Funding College: 529 Account vs. Real Estate

I have two daughters, 4 and 5 years old. Like many parents, we want to give them the option to go to college without having to go into massive debt. The cost of college has skyrocketed over the past 15 years, and I have no expectation that that will slow down. According to Otium Advisory Group, the average cost of tuition, fees, room and board of a private college in 2021 was $51,464. If we average a 3% inflation rate until my daughter enters college in 2035 (and we know the inflation rate will be higher), the cost of one year of a private college will be $80,179/year or $245,192 for all four years.

I have two Bachelors of Arts college degrees, and my husband is a doctor, so clearly our family believes in higher education. Do I think a 4-year degree will be important in the job market when my children enter adulthood? I’m not so sure. But I certainly want them to have the option to go to college without facing a mountain of debt if they choose to do so.

This brings me to the topic of today. How do we save for our children’s college education? Some people choose a 529 Account, but my husband and I have decided to use real estate as our investment vehicle to save for our child’s college education. There are numerous benefits to using real estate in this way. Two benefits include:

1. By putting the money into a rental property, you can enjoy monthly cashflow/passive income from that property. There is no cashflow from a 529 account.
2. As the 529 grows, you are not taxed on the gains. When you refinance equity from a home, the cash you withdraw is tax free. The difference is once you withdraw the equity from a home in a refinance, you still own the home at its original asset value! Whereas when you withdraw from a 529 account, the funds are gone.

Currently we have purchased homes for each of our children that we consider to be their “college funds”. Here is the math on one daughter’s home. The home was purchased in an area with a growing population. It has a 2016 construction date:

Purchase Price: $380,000

Down Payment: $133,000

Loan Amount: $247,000

Interest Rate: 3.15%

$2,600 Monthly Rental Income

-$1,061.45 Mortgage Payment (Principal & Interest)

-$399 Property Taxes

-$158 Insurance

-$208 Management Fee

-$130 Maintenance Reserve

-$5 HOA

$638.55 Monthly Cashflow

With depreciation/expenses, this monthly cashflow is virtually tax free. The annual cashflow on this property is $7,662.60/year. Over the next 13 years, this would mean a total cashflow of $99,613.80 if net rental income and expenses remained consistent (and not including inevitable vacancy).

The average home increases in value 3% per year over time. Some years are higher, some are lower, but 3% is the average. By 2035 when it is time for my first child to go to college, the math looks like this:

Home Value in 2035: $541,789

Loan Balance in 2035: $129,352

CASHOUT REFINANCE at 75% loan to value (LTV):

$412,437 Refinanced New Loan Amount (75% of $541,789)

-$129,352 Payoff Loan Balance on Existing Loan

$283,085 Check to me for college education!

And the best part is, we still own the $541,789 home asset! If this was a 529 account, we would have depleted the account by $283,085. This is why I love income producing real estate.

If you took my down payment of $133,000 and put it into the stock market at a 7% annualized return, your 529 account after 13 years would be valued at $320,509. Not only did we not enjoy monthly cashflow over the 13 year period, but once I withdraw this balance to pay for my child’s college education, the funds are gone, and we no longer have an asset.