When long term real estate investors plan, it’s virtually always with retirement in mind. To show my command of the obvious, their goal is to retire sooner rather than later, with more income rather than less. Most folks assume there’s plenty of time to make their goals reality. Most of the time I find myself in agreement. Thing is, there are instances when their retirement timeline forces decisions they wouldn’t normally hafta make if choosing to retire much later. There are as many reasons for shortening the retirement timeline as there are people. Thing is, many of the hardcore deadlines have nothing to do with the investor’s actual retirement. Here’s an example.
Your Kids’ College Education
If they go to junior colleges then to four year schools for their degree, you’ll be gettin’ off relatively cheaply. Kids going to four year schools right outa high school can face some pretty steep tuition/boarding costs. We parents want the best for our kids, which presents the challenge. From where does that money emanate? From the bank of Mom ‘n Dad, that’s where. More and more parents are opting to at least attempt to pay for their kids’ college education lately. The very thought of an undergrad degree saddling Jimmy or Nicole with six figure student loans is depressing. Over the years I’ve spoken with investors whose student loan debt was barely south of half a million bucks. That’s exceptionally high to be sure, but holy cow!
The timing challenge comes when planning doesn’t begin ’til the kids are well into elementary school or beyond. Those with babies or toddlers will do much better starting at those tender ages. The real pressure arises when your sixth grader is not only demonstrably brilliant, but has already voiced excitement about college. At that point, many retirement plans hit the pause button. Multiply that by two or more and parents can easily find themselves between a rock and a hard place.
Filling the Gap
First off let me tell ya I’ve discovered no ‘go to’ formula that is universally useful. Here’s the thing — If you have $500,000 in cash to dedicate to your kids’ college expenses, AND you have sufficient time, you have a chance. But there’s the rub, again. Time. If you’ve been slowly but surely building your investment portfolio for several years, you at least have a leg up. You can switch agendas temporarily. Here are some options, though they’re not on everyone’s menu. We’ll assume the older/oldest child is 12. That gives you six years, Mom and Dad.
1. If you have any free ‘n clear properties, designate them for this objective.
2. If you have investable capital available, think notes.
3. Have stocks ‘n bonds? It probably makes sense to rethink how they’re being used. Will they contribute to the objective?
I’d also add the futility of the 529 plans available. Those are the gov’t plans allowing parents to save for college. As you might expect, they have limitations and various penalties/taxes that make it almost insulting. That’s just my opinion, but it’s based upon conversations with dozens of parents who’ve given up on that approach.
Debt free real estate can be utilized in more than just one way. If you know with relative certainty the cost of your kid’s education, you’ll be far ahead of most parents. A refi for tax free cash on one or more properties is the quick way to underwrite those expenses. However, if the Ivy League is on Johnny’s radar, you’re already lookin’ at over $75,000 annually, possibly much more. Even if you don’t factor in inflation for the years ’til he’s outa high school, that’s $300,000. If he’s 12 now, that’s $75,000 a year for four consecutive years, beginning in six years.
I know I keep piling on with the problem, but it’s only cuz it’s real. Even state schools can cost five figures yearly, and that assumes the whippersnappers are still livin’ with ya.
What if you took the refi cash from one or more properties and acquired discounted notes? The after tax monthly income can be banked for the six years ’til Johnny enters school. In that time period you can save quite a tidy sum. At some point you’ll have saved enough to buy even more notes, which bring in more (after tax) income.
More capital can be had if you own stocks/bonds that won’t cause a huge problem when they’re sold. What we must admit here is that most parents simply won’t have the initial capital needed, regardless of the source, to fund a high cost college education. This is especially true when beginning with only 6-8 years left. It’s gotta be very frustrating.
You can make a significant impact though, with this and other strategies available to you. Refinancing debt free investment property will surely generate some well found protests, but here’s something to ponder. When you decide to sacrifice however many years of your retirement plan in favor of your progeny’s future, you don’t hafta be on the long term losing end. In fact, if you decide to employ notes as at least part of your strategy, you’ll have created an additional, stand alone retirement income source. Furthermore, it’s an asset that will grow, relatively speaking, organically. They pay off, and you profit. You rinse ‘n repeat with bigger notes yielding more monthly income. When your kids get their degrees, you could find yourself not only smiling with pride at their accomplishment, but at the thought of retiring with your real estate cash flow AND note income.
As parents we want to do what we can. There are all sorts of strategies you can employ when bringing cash, equity, and income to the table. It’s a matter of what works best, given the timeline and available horsepower. The silver lining, the positive takeaway is that you can finance some or all of your kids’ higher education without sacrificing too much of your retirement. In fact, many will be able to have their cake and eat it too.
Photo: ralph and jenny