How can I leverage college money for an inv. to afford college?
Salt Lake City, UT · Member since 2017 · 26 posts · 19 votes
My daughter wants to go to NYU. It's $55K/year (oh my). We saved up $25K for college, so we are short! However, I have a $250K of equity in my house in terms of a HELOC that has a 10 year deferred payment option at 3%. I'm looking to buy an investment property. I'm wondering if she could use the cash as an equity partnership in a deal that would allow her investment to gain nearly 40%/year until she graduates to help pay the loans that will be due. After 4 years, that initial investment, growing on this leverage 40% return would be nearly $100K
That would be quite a chunk against her $200K loans. 3 more years and she can pay off the whole thing, but she'd have to figure out how to pay her $2600/month student loans in the mean time.
Also, since it wouldn't be very liquid, I'm not sure how I could cash her out when she needs the money, besides selling the house at that point.
Just to clarify, are you suggesting that she pools her $25K with your $250K HELOC money to invest in something that would return 40% on her equity? Does the $250K have to make a return other than the interest only debt service?
If I understand correctly, the two of you would bring $275K into a deal. With leverage this would afford a $1M asset, right? If the total return on this in 4 years only needs to be $100K, you would need to have non-negative cash flow after all the debt service and an appreciation (or forced equity) of around 2.5%. That seems doable.
However, from spending well over a decade including college in NYC, I would not recommend having her try to manage something there. I bet managing a fourplex in the Bronx is not the NYU experience she is hoping for. Maybe consider a more turnkey investment in a kinder market that you're both comfortable with?
This is an interesting thought indeed.
Hi Brent, I am a father of two and feel your pain. However the answer IMHO is not how to make such an investment (which we all would like to find) but step back and evaluate the the picture. Picture your Daughter in four years with her new degree and a debt of $200,000! How many years will it take for her/you to dig out of that?
First I would spend the first tow years in community college with her having a job t pay her own way. She can then transfer to a college that will give her a good education in what ever she wants to do after college. Even if it is NYC, she will be in the hole only $100,000.
Just my thoughts.
Cheers, Buddy
Brent, huge props for posting this on BP for not only the peer investment opinions but also the "100,000 foot view" ideas.
Oh my is right man. Is it possible for you/her to acquire an asset that produces the payment amount before she starts college? What if the investment fails and she's left with 200k in student loan debt? Or maybe underperforms and there's 100k? That may be tieing up some needed cash in an illiquid asset.
Thank you for responding. It is a possibility that the investment property could fail. I've had several that have, but on the whole, they've done well.
I've talked to her about the CC idea. I personally love that idea. She's quite enamored with the idea of becoming a stage designer that works on Broadway or the West End (of London). NYU Theater does 6 shows a year, and she feels that would give her the learning and experience needed to land opportunity when she finishes.
She's also very aware that $200K is a tremendous amount of debt, that she isn't looking forward too.
Her older brother used the initial $25K we had for him along with scholarships to attend U of U, and also became a resident assistant. He is finishing college this year with nearly $25K in the bank. An enviable and rare position, to be sure.
She is weighing her options. She is hoping for scholarships as well, and has applied for them. Utah has great community colleges. Salt Lake Community College, e.g. has a theatre program, but she's really quite interested to get far from Utah as she's on the LGBTQ+ spectrum and Utah isn't very friendly to her politically, socially, etc.
I have read https://www.biggerpockets.com/... and thought she could consider a 4 plex in the Bronx, e.g., but maybe the extra stress would be just too much for a Freshman, in a new city, trying to get college done, and worry about owning property.
Just to clarify, are you suggesting that she pools her $25K with your $250K HELOC money to invest in something that would return 40% on her equity? Does the $250K have to make a return other than the interest only debt service?
If I understand correctly, the two of you would bring $275K into a deal. With leverage this would afford a $1M asset, right? If the total return on this in 4 years only needs to be $100K, you would need to have non-negative cash flow after all the debt service and an appreciation (or forced equity) of around 2.5%. That seems doable.
However, from spending well over a decade including college in NYC, I would not recommend having her try to manage something there. I bet managing a fourplex in the Bronx is not the NYU experience she is hoping for. Maybe consider a more turnkey investment in a kinder market that you're both comfortable with?
This is an interesting thought indeed.
Truly inspiring post! I love to hear the reasoning behind other's passion for investing. Do you want stay in your own market or invest out of state? Best of luck in all your investing!
Thank you for your reply @William Hochstedler.
That is about right, except that I'm saying that I have as much as $250k. The 250K doesn't have to make a return other than the interest only debt service.
If we put in 275K, and the property increases by 100K in 4 years, that's 2.5% annual appreciation on the home, and the ROI for the $275K would be 36% over the 4 years, or around 9%/year.
That would provide her with a very small roi indeed. I don't think that would be worth it.
That's slightly different than what I was meaning to communicate.
My thought is that the initial investment earns 40% per year off of real estate appreciating 10%/year. The leveraged total ROI in the first year, with appreciation and rental income, minus all expenses is around 36% in the first year, going up slightly every year with compounding interest and increasing rents.
With all of that said, I agree with you. She can't be considering something in the Bronx. I'm gonna adjust my sights to a market that I know better. Say Utah, e.g.
BTW, I noticed your profile mentions Logan Utah. My wife and I are True Aggies! We both are USU alumni and named our oldest child LOGAN.
Truly inspiring post! I love to hear the reasoning behind other's passion for investing. Do you want stay in your own market or invest out of state? Best of luck in all your investing!
Good question Seth, I'm considering both, but, since my first daughter just moved to Corvallis Oregon, we have put an offer on a place in Corvallis, and looked at another one today.
So thinking creatively you do have a few options.
One is by adding her to title and the loan, she may qualify for an owner occupied FHA/5% down loan (double check with a lender). That way you aren't cash strapped into the property. She could get roommates to offset the cost of housing. This could be a multifamily or even an SFR. At the end of her four years, you could consider selling. Because she is on title, the money made up to $250K could be tax free (double check with a CPA). With this strategy if she does acquire student loans, then the equity could help pay that off. Of course there are risks with this but there is risks with everything we do (and don't do).
We see it in Los Angeles near UCLA. Parents buy a condo or something near by, their kids go to school and live there, and then sell.
@Brent Fisher
The appreciation is off the charts in that markets so I can see why it peaks your interest! You have your daughter in the area so that is always a bonus for peace of mind. Im sure you are aware of this but markets in the Midwest and southern states are sometimes less than half the price than Oregon, provide great cash flow and markets like Texas will have the appreciation similar to Oregon at half the price tag! The 250k Heloc could be spread between several SFH investment properties and you don't have to worry about the states not being landlord friendly. Best of luck in all your investing Brent!
I'm somewhat reluctant to start investing into markets and areas that I'm not familiar with. Do you do that?
The first question I would have her consider is this: are you making a business decision or just doing something cuz you wanna do it? I mean, everyone wants to be an actress. movie star, rock'n'roll star, etc....but is it a sustainable future or just throwing away money?
Unless you are planning on gifting her that money, I would also sit her down with a financial advisor and have them explain what that amount of debt load really looks and feels like once you're done with college, away from Mom and Dad, and out on your own....it's a horrible way to start a life.
I understand the concern, it's completely valid. However, there are a few major aspect that can indicate if the market is solid. Renter population, landlord friendly laws, key industries, growth and endless other indicators. Luckily, in 2022 there is so much technology that investing out of state can feel like its right next door! The most important aspect of investing out of state is making sure you have the right team in place.
How would you feel comfortable with investing in properties outside of the market that you know and are comfortable with? Sometimes, even in Utah, I'm afraid that I'll buy properties in areas that aren't a good investment, because I see a price tag that draws me in.
@Brent Fisher Investing out of state is dependent on trust and reliability of the team that you work with. You want to work with a team with a solid track record. A team that operates in a plethora of markets. A team that helps you locate the property, determine the market that fits your investment goals, explain what to expect from the investment, and walk you through each step of the process, even the liquidation process. In can see why you are hesitate to invest in your current markets, those markets are very high priced as of today!
@Brent Fisher, I think @Seth Young is completely right about investing out of state. There can be a lot of pros to being in a more cash-flow-friendly market. Especially if you're trying to pick up cash flow for cheaper. Just keep in mind you will need to factor in management fees and have a good management company. This is no problem if they find you a good deal. It is still possible to self manage a property out of state aswell. Although, it can be a total headache. I self-managed a property in San Diego for a few years, and there were definitely some difficulties there.
As you know, Utah is an amazing place to invest if you're after appreciation and equity. Cash flow is much more tight though, especially along the Wasatch Front. That being said it's hard to beat Utah's market at the moment... https://www.bankrate.com/mortg...
As far as your daughter goes, I love how creative you're being. It's very hard to give advice on something like that, but I would love to hear what you end up doing.
Also are you still up in Logan? I went to USU myself for their aviation program!
@Brent Fisher so much to unpack here. I've got NYU stories, USU stories, Oregon State stories...... Financially, I haven't thought of any reasonable way to crack your dilemma, though I've tried. Professionally, your daughter has a long, tough road ahead of her. I hope she understands that. If she makes the move to NYC, her peers are going to matter more than her teachers. She needs to be with the people who are going to "make it," and be one of those people who are going to "make it." Opportunity won't show up with the diploma. Has she been designing sets at high school? Community youth theater? Has she scoured LinkedIn for students or graduates of the program and messaged them to ask them questions? Has she cross-checked what she can find at ibdb to see if they have professional credits? Lots of hard research there beyond who NYU might put her in touch with. Has she mapped the paths of current set designers on Broadway or in the West End? Their bios are all in the Playbills. Her path won't be the same as theirs, but it can be illustrative. Has she researched what set/scenic design jobs are available across the country and what skills they are asking for? Has she participated in summer programs and, whether she has or hasn't, will she in the future? Is she prepared to be a nomad through the early parts of her career, at a minimum? I could go on and on. I won't. Bottom line advice is that she can start this journey at a disadvantage (like $200K in loans), but she can't start it with any sort of passivity. She's not going to college to learn how to be a set designer; she's going to advance her career as a set designer. There's a big difference. Good luck to her!
@Brent Fisher so much to unpack here. I've got NYU stories, USU stories, Oregon State stories...... Financially, I haven't thought of any reasonable way to crack your dilemma, though I've tried. Professionally, your daughter has a long, tough road ahead of her. I hope she understands that. If she makes the move to NYC, her peers are going to matter more than her teachers. She needs to be with the people who are going to "make it," and be one of those people who are going to "make it." Opportunity won't show up with the diploma. Has she been designing sets at high school? Community youth theater? Has she scoured LinkedIn for students or graduates of the program and messaged them to ask them questions? Has she cross-checked what she can find at ibdb to see if they have professional credits? Lots of hard research there beyond who NYU might put her in touch with. Has she mapped the paths of current set designers on Broadway or in the West End? Their bios are all in the Playbills. Her path won't be the same as theirs, but it can be illustrative. Has she researched what set/scenic design jobs are available across the country and what skills they are asking for? Has she participated in summer programs and, whether she has or hasn't, will she in the future? Is she prepared to be a nomad through the early parts of her career, at a minimum? I could go on and on. I won't. Bottom line advice is that she can start this journey at a disadvantage (like $200K in loans), but she can't start it with any sort of passivity. She's not going to college to learn how to be a set designer; she's going to advance her career as a set designer. There's a big difference. Good luck to her!
Thanks Dan, I'll read this through with her. She beats to her own drummer. She has been designing sets in high school and working at Hale center part time.
she's a little touchy about finances when i want to explore it with her. But i think she'd read this without me there in person.
Sure thing,@Brent Fisher. Great that she's been designing, and Hale Center is great. I'm going to PM you because I don't want to post a third person's name online without her permission.
@Brent Fisher, I think @Seth Young is completely right about investing out of state.
Also are you still up in Logan? I went to USU myself for their aviation program!
@Dan Schwartz,i got a house. I'm excited. After so many lost offers, i finally got one. An RE in my wife's brokerage presented one. We did our research, presented an offer, and beat out the neighbor.
Now we are trying to figure out what renovations it needs. It's a 4 bed 1 bath in cottonwood heights. No garage!
We are thinking 2 bed 2 bath, 1 car garage. The garage had been converted to a room for storage.
We plan to live there a year and then rent it.
Any thoughts on the best way to configure this little 1600 sqft place?
@Brent Fisher congratulations!! I don’t know the area or the home, but think about why it was built/configured the way it was and what would make it more valuable. I’m working on a home in a retirement community now that had barely been touched in 40 years. There’s a lot I *could* do to it, but I ultimately decided that the main value to be unlocked was in making it not look like and feel grandma’s house anymore. Good luck to you!
Yeah, that's a pretty big value! For us, since we'll be living there, we feel like it needs another bathroom and an owner's suite that connects to a bathroom.
We checked out building a garage. It would cost 60-70K. That brings a value of 20-25K. Hard for me to pull that trigger!
So, now it looks like we'll be moving in with nothing doneso that we can get this house on the market in primeseason.
We're using Monday.com to track everything to prepare, and it's nearly 200 items! Man did I under-estimate that!