When it comes to saving for their child’s college education, most parents automatically think of the Colorado College Invest 529 accounts. The main reasons are that contributions can be deducted from Colorado State income tax return and the earnings in the account grow free of federal and state taxes. However, buying a home to save for college could be an alternative to consider.
Buying a rental property when a baby is born is a great way to save for college. If you buy a rental property with a 15-year mortgage when your child is born, it will be paid off and you’ll have three extra years to decide how to use this investment by the time your child is 18 and ready to go to college.
The property can be sold, the taxes paid, and gains from the sale used as cash for college. Or, you could refinance it to pull cash out – tax-free – and use the cash for college. You could even keep the property free and clear to rent out, and then use the monthly cash flow to pay for college expenses. In many cases, if your child decides to stay in town to attend college, she or he may actually live in the house or property during college and rent out any extra rooms to roommates.
Hindsight is always perfect, but for example, if you bought a home in the Baseline subdivision in Boulder just east of the CU-Boulder in 2004 when your child was born, you would have paid approximately $300,000. When the child turned 18 in 2022, the home would be worth about $700,000 and you would have no loan on it. You would be able to use the options stated above. Right now, the homes in that neighborhood rent for about $2,500 to $3,000 per month. You would need to pay for mortgage, taxes, insurance and maintenance expenses, while the remaining cash flow could go towards monthly college expenses.
In the early years of the 15-year mortgage, there probably would not be enough rent to cover the whole mortgage payment. You might investigate other financing options, such as the 30-year mortgage, to help with cash flow in the early years.
By Duane Duggan. Duane has been a Realtor for RE/MAX of Boulder since 1982. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail DuaneDuggan@boulderco.com, call 303.441.5611 or visit BoulderPropertyNetwork.com.