A smarter way to invest in your child’s education

What if you could invest in something that earned enough profit to pay for your child’s college tuition and still kept your initial investment growing towards your own retirement? That’s the picture when you purchase a home or condo as an investment for college. There are options in every price bracket and investment models that work no matter how soon college starts for your kids.

Interest rates are historically low and the demand for housing is continually rising in our tech-rich, mild-weathered, green, economically-advantaged neck of the woods. Companies like Amazon, Microsoft, Google, SpaceX, Boeing and Facebook attract over 5,000 net new people per month to the Sound, giving the Pacific Northwest a very hot housing market that’s grown strongly for generations. Don’t you wish you had bought Mercer Island waterfront in the 1980’s? In a few years we’ll look back on today’s market the same way.

Here’s where your kids come in. You may already be proactively depositing into a college fund. This is a step in the right direction but it’s not a terrific investment. The dollars go in and grow at a snail’s pace of interest or rise and fall with the stock market and hopefully you get back more than you put in. There are some tax advantages….

The tax advantages of real estate are huge. The interest paid on your investment mortgage is tax deductible and you also enjoy depreciation, so you get to shelter and keep more of your hard-earned wages from the very start.

Here’s the magic in using real estate for your college fund: When you purchase a home with a mortgage you are leveraging your money at a higher rate of return than you could possibly attain with any other safe vehicle. “Aha!” you say, “Safe? Remember the housing bubble and how home values dropped?” Yes, yes I do! But here’s the thing: Prices are back just a few years later and we are seeing the highest price growth ever. Seattle enjoys a historically strong market, remember?

What’s leverage? It gives real estate a 5:1 advantage (typically) over other kinds of investment with almost zero additional risk. Leverage is where you invest some money and a bank supplies the rest of what you need – up to 80% loan-to-value without additional fees. That means a $50k “ordinary” investment into the stock market controls $50k of stock, and when values eventually double your profit is 100%. Great!  But $50k in real estate controls $250k in property, so after doubling in 10-12 years you profit a whopping 500% plus rental income and tax benefits.

Let’s say you put down $50,000 on a $250,000 condo or home. Your mortgage and costs should be covered by the market rent. When your child is ready for college you can do a cash-out refi to access most of your profits without incurring a tax bill.  Then after refinancing you will continue receiving rent and your investment keeps appreciating, as opposed to liquidating stocks and paying tax on the profit.

By now you might be asking yourself, “How can I do this? How am I going to make this work for my children, family, and retirement?”

First and foremost it’s critical to have a good agent. Use someone trustworthy who is knowledgeable about the local market, has an eye for a good investment, and with a proven track record of getting things done. Since the hot market inspires multiple-offer bidding frenzies for good homes, you especially need an agent who knows how to win in multiple offer situations with strong negotiation skills.

If your kids are young you have enough time by starting now. But even if your kids are in middle school you’ll be able to supplement student loans while continuing appreciation will quickly pay off those loans after your child graduates college.

In conclusion, pick a good road and start right away. Real estate is the best road around. Like any good habit, this kind of investment improves your life gradually and builds on itself, so you know you’ll kick yourself for not starting sooner. Today is officially the soonest you can start, so just do it. Get started now.

By Kari Haas, Broker Windermere Bellevue Commons