My niece, Madeline, heads to the College of Charleston today. Good luck, Maddie!
Sometimes people don’t want to invest in a 529 college savings plan. I understand that thinking. Once college is over, the investment is gone and what does mom or dad have to show for it? Hopefully you have an educated child with a good enough job to afford a really big house. They might even let you sleep in their guest room if you’re lucky.
What if there was a way to save toward college but keep the investment AFTER junior finished graduation? Wouldn’t that be cool?
There is such a beast, but there are caveats, as there are with any investment:
First, you have to be interested in rental real estate.
Second, you have to have enough money for a down payment on a piece of property.
Here’s how it works:
Find a house near the school junior plans to attend. Make your best deal for the home. There are plenty of sites that discuss how to purchase rental real estate. I recommend you read Paula Pant’s story Is This House a Good Investment at Afford Anything.
Interest rates are low now, so this is an especially good time to jump on this strategy.
Complete the purchase and perform any needed repairs to rent it.
Ask junior if any friends would like to live in the house with him/her. If not, place an advertisement in the local newspaper and on Craig’s list. PT Money recently ran a good story about how to check the credit of your renters (read Find a Tenant: Credit Check and Screening). The kids might not have any credit, but mom or dad probably do.
Rent the house for enough to cover the mortgage costs and upkeep. Even if junior’s friends become your renters, make sure everyone pays a security deposit and signs a lease. Keep it professional.
…and here’s where it gets fun.
Hire junior to be your property manager. For this to work, JUNIOR MUST DO SOME ACTUAL LABOR. Make a list of official duties, create a pay scale, and have junior sign an employment agreement.
Pay junior a wage. You may want to hire a local payroll firm to deduct taxes and create an actual paycheck (this service costs far less than you’d imagine). If he does well, give him bonuses liberally.
Junior uses the wage to pay tuition costs.
At tax time, claim the rental house income and expenses on your taxes. This includes the cost of junior’s labor.
Why this works:
You’re receiving a huge discount on your college expenses AND collecting any excess rent plus keeping any appreciation on the property.
Junior, at best, is collecting the wage while in the 10% tax bracket. You’re probably in the 25% bracket if you’re like most people who read financial blogs. You save 15% off the cost of your college simply by paying junior to take care of your property for you, plus you have a built-in manager (no real out of pocket additional expense…you were going to have to pay that money out anyway for school costs).
Additionally, you receive MORE savings off of the education expense because you’re deducting junior’s salary as an expense from your taxes.
I need to be 100% clear here: this can’t be a tax avoidance strategy. You’re asking for an IRS audit that you’ll lose if you simply buy a house a funnel funds for junior’s college through your property costs.
Your goals should be: 1) own rental real estate; 2) make a gain on your investment by deducting all legal costs of owning property; and 3) employ junior for a fair wage as he/she heads to college. If junior uses this money for school, great.
If not, you’ll have other ways to make your child sorry they didn’t listen to a good parent’s advice!
Photo: College: 401k 2012
This idea is really quirky, for sure. For one, you’d have to fully trust Jr! He would have to take good care of the property, as would his friends. It’s a great idea investment-wise. I might have to consider it when mine are old enough. I’ll go work on that down payment 🙂
Great point. If I own a property in a college town, I have to be willing to have my house get beaten up. Remember college town houses? Not palaces, for sure.
Consider my mind blown. 🙂
Seems like a neat idea but make sure you know the market. When I went to my college they were building a ton of housing and they built too much broking rent prices down in the whole area. That can greatly change your investment outcome.
I think that’s why the link to Afford Anything is so important. If it doesn’t pass the tests in her article, you definitely shouldn’t buy the property.
This seems like it would be a good idea, except that teenagers have been known to change their minds every five seconds and may not end up going to the campus you bought the house on. Or they might not get accepted. And there’s the whole deal that Michelle points out about trusting Jr and his buddies. But maybe just investing in a rental in general? It would be awesome if this ended up working out, and I’m sure it does for some.
When clients and I have discussed this in the past (it was actually a client’s idea, in fact), you know whether it’ll work for your kid or not. If junior changes his mind, you shift gears and hire a property manager.
Oh, you mean buy the house when Junior is a baby?
Definitely not, because you don’t know where she’s going to go to school. Clients who’ve done this bought the spring of the year Junior was attending as a freshman.
Junior also learns responsbility!
…and I love that!
Of course, I like the like the concept! A lot depends on the real estate market of the area where your child goes to college. My children went to UC Santa Barbara where real estate is expensive.
I don’t think that property in Santa Barbara would meet the Afford Anything restrictions on buying. Unfortunately, other methods would work better there!
I think this is a brilliant idea. And like you said, if things don’t work out with Junior looking after the place or even going to that college then you can always hire a property manager. As well, if a person is worried about young students ruining their house they could consider looking for older students that are more focused on studying and less on partying.
My mom and I actually had this discussion toward the end of my college career. For us, it would have been a little different- my college was being paid for by a full ride (at least until I lost it), but she mentioned that it might have been better if she had co-signed for me on a house, I could have had friends as roommates whose rent paid the mortgage (because I lived with friends anyway), and at the end of college, I would have had a degree and house with equity.
That’s exactly how this strategy started! Funny. Then someone asked the question, “What if Jr. had set duties and we paid her?” The tax implications are pretty clear.
Smart investment idea! I thought about this when my daughters left home last year. Unfortunately, they both are in expensive cities — NY and San Fransisco. Overall, this is a fabulous way to invest and have best of both worlds!
This is a great idea and I know some people who have done something similar. It’s something I would consider doing for my own kids, but then again if I don’t plan on having a kid for 7 years who knows what interest rates will be like in 25 years….
My parents did something not as crazy as above for my housing in college.They bought a trailer with my roommates parents. Yes, I lived in a house trailer during college. Oddly enough in our town they ended up selling the trailer at cost for what they bought it for 4 years perviously. So I nearly free room during college (minus small monthly lot fees).
I think this is actually a really smart and clever idea. I like part about junior actually needing to do some labor. Ha! Good luck with getting kids to do that 🙂
What are the odds of getting hit with the Kiddie Tax on this one? Great strategy, but what’s the end game? Insuring houses with students are crazy expensive and maintenance and turn over is killer.
The kiddie tax being which one? The tax on giving money to your kids? If your kid is your employee there is a zero percent chance. You’re not giving her the money. They have to work for it. If it doesn’t meet the Afford Anything piece criteria, don’t rent. This has worked a ton.