Funding College: 529 Plan or Rental Properties?

Is the 529 college savings plan no longer the best option to fund college?

Buying an investment property can be a great way to fund college for your kids. Just like a 529 plan, there are tax advantages to owning rental properties.

With a 529 plan, you have to deplete the asset and cash out the investment to pay for college expenses.

With a rental property, you have the flexibility to either sell/deplete the asset OR fund college with dividends (rental income) that the property generates.

Ok, I'm about to get technical but there is good information here. Stay with me.

If your kids are 3 right now, in 15 years you could either:

1. Save $1,250/mo in a tax advantaged 529 plan at a 6% ROI which would grow to $363,523 principal balance. When it comes time to pay for college, you would need to actually deplete the asset to pay for the expense. $225,000 capital invested over 180 months. The 529 can ONLY be used for college and certain education expenses. This also assumes you can save $1,250 every month for 180 months.

-OR-

1. Purchase a $250K rental property today. With a 15 year loan, the monthly payment on a $187,500 loan equates to $1,557/mo + $220/mo (est.) for taxes & insurance + $375/mo (est.) in management fees, repairs/maintenance, capital expenditures & vacancy (total PITI = $1,777/mo + $375/mo expenses = $2,152/mo in cash outflow). 
2. Let's assume you can rent out the home for $1,500/mo, this would yield a net cost of $652/mo to keep the rental property ($2,152/mo minus $1,500/mo income). Assuming an industry average appreciation rate of 3% on the house, the $250K home would appreciate to $391,858 in value over 15 years and the loan would be paid off to zero. 
3. Total capital invested = $179,860 over 15 years ($62,500 initial down payment + $652/mo expenses x 180 months). Total monthly cash flow (dividends) of $2,268/mo after 15 years since the rental income grew from $1,500/mo to $2,269/mo during that time (3% annual rent increase over 15 years). The rental property and income can be used for college or anything else you want. 

THE BOTTOM LINE:

Using a rental property to fund college as opposed to a 529 plan saves you $45,000 in invested capital, leaves you with $28,335 more in principal/equity to draw from, AND generates $2,269/mo in passive rental income without the need to deplete or liquidate your principal investment.