Future cash-flow to fund kids education

[Sunny Karen]

Hello BiggerPockets community,

I wanted to get some feedback on my strategy to fund my kids education using real-estate. My older one is ~14 years away from college and younger one is ~18 years away from college (if they decide to go).

I am targeting the Tulsa & OKC metro area. I have a few new construction duplexes I am evaluating.

Cost for 4 duplexes (8 doors): ~$1.32M

Gross rental yield today: ~130K/year

With 40% down-payment (I know it's high) and 6% interest for 15-year term, I will be breaking even on cashflow today or slightly negative (<$3000/year).

Assumptions: 10% vacancy, 10% maintenance + capex, 10% property management and PITI: 100K/year.

I am not worried about cash-flow at this time and can cover expenses with W2 job.

In 15-years, the hope is that the homes are full paid off and at that time we will have:

- 100K/year in net cash-flow assuming 1.5% rental increase/year. This should cover college expense per/year and the kids are spaced out by 4 years.

- 1.8M in equity assuming a 2% appreciation.

This requires us to put down ~$550K today to make it happen. The CoC return initially is non-existent, however it does result in ~40K/year in mortgage pay down. And if the rates decrease to <5%, we can always refinance and pay-down sooner with the generated cashflow.

Any one doing something similar for kids education and long-term wealth building? Any risks to consider?

[Jonathan R McLaughlin]

@Sunny Karen sounds like a great plan and very workable. A couple of thoughts:

1) I would probably opt for 30 year and paying more than you have to for the emergency flexibility you mention. It is a long time till kids college. What if you lose the W2. You want this to be truly self-sustaining, yes?

2) Not sure what the loan structure is, but you may want to make sure you can separate the properties easily if you want to sell one.

3) Consider putting down just slightly less (in combo with above?) and keeping an emergency fund in a liquid high yield account...you mentioned not being able to cover a big emergency.

4) I would look into life insurance/upping disability policies for you and your husband if you don't have already timed around the mortgage. Terms are incredibly cheap and its an added layer of protection

5) Consider channeling some of the positive cash flow from these into 529 plans for the kids. A good accountant could let you know how much of a benefit that could be. If you find yourself wanting to sell early each of you is able to fund those 5 years in advance at 15K a year each. So that could be a powerful tool

6) Consider the future potential of condos in the duplexes...not sure of the way your market works, but the world is kinda going that way. The ability to condo would allow you even more flexibility to sell pieces. You could even consider doing the docs now, etc. 

7) keep an open mind about the tactics of selling/exchanging early. 15-18 years is a long time, and you will be near the end of the baby boomer bubble. If you find yourself with a great deal of equity, you may want to capitalize on it. Strategy and goal can remain, but tactics can shift.