My Favorite Quirky College Saving Strategy
My niece, Madeline, heads to the College of Charleston today. Good luck, Maddie!
Sometimes people don’t want to invest in a 529 college savings plan. I understand that thinking. Once college is over, the investment is gone and what does mom or dad have to show for it? Hopefully you have an educated child with a good enough job to afford a really big house. They might even let you sleep in their guest room if you’re lucky.
What if there was a way to save toward college but keep the investment AFTER junior finished graduation? Wouldn’t that be cool?
There is such a beast, but there are caveats, as there are with any investment:
First, you have to be interested in rental real estate.
Second, you have to have enough money for a down payment on a piece of property.
Here’s how it works:
Find a house near the school junior plans to attend. Make your best deal for the home. There are plenty of sites that discuss how to purchase rental real estate. I recommend you read Paula Pant’s story Is This House a Good Investment at Afford Anything.
Interest rates are low now, so this is an especially good time to jump on this strategy.
Complete the purchase and perform any needed repairs to rent it.
Ask junior if any friends would like to live in the house with him/her. If not, place an advertisement in the local newspaper and on Craig’s list. PT Money recently ran a good story about how to check the credit of your renters (read Find a Tenant: Credit Check and Screening). The kids might not have any credit, but mom or dad probably do.
Rent the house for enough to cover the mortgage costs and upkeep. Even if junior’s friends become your renters, make sure everyone pays a security deposit and signs a lease. Keep it professional.
…and here’s where it gets fun.
Hire junior to be your property manager. For this to work, JUNIOR MUST DO SOME ACTUAL LABOR. Make a list of official duties, create a pay scale, and have junior sign an employment agreement.
Pay junior a wage. You may want to hire a local payroll firm to deduct taxes and create an actual paycheck (this service costs far less than you’d imagine). If he does well, give him bonuses liberally.
Junior uses the wage to pay tuition costs.
At tax time, claim the rental house income and expenses on your taxes. This includes the cost of junior’s labor.
Why this works:
You’re receiving a huge discount on your college expenses AND collecting any excess rent plus keeping any appreciation on the property.
Junior, at best, is collecting the wage while in the 10% tax bracket. You’re probably in the 25% bracket if you’re like most people who read financial blogs. You save 15% off the cost of your college simply by paying junior to take care of your property for you, plus you have a built-in manager (no real out of pocket additional expense…you were going to have to pay that money out anyway for school costs).
Additionally, you receive MORE savings off of the education expense because you’re deducting junior’s salary as an expense from your taxes.
I need to be 100% clear here: this can’t be a tax avoidance strategy. You’re asking for an IRS audit that you’ll lose if you simply buy a house a funnel funds for junior’s college through your property costs.
Your goals should be: 1) own rental real estate; 2) make a gain on your investment by deducting all legal costs of owning property; and 3) employ junior for a fair wage as he/she heads to college. If junior uses this money for school, great.
If not, you’ll have other ways to make your child sorry they didn’t listen to a good parent’s advice!
Photo: College: 401k 2012