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One of the best investments parents can make in their children’s future is covering their college tuition — but it’s also one of the biggest. While scholarships and grants can help, this is a massive expense that can haunt you or your children for years.
However, there’s one great way to pay for college without student loans and keep your family out of debt. While it may not be an option for all budgets or real estate markets, purchasing a second home and turning it into a rental property can be a creative way to fund your child’s college education. In this post, I’ll show you how.
Buy a secondary property
Congratulations! It’s January, and your child has just been accepted to college. The first step is for one parent to purchase a great property near your child’s school that will be desirable to other students. Ideally, this will happen by June of the same year.
If you’re a two-parent household, make sure just one parent takes on the mortgage, so it doesn’t go on both of your credit reports. If you’re a single parent, you may want to start investing in property earlier — for example, when your child is in high school — so that you have more time to build up savings for additional properties.
Make your child the landlord
Next, move your child into the property — and make them the landlord. Rather than requiring them to balance a full-time job with papers and tests, your child’s income will come from the other tenants who will rent rooms in the home.
Make sure to keep any reserve income from these rentals; if you let your child keep it all, they’ll likely spend it. Instead, save the reserve income in a separate account to cover expenses in case of accidents or repairs.
Find responsible tenants
Following a stringent screening process, it’s now time to find responsible student tenants who will rent the other rooms in your new property. Make sure to take deposits and get them moved in before the school year starts. That way, by the time your first tuition bill is due in the fall, you’ll have a steady stream of income to cover the costs of both school and the property.
Do it all over again
Another congratulations is in order; now you have equity! If you have a second child, when they are ready for college, you can repeat the process all over again. If there is a second parent, you may want to take out the mortgage for the second rental property in their name. If you’re a single parent who began investing early, you may have the resources to take on the additional property yourself.
If you only have one child going to school, you now have a rental property to provide you with a source of secondary income after your child graduates. But now that you’ve seen how easy this process is, why not purchase a second home anyway following a similar model? Rent to reliable students or young professionals in the area, and watch your retirement savings grow.
Best practices
Make sure to keep your real estate in separate entities, and consider starting an LLC for each property your family owns (“Gresham Family LLC I,” “Gresham Family LLC II” and so on). This way, each property has its own financial and risk management accounts; should an accident occur at one of your homes, each will have its own income, insurance coverage, and emergency reserves.
When your young landlords move on to the professional world, you can either manage the additional properties yourself or hire a property management company. For a reasonable fee, these companies handle the day-to-day work of dealing with tenants, such as collecting rent and responding to maintenance requests.
We know that this option may not be affordable for all families and real estate markets, but depending on where you live, the numbers really can add up. For example, say your child has been accepted to the University of Alabama at Birmingham (UAB):
- Tuition at UAB costs $8,568.
- Looking in Birmingham, Tuscaloosa, or Auburn, near the school, you can find a five-bedroom house for around $65,000.
- Your mortgage will likely be $500 to $700 per month. Say you rent the four additional rooms at $450 per month, plus utilities.
- If your tenants start during the summer and you collect two months of rent before school starts, you should be able to cover tuition before the first-semester billing deadline.
To learn more about rental properties, creative ways to pay for college without student loans or any of the topics we’ve touched on here, contact us for a free consultation today
