Determine financial aid impact of home or rental property?

I know that some colleges assess equity at a high rate while others do not consider equity at all. Some of that info is available on EDMIT but it is a limited list. Are there any other lists or calculators that show how each college assesses equity?
We are low income, about $35,000 a year but our home is valued at $462,000 due to a housing boom in our area. We have about $70,000 left on the mortgage. We also have a rental property worth about $225,000 with $5000 left on the mortgage. We’d like to target schools that won’t penalize us for trying to pay off the mortgage before we retire (we are 58).
Thanks!

While time consuming, your best bet is going to be running the NPC for each college you are considering, even though the rental property will make the results less accurate. You are right in your assessment that not all schools consider equity in the PRIMARY home. The vast majority of profile schools will consider the equity and rental income for the other property. You may also need to call some financial offices and ask.

1 Like

Yes, plus the rental property equity has to be reported on FAFSA, so make sure to include it when completing that. Here is a FAFSA EFC forecaster (you may need EFC for some NPCs)

Your earned income is 35K PLUS the rental income? Or is the rental income your only source of funds? And other assets in the picture?

We are self-employed so the majority of our income comes from our family business. The rental brings in $850 a month but it is an old farmhouse that always needs work so it is not particularly profitable. 35K includes the rental income (or loss depending on the year). No other assets.

Apart from the financial aid complication- have you calculated whether it’s worth just selling the rental property if it’s not “particularly profitable”? You’ve got a significant amount of your net worth tied up in a property which isn’t particularly profitable- would you do better stashing the money in a mutual fund? If repairs eat in to your profits- what’s the financial upside in keeping the rental property?

2 Likes

Your other thread has some answers to this question.

https://talk.collegeconfidential.com/t/most-accurate-financial-aid-calculators-edmit-tuition-tracker-college-raptor-net-price/

Most Profile schools are going to assess a portion of your equity (half a million dollars, right) as part of their calculations for institutional need based aid. IIRC the schools assessing the least or no equity are the most competitive for admissions…so your student would need to clear that bar first.

Adding…if you are self employed, please keep in mind that there are deductions allowed by the IRS for tax purposes that are not allowed for financial aid purposes. They will be added back in as income.

How much difference is there between your gross income and your AGI?

2 Likes

Gross income from Schedule C line 7 was $92,374, business expenses were $53,721 so our profit was $38,653. Our AGI was $33,557. The difference between gross income and AGI would be $58,817. The difference between gross profit and AGI would be $5096. Not sure which you were looking for.

Honestly, there is no financial upside in keeping the rental. Our tenants husband died a couple of years ago. He was in his 40s. She is a responsible tenant and a lovely person and we just haven’t had the heart to kick her out or to raise her rent.

If your student is applying to a CSS profile school they may ask for business details and add some expenses back in.

Also if you have a business loss they can add the loss back in on the assumption that losses are often paper losses like depreciation. That happened to us.

You can always appeal and show that the losses weren’t paper losses but actual expenses, though.

Also you can appeal their assessment of your primary home equity. We did that successfully given high home value appreciation but relatively modest income. I think you would have a strong case for that but of course there is no guarantee.

Just as an FYI. The EDMIT site listed Bard, Connecticut College, Gettysburg, Hamilton, Occidental, Rhodes, RISD, Santa Clara, Stonehill, Ursinus and Whitman as some of the schools that do not consider home equity.

Be careful. Certain types of businesses are reputed to take in a lot of their income in cash, under the table, and colleges know this. Also, rent of $850 on a property worth $225K is going to look fishy, too (although your explanation sounds reasonable, but financially very unwise, especially for a family that reports such low income).

That rental property is being rented for FAR less than the carrying costs of a 30 yr mortgage on 225K plus the property taxes, insurance, and maintenance. Of course, the mortgage was probably on a much lower purchase price, over 25 yrs ago, if all that’s left on the mortgage is 5K. And assuming that you’re running a family business in which you both work, income of 35K is hard to believe, too.

If I were a financial aid officer, this one would have a BIG flag on it, for closer examination. However, leaving that aside, you might want to cash out refi the rental property, and pay off the mortgage on your house, since all schools will look at the equity in the rental property as being fair game for paying for college, but are more likely to discount the value in your primary home. Also, if you have other debt, like car loans and credit card debt, it would be a good idea to pay those off too out of the cash-out refi on the rental property, and make any necessary purchases out of that money. You do not want to have money sitting in the bank - that is dinged the highest - and you don’t want money in your child’s name, which is dinged even worse. If kid needs a computer, cell phone, whatever for school, buy it out of that cash-out refi money.

You should seriously think about changing how you’re running that rental property. Please, if your income really is that low, are you in any position to be supporting the tenant like this? In general, a rental property is an okay deal if the annual net on it (rent minus maintenance, property taxes, insurance, plowing/mowing, water and utilities that you have to pay, if any) yields approximately 10% of what the property would sell for today. Some might consider buying a property with the expectation of tremendous increase in value with current rents yielding as low as 5% of the purchase price, annually. We actually look for properties that would annually yield 20% of the selling price, although that’s tough to find nowadays. We have not raised our rents to what the market will bear, more like 90% of the going rate, and yet our current net yield on our properties is approximately 13.5%. If your rental house is really worth only 225K, and assuming that after property taxes, insurance, water and utilities that you pay, and maintenance, you net $7500/yr out of it (and I suspect it’s more like 5K/yr), then you’re essentially only netting 3% of the purchase price, today. That is a terrible yield. I suspect that if you were to compare the rent for that house to equivalent houses in your area, they would be going for at least double the rent that you’re charging, maybe more. Time to sit down and have a serious discussion with your spouse about how to move forward with that property.

Parentologist is very wise. Worth a close read, OP, even if the message is hard to hear.

Put another way- it’s unbelievably kind and generous for you to be subsidizing your tenant’s lifestyle. Who is on the hook to subsidize your kid’s college education? You guys. The college, if you get institutional aid. The federal government (i.e. all of us) with loans. And after that- nope, nobody, nada.

You know your financial picture better than a bunch of strangers on the internet so I don’t presume to know more than what you’ve told us. But it’s worth a complete look at your financial picture, retirement plan, risk profile, etc. to get a handle on things before you get serious about college. Targeting schools which won’t penalize you for the rental property is one thing- but you may not have enough cash flow (or borrowing power) to pay your EFC even at a mega generous school. And then what?

I’d start seeking out Merit schools as well to get a handle on what those numbers look like. Sounds like the rental property is a bit of an albatross even without the financial aid complication.

Thank you everyone for putting the time in to answer my questions. I can’t tell you how much we appreciate it. We bought that rental house for $92000 in 1995. It was our first home. That said, Parentologist, you are absolutely correct, it is not a wise investment. Thank you for laying it out so plainly.

Just an addendum for others with the same question. EDMIT does have a limited listing of schools and the amount of home equity considered in their financial aid calculations. Google “EDMIT home equity”.
Alternatively, to get an idea of how home equity might impact aid, plug the figure into the net price calculator and run it and then leave it out and run it again to see how the financial aid package might change.

That’s a LOT of deductions…I would imagine those business deductions will be looked at very carefully.

I agree that looking for schools where merit aid is highly possible is well worth your time.

1 Like