The baby’s college fund
August 30th, 2006 by KenricI had this conversation with a co-worker about 3 years ago. He had just had a baby girl and was telling me how he and his wife are saving $400 a month for her college fund.
“We are putting $400 into the S&P 500 index mutual fund every month”
“Jason, with an 18-yr timeframe I would purchase a decent home in a good neighborhood and rent it out. This townhome here is $180,000 and rents for $1,500/mo. You would probably be negative $200 a month, but you can cover that since you are saving $400 a month now”
“But what if it goes unrented? We can’t cover the whole mortgage.”
“True, you should save a few months and have a reserve fund for your property. But do you understand that if you buy this property that someone else is paying $1,500/mo towards your daughter’s college tuition and you are paying $200/mo only? You can still put $200 into that index fund.
While it’s true that most of that $1,500 is going to interest, that will change in 10-15 years. In 18 years if this townhome has not appreciated at all and is only worth $180,000, you will have $70,000 in equity. On top of that you will probably be cashflowing in 3-5 years so you can continue putting your $400 into that index fund.”
“Yeah, it certainly sounds good, but I don’t know about real estate investing”
That was in 2003. Today that townhome is worth $320,000 (I should have bought it!) and probably rents for a little more than $1,500. His daughter’s college fund would be at $140,000 today and would keep growing with no money out of his own pocket.
I know someone who uses this strategy by buying one property for each kid as they’re born. Even with housing’s up and downs if you’ve got 18 years before you need the money I feel it’s a no brainer.
Posted in Real Estate | 3 Comments »
Stumble it!
Unfortunately,
That ignores some of the biggest costs of investing in real estate:
1. Time (when you have young children, this is very valuable)
2. Repairs (count on 2-3% of purchase per year)Tenants do break things and things do wear out
3. Insurance
4. Vacancy (usually should be averaged to 10-15% based on your area)
Real estate investing, like any other investing is for the capital gains. Anyone who tells you it is for cash flow is trying to sell you a book.
By John Doe on Aug 31, 2006
John,
Time can be saved by using a property management company.
Repairs will always be there. You can minimize initial repairs by purchasing new construction or newer homes.
Insurance was included in my calculations
Vacancy is always an issue, but if you use 10-15% in your calculations you should be fine.
I disagree with you on the last statement. Real estate investing is for both. I would say that at the beginning when you are starting out and getting $100-$200/mo on a single property that the bulk of your return will come from capital gains. However, later on when you have more property or move to multi or commercial, your cashflow will become significant.
I always look for cashflow first. I don’t want to have to fund my properties at all after I put my downpayment in.
By monarchcrest on Aug 31, 2006
Meanwhile, the actual baby fund is at $15K.
By knuckle_headed on Aug 31, 2006