So many of you are either in your last year of high school or recently graduated and you’re trying to figure out how exactly you are going to pay for college.
If you are anything like I was, you haven’t been the most diligent student and haven’t really taken the necessary steps to position yourself as “scholarship friendly” and are now feeling a bit uneasy about the reality that you may need to go into debt in order to make your undergrad happen.
Don’t feel bad!
The vast majority of people face the same issue.
The truth is, you either need to be a super proactive individual, starting early on to make sure your grades are close to perfect and that you have a very well-rounded routine of extra-curricular activities, or you need to be someone with an incredibly powerful story of overcoming some major life setback (coming out of poverty, being an orphan etc.) otherwise, you don’t really stand a chance for scholarships!
It was this very reason why I’ve personally stayed away from getting my degree for so long. I had mediocre grades, I thought the whole high school club scene was lame and I arrived at graduation facing the reality that I was going to have to either pay out of pocket, or go into debt in order to get a degree.
So I didn’t.
But through studying, I’ve realized that there is a better way to pay for school that doesn’t rely on mortgaging your life, or working 2-3 jobs to fit the bill. This is what I want to share in this post:
How Investing in Real Estate can Pay for Your College Tuition
The following information is pretty powerful if you do it right. I wish someone had written this when I was looking to pay for school. So, please, be generous in sharing and passing it on. With that, let’s dive in!
The Ground Work
So there are some basic things about real estate you want to learn about before you go out and purchase your first investment property, however, we don’t have time to discuss those here. My suggestion is to begin here, and go down all the rabbit trails you possibly can.
With that said, what I’m going to show you is how using real estate, moreover, being a landlord can be an incredible means to pay for school.
The best course of action for this, in my opinion, is to purchase a small 4 unit apartment using a conventional FHA loan, so that you only need 3.5% of the down-payment to get the property financed.
Initially you are going to live in one of the units while renting out the additional 3 (living rent and mortgage free mind you) for the first 2 years. Then in the second half of your studies, you are going to move out and rent out all 4 units.
You’ll be saving ALL of your net revenue in the process and a year and 1 month after you graduate, school will be completely paid for.
Don’t believe me?
How Much does a Bachelor’s Degree Really Cost Me?
The average bachelor’s degree consists of 120 credit units. On average school tuition costs around $500 per credit unit. So if you divide 120 units over the duration of 4 years, you get 30 units per year, and there are typically two semesters per academic year, so 15 units per term.
15 x 500 = $7500 per semester, multiplied by 8 (two terms for four years of school) and you end up having a total payment of $60,000.
My initial suggestion is to fill out your FAFSA and see if you can get any scholarships (obviously).
The next step is to exhaust the amount of federal and state student loans you can get (there are some called “subsidized loans“ that the government won’t charge interest on until you’re out of school. Those are the best option and exactly what you want to shoot for, but there is a possibility that you may not qualify. Even so, with the other government funded option being an “unsubsidized loans” typically the interest rates they charge are very minimal. For more information click here).
Go ahead and pay for school using your government funded student loans.
I know it sounds counter intuitive, “Go into debt but you won’t actually be in debt”- trust me! This is leverage, not debt. You’ll see, just bear with me!
Before You Start College, Work Like an Animal!
So we are going to be purchasing an investment property prior to enrolling in college, right?
That means you need a couple thousand dollars for a down payment!
How? Good fashion hard work!
Let me introduce you to your property (now I’m in the San Francisco bay area, so the following numbers are most likely going to look completely different than properties in your market. Just look for the principles and apply them to your situation) and show you how much you’re going to need to get started.
Property Address: 123 Awesomesauce Lane, Oakland CA 94605
You’re listing price is $390,000.
3.5% of $390,000 is $13,650 for a down payment.
So you need to have in cash $13,650 in order to get the financing to make the offer on this 4 plex.
Work a Few Jobs…Period.
If you are like how I was when I was fresh out of high school, you probably don’t have any work experience, so you may need to work several jobs in order to make this happen.
What does that look like practically?
Let’s say you could only get jobs starting at $10-12 an hour.
To factor in taxes let’s just say your taking home $7.50 -10 and hour.
Your first job starting out is at Wendy’s (don’t hate! That was my first job… and I almost got fired from it too! lol)
so $7.50 x 40 per week (a full time schedule) = $300 a week, which is $1,200 a month.
You work here Monday – Friday from 8am – 5pm.
Next let’s say you were smart and during the final few weeks of school you took some classes to get your security guard license (it only takes one day of training typically for you to be ready for the exam and bank of Mom can probably fit the bill if you explained why you were wanting to do it) and your background check and license has come in and you’re ready to start applying.
You get a swing shift job for a security company starting at $11 per hour, so let’s say your take home is $8.50.
$8.50 X 40 = 340 per week, $1360 per month.
You’re hours are Monday – Friday from 6pm - 2AM.
Already you`re at combined total income of $2,560 per month, which if you’re still living at home, is something you should be able to save the majority of.
The final addition to this, is on the weekend be proactive about odd side jobs you can do, like mowing lawns, washing cars, stenciling house numbers on curbs etc. to make a few extra dollars.
One brilliant idea is if you troll the free section on Craigslist, (at least in my area) you can usually find items that you can turn around resale as is, right back on craigslist.
If through odd jobs you can average an extra $300 per weekend that would bring your monthly income to $3,760 (300 x 4 weekends = $1,200) and if you saved EVERY penny, you could have your down-payment in 3 and half months.
Now you may want to breath a little bit, and possibly take the first semester off and start school in the Spring in order to have a life (and sleep).
I’m just trying to show you that if you’re determined, you can make it happen pretty quickly.
Okay – I Have My Down Payment, Now What?
So now it’s time to sync up with a lender who is savvy with FHA financing.
Once you get preapproved for your amount (our example property is listed at $390,000 remember? Also, you may need your parents to co-sign in order to get approved) you then simply shop around.
So, for our example, let’s say you found 123 Awesomesauce Lane, in Oakland on Realtor.com and it was listed at $390,000.
You thought it looked promising, so you decided to run some numbers to find out if it was worth pursuing or not.
You found out that rents in the area typically go between $1850 – $1900 (This is realistic I promise: here) and you have your uncle, who happens to be an home inspector, check out the property and it turns out to be top-notch condition and it could easily rent out for $1900 per unit.
Well as per the requirement for an FHA loan this property has to be your primary residency for a minimum of two years, so you`re going to live in one of the units and rent out the remaining 3.
$1900 x 3 = $5,700 in gross monthly income. You’ve been hanging around the BiggerPockets forum and you know that, at the least, you want to take out 50% for expenses, repairs and etc. not including debt services (mortgage payment).
As for determining the mortgage payment, you’ll have a better idea after speaking with your lender, but I ran the numbers in a mortgage calculator online just to get a ball park and at 5% interest, it came out to $2426.58 per month.
So Here are the Numbers:
$1,900 x 3 units = $5,700
$5,700/2 (or x 0.5)= $2,850
$2,850 – 2,426.58 (mortgage)= $423.15 total ($141.05 per unit, per month).
So, you determine this is a decent deal, and you move in and begin school. At this point, you are now living mortgage free, going to school and working only part-time to cover your living expenses and enjoying life.
The First and Last Set of 2 Years:
Like we said near the beginning of this post, for the first two years, you are living in the property, one to satisfy your FHA requirement and secondly, because it’s a great money saver.
During the first 2 years of school, you have saved ALL of your net income from the property (24 months x 423.15), totaling: $10,155.60.
Now, you decide its time to just bite-the-bullet and work full-time while going to school full time, so you can afford another place (or if mom and dad are nice, they can let you move back home) so you can rent out your fourth unit.
Why would you want to do this?
Well, let’s take a look:
After you move out your rental income increases to $1373.42 per month ($343.35 per unit, per month).
$1,900 x 4 units= $7,600
$7,600/2 = $3,800
$3,800 – $2,426.58 (mortgage)= $1,373.42
That’s a WHOLE lot better than what you were making per month the first 2 years!
The last two years of school, you again save ALL of your net income and you’ve now accumulated (24 months x $1,373.42) a total of $32,962.08 on top of the $10,155.60 for a complete total of: $43,117.68!
So as of graduation, let’s say you finished your degree with $60,000 (as we determined above as the average tuition cost in most schools) in subsidized and unsubsidized loans. You now have $43,117.68 of it paid for, just like THAT (*imagine snap-of-finger-sound here*)!
Remember above I said after a year and 1 month after you graduated, your schooling would be paid for completely?
Let’s run the numbers:
$60,000 – $43,117.68= $16,882.32
$1,373.42 x 12 months= $16,481.46
$16,882.32 – $16,481.46 = $401.28
One more month of $1373.42?
What happens? #DEBTFREEE!!!
Now Here’s the Kicker: Appreciation
Now I’m not one for gambling, and investing based on appreciation is gambling.
However, if you are conservative in your estimation, something really interesting could happen with our little property at 123 Awesomesauce Lane.
You see, it is typical for real estate properties to go up in value over time.
Banking in on this is dangerous because you never know if the market is going to tank or what-have-you, but over the long run real estate has always gone up, historically.
Remember that the home value of your property was $390,000 when you bought it?
Conservatively, let’s say the property value appreciated around 4% per year during the 4 years you were in school.
$390,000 x 0.04 = $15,600
$15,600 x 4 years = $62,400 in additional equity, not including the amount of the loan you’ve already paid off!
So, if things were looking good, you may decide to sell the property at graduation, and chances are you’d have enough equity to cover school costs and then some!
Then all the cash flow you’ve saved up, that $43,117.68 could be used as a down payment for bigger and better real estate investment (or a killer road trip to celebrate you graduating debt free!)
Which route would you go? Banking on your appreciation or continuing to hold the property for years to come?
Be sure to leave your comments below!