Buying a Rental Property to Pay for Kid's College Expenses

[Gareth McEwan]

Hi All

I have the traditional 529 College Savings Plans for my 2 young boys. After doing some basic math, I can see that it won't come close to what they'll likely need in 15 years time.

I haven't yet started investing in real estate, and I had already planned on making a purchase this year.  Now I am thinking of running the numbers on a 15-year mortgage, as opposed to my original idea of a 30-year mortgage.  I recall listening to a podcast by Brandon Turner, where he mentioned he had bought a fourplex to pay for his daughter's college expenses when she was ready to go to college, so that's where my inspiration comes from.

So my question is, given that I am starting out and will use a 20% downpayment and financing for the rest, would you suggest I simply purchase the property in my name, and carry on business-as-usual?  My intention was to do that, then expect the property to be paid off (or close thereto) by the time my eldest goes to college, and then refinance cash out to pay for his college (or use the mortgage-free rental income to pay for his college).

However, a friend mentioned that the IRS would likely recapture the depreciation expenses at the time I intend to cash-our refi for the above-mentioned purpose (putting a sizeable dent in the net gain after all that effort). My friend also mentioned I should talk to my CPA about using an IRA to make the purchase. Thing is, I will need financing, and I would still like to see if I can receive some positive cash flow each month, and would generally like to have my way with the property (making the IRA apear too covenanted a structure). So I figured I would ask for input, advice, suggestions.

Any other approaches I should be considering to achieve the maximum net gain down the road?

Thanks a mil,

Gareth