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Paying for Children's College using the Sale of Rental Property

quiachon408quiachon408 5 replies1 threadsRegistered User New Member
I have two kids, my son is graduating in 2020 and daughter is graduating in 2021. My son wants to study EE and daughter Science in order to apply to Vet School. Both should be able to qualify for merit based scholarships but what I was looking for is how to help our kids pay for any loans they will be taking to offset the rest of the costs. We have a beach house rental in NC that has about 100K in equity that is a vacation rental that breaks even between mortgage and other payments and what we get from rentals. We also have a rental home near where we live that we are renting out and it has about 100K in equity as well and is being rented and we are breaking even on that every month. What I am trying to figure out is should I sell the nearby rental within the next year to take advantage of not having to pay capital gains taxes (we moved out in 2017 so if we sell by 2020) or should we wait and let the kids take out loans and build up more equity in our rental homes so that 4-5 year later we can sell and have more $ to put towards paying off their loans.
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Replies to: Paying for Children's College using the Sale of Rental Property

  • rickle1rickle1 1867 replies16 threadsRegistered User Senior Member
    Interesting. That's really a function of math and risk. If you sell now, you save on tax but lose opportunity cost of appreciation. If you wait, you pay tax but potentially receive greater value for property. There is no right answer (or wrong). I tend to make those decisions with the "gut check". What feels right?

    A question I have is were you planning on selling those rental properties at some point anyway? If so, you're just speeding that up, taking the equity and moving on. If not (or not for a long time), perhaps there are other resources to leverage.

    Either way, it's an interesting conversation for this forum. I view it as equity is equity whether it be in RE, a brokerage account, or cash. The primary difference is liquidity. Others will take the position that you shouldn't have to sell a property to subsidize college costs. In reality, the equity you have in RE is no different then if it was sitting in a savings account. Just a different way of getting there.
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  • quiachon408quiachon408 5 replies1 threadsRegistered User New Member
    We were eventually planning on selling the rental properties when I retire in 11 years. The plan was to sell our primary residence 9 years from now and move into the other rental home for the next two years and then sell that so that we can avoid capital gains tax. We didn't set up a 529 for our kids but rather invested in real estate and planned to use the proceeds to help our kids pay for school that way. If we waited till 9-11 years from now we would obviously have more in proceeds from the sale of the two homes to help offset any loans our kids would have to take but we were thinking do we want to incur all the interest that the loans would build up during the years after they graduate. I am hoping our son gets an ROTC scholarship so that at least that would help offset costs for one of our kids.
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  • kiddiekiddie 3370 replies215 threadsRegistered User Senior Member
    If the properties are "only breaking even" then I would sell them and use the money for tuition. They are not a good investment, if they don't make you money.
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  • thumper1thumper1 74224 replies3247 threadsRegistered User Senior Member
    I can not quote this idea exactly as stated...but I’ll paraphrase.

    Do not do anything for college financing purposes that you didn’t intend to do anyway. In other words...if you didn’t plan to sell any of those properties...really really think carefully about doing so to fund college.

    If I were in your shoes, I would be looking at colleges that are affordable to you without selling either property at any point. How much in loans do you plan to take annually? Perhaps reevaluate that part of the plan. Find colleges where you will not need to take loans out in huge amounts.

    As noted above...if you sell now and have the profits sitting in some account (our in a shoebox, or under your bed...or wherever) this money will still be an asset...and will be used in the financial aid calculations. BUT it doesn’t sound like you are looking at need based aid at all...right?

    My suggestion...look at the amount you can reasonably pay for your kids to attend college...and go from there.

    One other thought...the anticipation is that your kids will enroll in college, and complete a degree, right? You are looking at four years of funding college for each...right? What happens if either...or both...leave college for any reason? If you sell one of those pieces of real estate, you won't have it.

    If we are voting...I vote for NOT selling.
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  • thumper1thumper1 74224 replies3247 threadsRegistered User Senior Member
    we would obviously have more in proceeds from the sale of the two homes to help offset any loans our kids would have to take

    Hmmm...do you know that your kids can’t take out HUGE loans themselves? Their limit for loans they take out in their names only would be the federally funded Direct Loans in these amounts...

    Freshman $5500
    sophomore $6500
    Junior $7500
    Senior $7500

    For a total of $27,000. That’s it. The loan payment on those is about $310 a month for 10 years. The should be able to pay that amount themselves

    Any loans in excess of the above amounts would be either co-signed by you parents, or taken out by you.

    Presumably your rental property nets an income. Perhaps that money could be used to help pay loan repayments when the time comes...or if you do sell...just pay off the loans then.
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  • mommdcmommdc 11336 replies31 threadsRegistered User Senior Member
    Both should be looking at instate public universities, especially if there is a vet school associated with it. For engineering ABET accreditation is important. If they get merit with their stats, even better. They both should maximize their AP credits, especially the pre-vet. Maybe she can graduate with the bachelor degree in three years. The engineering student might be able to do a coop semester which could help with job placement, and AP credit could enable him to still graduate in four years.
    If no affordable public universities are instate, then they can go to OOS where they get lots of merit.
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  • mommdcmommdc 11336 replies31 threadsRegistered User Senior Member
    edited August 15
    With the limited knowledge about ROTC that I have, it seems they get scholarships from the second year on. And have to do military service for a number of years. Does he want to do this? I believe there are some required classes they have to take.
    Also, my S's roommate got up at 5 am every day for a run before class, and they had some weekend ROTC activities, I think that would make it difficult for an engineering major.
    The vet student will have substantial loans for vet school. So another reason for both of them to look at affordable choices.
    edited August 15
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  • quiachon408quiachon408 5 replies1 threadsRegistered User New Member
    Agreed that finding an affordable school is important. My son wants the military experience and would like to join Corps of Cadets at VT as first choice. That being said tuition, room and board and fees is close to 30K a year. Army ROTC has 3 and 4 year scholarships that covers either tuition or Room/Board. They both are taking challenging courses in highly competitive Northern Virginia high school. Son has a 30 ACT right now and is retaking it in hopes of bumping that up to around a 32. My daughter has an extra year to figure out where she wants to go. She likes VT too but doesn't have to go there for undergrad. I understand that the kids by themselves are limited in loans that they can take. I think it may be smart as stated above to hold on to the properties as planned and help the kids with the loans down the road.
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  • momofsenior1momofsenior1 6971 replies49 threadsRegistered User Senior Member
    I'm also in the camp of not altering your investment strategies for college. Chase the merit $.
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  • kiddiekiddie 3370 replies215 threadsRegistered User Senior Member
    OP said the real estate investments were always intended to pay for tuition (instead of 529) and are not making her any money (breaking even), why doesn't anybody else agree with selling? The properties are currently mortgaged and nobody knows how much the properties would apreciate (or not) over the next 4-5 years in today's crazy real estate market.
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  • momofsenior1momofsenior1 6971 replies49 threadsRegistered User Senior Member
    OP said they weren't planning on selling until retirement in 11 years.
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  • quiachon408quiachon408 5 replies1 threadsRegistered User New Member
    kiddie wrote: »
    If the properties are "only breaking even" then I would sell them and use the money for tuition. They are not a good investment, if they don't make you money.

    We don't make $ monthly but build equity as our rents pay for the mortgage and taxes. Each year I hold the property I build approx 20-25K per year not counting appreciation. We live in Northern Virginia where Amazon will be bringing HQ2 20 miles away. We felt it was a good investment.
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  • thumper1thumper1 74224 replies3247 threadsRegistered User Senior Member
    Each year I hold the property I build approx 20-25K per year not counting appreciation

    If it’s not appreciation...how are you building this amount of money per year? Is it the rental income?

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  • kiddiekiddie 3370 replies215 threadsRegistered User Senior Member
    She is calculating the increase in equity from paying down the mortgage 20K a year. Since the rental covers the mortgage and tax payments.
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  • quiachon408quiachon408 5 replies1 threadsRegistered User New Member
    I overstated how quick the mortgage gets paid down...the mortgage gets paid down about 10 K a year since we refinanced the home to a 3.4% apr.
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  • thumper1thumper1 74224 replies3247 threadsRegistered User Senior Member
    Thanks @kiddie

    I still say...don’t sell now....mostly because there is no sure way to guarantee that the kids will actually stay in college. Stuff happens. Kids leave school for one reason or another.
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  • cinnamon1212cinnamon1212 344 replies4 threadsRegistered User Member
    Real estate is a risky investment. You can build equity but you can also lose equity. I don't know what the OP should do, especially with the Amazon factor, it depends, I guess, on their tolerance for risk.

    What happens if the economy tanks a la 2008, and people cut back on vacations, so the beach property isn't fully rented and is losing money? And the value of the house drops 35% and no one is buying. That's clearly a worst case scenario, but not out of the realm of possibilities.
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  • rickle1rickle1 1867 replies16 threadsRegistered User Senior Member
    I see it as a timing issue. Your plan was to invest in these rental properties to help pay for college. They are doing well. They can achieve the goal of paying for college now OR they can continue to do well and pay for college on the back end by repaying loans. So there is risk. What is the cost of the loan? How does it affect the overall return on the properties? How much extra appreciation will you realize in the 9-11 yrs? As an investment RE owner (commercial, not residential) who has seen both sides (the dream and the nightmare), what are your carry costs? Expenses for maintenance? What happens to return when a tenant leaves? (experiencing that right now unfortunately- I didn't plan on that many yrs ago).

    Weigh it all in the formula. Then do what makes sense / feels right. Money is money. Doesn't matter what form it's in. The human element will take over based on your risk tolerance.
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  • quiachon408quiachon408 5 replies1 threadsRegistered User New Member
    rickle1 wrote: »
    How does it affect the overall return on the properties? How much extra appreciation will you realize in the 9-11 yrs? As an investment RE owner (commercial, not residential) who has seen both sides (the dream and the nightmare), what are your carry costs? Expenses for maintenance? What happens to return when a tenant leaves? (experiencing that right now unfortunately- I didn't plan on that many yrs ago).


    We have minimal costs for upkeep of the property. I take care of small repairs any misc maintenance. We rent to military families only since we have a avenue to go against the renters if they don't pay. I can contact their unit and their command since financial debts can affect military Clearances and their career. So that being said, since we've been renting the property we are able to have 5-8 quality applicants when listed willing to sign 2-3 year lease based on their orders. If we hold on to it for 11 years we can potentially gain nearly 300K assuming current property values. If we sell now we'll make 120K if we sell it ourselves. Like you stated...its depends if we want to take the risk. We could experience more appreciation or we could see the market go down. Around here values fell about 15% during the 2008 recession but came back in 2013.
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  • rickle1rickle1 1867 replies16 threadsRegistered User Senior Member
    ^ Sounds like you have a good handle on it. (Great tenants BTW!) Factor in the cost of borrowing if you hold so you have a real apple to apple. At the end of the day, college costs what it costs, your assets are what they are (regardless of how they're invested), your debts are what they are. You can take form assets to have no debt or you can add to assets (by not selling - or investing elsewhere) and add debt. The variables are market return (including costs) and stomach tolerance.
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