Buying a home for college

[LivingAlmostLarge]

So a neighbor of mine mentioned that they bought a cheap home a five years ago with the plan that they would have it paid off or close to paid off when their two kids went to college and that was their enforced savings plan. The renters would pay down the mortgage for the most part and in 10-15 years they would sell it and take the equity and pay for college.

Okay I'm listening to this and it seems to make sense. But something so easy and too good to be true can't be right? What am I not looking at financially why this could be a great or bad idea?

They recently refinanced and the rent now covers the mortgage and property taxes. I'm not sure it covers everything I think maybe they sink in $50-100 month. It is not where we live. It's in a city they used to live. The house was $200k and I think they rent it for $1200. But they sunk in some to fix it to rent out.

Has anyone else done this? Are there any downsides?

[Jluke]

As everyone would expect by now from my other posts, I did a quick amortization schedule... 200k home; 40k down (20%). 160k mortgage at 4.5%.

In 14 years, the principal would be reduced by 53k (this is also the point where principal/interest of payment is 50/50). So total equity would be 53k + 40k initial investment = 93k plus whatever more you can sell it for.

However,
how much was put into the upkeep of the home? rugs, furnace, a/c, roof, painting, TIME

was it always rented?

property taxes go up?

realtor fees when you sell

tax advantage or disadvantage over the years (rental income vs tax write-offs).

I'm hoping someone can shed a positive light on investment properties. I view my home as a losing investment b/c of interest, property taxes, upkeep, etc.

[autoxer]

• I don't believe using a mortgage as a forced savings plan is a wise decision, but I understand why it works for some people.
  
• A $200k house renting for $1200/month, doesn't sound like a particularly great investment.

I don't own any rental real estate, but I know there are some people on this board that are really good at it.

[tripods68]

So a neighbor of mine mentioned that they bought a cheap home a five years ago with the plan that they would have it paid off or close to paid off when their two kids went to college and that was their enforced savings plan. The renters would pay down the mortgage for the most part and in 10-15 years they would sell it and take the equity and pay for college.

Okay I'm listening to this and it seems to make sense. But something so easy and too good to be true can't be right? What am I not looking at financially why this could be a great or bad idea?

They recently refinanced and the rent now covers the mortgage and property taxes. I'm not sure it covers everything I think maybe they sink in $50-100 month. It is not where we live. It's in a city they used to live. The house was $200k and I think they rent it for $1200. But they sunk in some to fix it to rent out.

Has anyone else done this? Are there any downsides?

Not a smart move.

Factor the risk of buying a home plus interest cost and job losses along the way. Assuming they have to pay 4% on the house. They could have save money towards college in the diversified mutual fund earnings as much 5% to 10% a year without having to pay extra towards repairs and property tax/insurance on rental. The risk is even higher if not so good-tenant-not- paying on time. What happen if they lose a job, do they have enough money to pay two mortgages primary and rental? I'm guessing not.

[snafu]

Not long ago there was an interesting discussion between several regular SA participants about investment/rental formula. [TBH/97 Guns & others]

http://affordanything.com/2012/01/25/income-property/

This seems like a good starting point. Your skill sets for upkeep, maintenance and repair might be a 2nd point.

What does MMM advocate?

[pflyers85]

Not a smart move.

Factor the risk of buying a home plus interest cost and job losses along the way. Assuming they have to pay 4% on the house. They could have save money towards college in the diversified mutual fund earnings as much 5% to 10% a year without having to pay extra towards repairs and property tax/insurance on rental. The risk is even higher if not so good-tenant-not- paying on time. What happen if they lose a job, do they have enough money to pay two mortgages primary and rental? I'm guessing not.

I would tend to agree with you as well. There is definitely knowledge and certain skill sets that could offset some of the risk. Like if a person is knowledgable in real estate beyond what they read from magazines and national publications and know that local market inside and out. They could also have connections to get less costly quotes for home repairs or are handy themselves. For these types of people there could be a greater chance that it would work out. It's certainly possible it could work out for those not as knowledgable or connected. However, I'm with you in that there are far less risky investments out there than can provide the same desired result.

[phantom]

I don't think you have to know much about whether or not this particular house is a good or bad investment to say that using a single property as a college savings vehicle is a risky plan. My concern with using a rental property as a college savings vehicle would be the risk of the value of the property being down when the kids are ready to start college. When saving for something that is going to happen within a very small window, I wouldn't put all of my savings into any single, volatile investment.

[disneysteve]

When saving for something that is going to happen within a very small window, I wouldn't put all of my savings into any single, volatile investment.

Also, when you go to sell a house, it could take weeks or months to sell it. When I want to take a distribution from my 529, it's just a few clicks online and the money is transferred to my account in a couple of days.

[Jluke]

I don't believe it is a good investment, but I think the key is that someone else is building wealth for you by making the payments (assuming it's rented, and that the rent covers everything with some profit too).

[LivingAlmostLarge]

According to that great link, the house is close to making it work. Not entirely but close. There isn't enough of a return on the money for probably savvy landlords. But for people just trying to save for college i think 3% isn't bad. Plus since it's leveraged it's something like 15%.

I can see where I am renting it's horrible. It's a big money loser without even calculating basics. But the landlord is likely banking on huge appreciation taking care of the financially eventually. I mean i know my rent isn't covering all the costs for sure now. Appreciation is likely the only way it'll work.

But I'm still toying with the idea. My DH and I talked about it. After we get our own house settled we decided we might consider looking into a rental or two. But trying to follow successful bloggers or posters who really look only at the numbers makes it difficult.

I haven't seen things that make financial sense like what other people post. And that makes me hesitate. Although the idea of someone else paying the mortgage for the most part is nice and I gain the equity and appreciation.

[Drake3287]

During the last recession both of my kids were going to college in San Diego at the same time and I was paying something like $1,500. a month for the condo (x 4 years) they lived in. At the time I thought about buying a condo and having them live in it with the thought of selling it down the road after they graduated.

Like most high cost items, I thought about and thought about it but never pulled the trigger. Worse decision I ever made, at this point any condo in San Diego is now worth at least $100,000 more then it was in 2010.

As it turns out, the condo that we rented was owned by a family that had purchased it while there child was in college. Easily turned into a nice cash flow for them.

Long story short, do the math and see if it works for you.

[rennigade]

Worse decision I ever made, at this point any condo in San Diego is now worth at least $100,000 more then it was in 2010.

The s&p doubled since 2010. A lot of people made a lot of money in those 5 years. No condo needed, no overhead, no tenants. A computer, a screen, the internet...and some liquid money is all you needed.

[corn18]

When I read the title of the thread, I thought something different might be afoot. I am thinking about buying a rental property near whichever college my daughter chooses. I would rent it out to others for the first couple of years if my daughter has to stay in a dorm. If she doesn't, she can stay in my rental and I will rent out the remaining rooms to others. I save housing costs and maybe I can get a positive cash flow from it even after she graduates.

Anyone own college property? I know my friends pay rent even in the summer just to keep a place because there is such a shortage of housing where their kids go to college.

Tom

[LivingAlmostLarge]

Drake's reasoning is why I like the idea of a rental. But the stock market has been good to us.