Here’s the basics: We own an LLC that buys, renovates & manages small apartment buildings. According to the FHFA webpage calculator the equity is $850k. I’ve read here that taking 20% off for “quick sale value” is standard, so that puts our equity at $600k. The largest building that holds 2/3 of that equity is “commercial”, in that it is more than 4 units and would not qualify for a residential loan. I read in a thread that might make a difference in how it is counted.
We own no other personal real estate, we live in one unit in one of the buildings, so we can’t even put down rent as a personal housing expense. Though we are in our 50’s we have only about $100k in retirement accounts, the business is our retirement plan. Our income varies according to the LLC expenses and the profitability of another small business, last year was $115k, 2014 was $98k. Our son is applying mostly to Profile schools and we essentially have no protected assets at all. Our daughter is 3 years younger so overlap will be only 1 year.
It looks at first pass in the calculators like we’re not in good shape for financial aid. Does anyone have a clue what can we expect? Will they try and treat the LLC as a passive asset rather than an active family business? I qualify as, and have filed taxes as “Real Estate Professional”, I have no W-2 income at all while my wife has a full time job.
We’ve been pretty discouraged at what we’ve found out so far, a lot depends on how the LLC assets are valued. Any insights or tips would be appreciated.
This is a questionable practice. Assets should be valued based on fair market value. There is nothing in the FAFSA or Profile instructions that mentions anything about “quick sale value,” and from what I have learned it is not anywhere near a “standard” practice.
I think you already have the answer to that, based on what you’ve seen on the calculators so far. The bottom line is that investing in real estate can be very detrimental in financial aid calculations.
The net price calculators will likely not be accurate for someone with real estate other than their primary residence…and also for business owners. Both are the case for this poster.
What is your AGI? What is your gross income?
Is your kiddo applying to colleges that require the CSS Profile?
The FHFA figures can be tricky,rather broad for an area. I used them to my advantage (we bought very low,) but overlaid with a very realistic assessment of real market value, as of the date of filing. Bottom line: you need a defensible figure for your own properties in your specific selling area, their warts, their assets, and the housing market in those neighborhoods. Based on my own experience, even that 850 number may be low.
The principle isn’t to go deduct 20% off the top. For what? Just because you “can?” No. Instead, you assess what would cause these specific properties to have more/less than some outside-predicted value, some random number manipulation, were they to go on market now.
Unprotected assets are considered tappable. What you may be able to do is ask for Professional Judgment, in which the college goes back and looks at your figures per your own context. To get a better idea, you may want to speak with a few college FA folks, pick their brains, see their reactions. It is possible you would get some break, but we don’t know this.
Other than that, you look for schools which offer merit awards or are not “meet full need only.”
Those Profile schools will include the equity in your rental properties as assets. @BelknapPoint does it matter at all that this is a LLC? In addition, the income generated will be income.
It sounds like you were hoping for need based aid for your older child. Really, at a $100,000 income and the assets you are listing here, I am not sure that is something that is going to happen. Schools give need based aid for students who don’t have the income and assets you have. Colleges do not give need based aid so that families can keep high value assets. That is not the purpose of need based aid.
Has your son looked at schools where he could garner significant merit aid for his stats? That would be exclusive of your income…merit is based on his academic strength…SAT or ACT scores and GPA. Perhaps a couple of those schools should be in the mix.
Net Price Calculators are on each college website. They give an estimated amount of aid plus an estimated net cost. BUT in your situation with the business and the real estate other than your primary residence, they won’t be particularly accurate.
Does your son know the max amount you can realistically contribute annually? That is a more important number than any other number. He can apply to some schools with the understanding that the net cost has to come in at a certain number…or the school cannot be considered.
if your equity is $850,000, that is the amount you will use. The Profile will ask the current value of the properties in one question…and the loans outstanding on them in another.
Go out to the web sites of the schools in which your student is interested and look for the Net Price Calculator (usually under Financial Aid). Each school will have a different calculation based on their available aid.
Time to have a convo with your son and adjust the school list.
Tell your son how much you CAN pay, which is likely much less than what CSS schools will expect. Then tell him he must apply to AT LEAST 3 schools that you know you can afford because of ASSURED merit scholarships and your affordable contribution.
If your son isn’t careful, he could end up with NO affordable schools. Make sure he understands that HE can only borrow $5500 as a Frosh.
If your son balks at applying to a few affordable schools, insist on some “parent pick” and identify some schools that will give him HUGE merit for his stats so the remaining costs are what you can pay.
HOw much can you pay each year?
@“Erin’s Dad” The NPCs will not be accurate for this family because of the business.
You should use that form to calculate your LLC net worth and go from there.
You mean you have the LLC and another small business that is not part of the mentioned LLC?
How much income does the LLC generate and how much income does the other small business generate?
Your situation is probably not much different than the situation of a person who makes $115K/year and owns a residential home with $850K in equity. Or it could be better under the FA office view if your LLC provides a large part of your income.
Thanks all. Let me try and answer some of these. We are applying to a range of schools, some in state Public, some out of state Public, some private stretches, some private not as much. We have a handle on that part of the game, this net worth part is the hard to solve problem because we’re such outliers in our structure.
The LLC provides a varying amount of income, depending on rents and renovation expenses. This year it might go as high as $30-40k. My other business is consulting type, net income can vary from loss to $50k, though the latter are rare.
It makes sense that something needs to come off, it’s not like there’s no costs to selling property under the best of circumstances. What I can’t figure out is why does a family business that makes widgets get treated differently than one that actively manages real estate? It’s ridiculous to treat it like it’s a liquid asset like a stock, especially if it’s an incorporated business that provides part of our income.
As for the FHFA calculator, I had read it was what the schools used. What do they expect us to do to come up with unassailable values, to pay for appraisals? Zillow is less than useless for multifamily properties if they’re listed at all, which the commercial one is not. Even the city assessments are screwy, I have an appraisal for one from 2012 that is 60% what the city is claiming, and that’s after a tax appeal got it lowered. Another 2012 appraisal is 56% of current assessment. Does anyone know what actually happens when they want to double check your values?
In one of your posts…didn’t you say the value then was $600,000 or so? Assets for FAFSA purposes are assessed at 5.6% of value. So…that would add over $30,000 to your family contribution…and that doesn’t include,use your income.
I think you are doing the right thing by casting a wide net. But please do let your kiddo know your budget. If you have to come in below a certain number, the student needs to know now that any college with a higher price will need to be taken out of consideration. Better to know that now.
Oh…and those Profile schools…they can assess assets at any %age they choose. Ditto things like home equity, and assessment on secondary real estate,
The IRS is not FAFSA or Profile. Find the quick sale value in the FAFSA or Profile instructions, and you’ll be my hero.
They don’t expect an “unassailable” estimate of value, nor do they expect you to pay for appraisals. Make an educated guess of fair market value based on your professional experience. It doesn’t need to match Zillow, and it most certainly doesn’t need to match the tax assessed value. Yes, there are costs to a sale if you are liquidating real estate to pay college expenses, but the forms are geared towards simplicity and can’t take every variable into consideration.
Unfortunately, Profile colleges aren’t looking just for liquid. They can count even cases of trusts where you cannot access the funds until some future date. They can cause issues for siblings who own property together, even that which cannot be sold yet. And second homes under water. Over time, we’ve seen these issues and others on CC or come across them via our own research in FA advice sources.
“Qualified” retirement funds are the only usually safe assets.
On the Profile, you enter figures they ask for. Market value, amount owed, whatever it is. Yes, it asks for several figures, but all to get to a Net. The FHFA is a broad figuring by state, year/quarter bought, various calculations for growth and loss in that area- not the value of your individual property. When you buy at fire-sale prices and rehab, it can’t accurately reflect market value.
(Nor is what the city or town assesses you for. That has it’s own formula and purposes.)
I’d really think, as an investor, you probably have a good idea of the present worth. Where you have some play is where the condition of the property would bring a sales price down, on the filing date. This is different than a theoretical Quick Sale calculation for IRS purposes. It’s more an “As Is” figure. Roof leaks? You know you usually have to discount for that. And other things.
What you want isn’t exactly “unassailable,” but rather “defensible.” The only unassailable is the price it does sell at.
I’ve found at least 3 FA counselors online supporting this position. Surely the name of this game is coming up with a plausible, defensible methodology?