them over their summer breaks, or on nights and weekends.
Involve them in every part of the process, starting with finding good deals on properties. Show them how to value properties, both as-is and after repairs. Walk them through finding financing and working with lenders.
Have them join you for interviewing and negotiating with contractors — and managing them (a notoriously difficult task for real estate investors). Then make them pick up a hammer to participate in renovations. Finally, bring them along for hiring and working with the listing agent. They’ll learn real-life skills that will serve them well in adulthood. And maybe they’ll actually show up for their 8 a.m. classes since they helped pay for them.
Did you know that your kids can satisfy the owner occupancy requirement for mortgage loans?
That’s right: you don’t have to live in the property to qualify for a low-interest, low-down payment loan. Some mortgage lenders informally refer to these as “kiddie condo” loans, where you and your child appear on the deed and note together, but only they live in the property.
Instead of paying for dorms and meal plans, go in on a one- to four-unit rental property next to campus. Your child lives there and manages the property, and their housemates’ rent covers the mortgage and then some. Just make sure your child has plenty of their own skin in the game so they don’t let their friends trash the house.
When they graduate, you can decide whether you want to keep the property as a long-term rental or cash out. Real estate in college towns tends to do well in the long term: a 2023 study by HireAHelper found that properties in college towns appreciated 4% over the previous year, compared to 1.6% for homes nationwide.
Roth IRAs are awesome. You can withdraw your contributions at any age, tax- and penalty-free. And the IRS lets you withdraw earnings tax- and penalty-free under age 59 ½ for qualified education expenses.
Those include:
And you can invest in rental properties or real estate syndications with a Roth IRA, if you open a self-directed IRA.
Read up on the IRS rules for withdrawing Roth IRA funds for higher education costs, and never raid your own retirement funds to help your kids pay for college. Only use this strategy if you know your retirement nest egg will survive longer than you will.
You have plenty of other options to invest in real estate to cover college costs as well.
Instead of using the BRRRR strategy to build a portfolio with no money down, you could use seller financing or other creative financing options. Or you could flip land, or wholesale properties, rent part or all of your home out on Airbnb, rent your spare parking space out on Spacer, or some other strategy that I’ve never even heard of.
Whatever you do, involve your kids and their effort and/or money in some way. They should have some skin in the game and a sense of investment and ownership in their own college costs. Even if you offer to pay for their entire education, consider making it contingent on their performance, whether you measure that by GPA or some other objective metric.
As a final thought that may not have occurred to you, don’t limit your kids’ college search to the U.S. My wife is a college counselor, and many of her students go to outstanding universities overseas. The Netherlands, for example, has excellent English-language colleges that charge a fraction of the cost of U.S. schools. Think outside the box!
About the Author:
Brian Davis is a real estate investor, personal finance writer, and co-founder of SparkRental with over two decades in the real estate and finance industries. He owns fractional shares in over 2,000 units and regularly contributes as a real estate and personal finance expert for Inman, BiggerPockets, R.E.tipster, and more.
Disclaimer:
The views and opinions expressed in this blog post are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.