So your child has grown and you're getting ready for her/him to head off to college. Certainly a bittersweet time in your life as a proud parent. Your "baby" is starting to be an adult, moving out of the house and learning to make decisions in the "real world." And you are gaining (regaining) some of your personal space. This is definitely an anxious time in your life. And then you think, "How am I going to pay for all of this?"
It is estimated that the average cost to a parent (not the total average cost) to send a child to college in Florida is roughly $20,000 per year. Many kids are working and earning money and I suspect that is why this average cost to the parents is not higher. So whether the parent is sending $20,000 ÷ 12 = $1,667 per month for tuition and rent, or for food and transportation, or for entertainment or whatever, the average parent is spending $1,667 per month to send their child to a Florida college. The worst part is (according to an accountant friend of mine), this expense is not even tax deductible!
So what is a parent to do? Is there any investment strategy that might help the average parent in this situation? I guess you might suspect that I have a real estate solution (since this is the Tallahassee Florida Real Estate Blog ).
First the disclaimer. I am not an accountant (nor do I play one on TV). I suggest that you forward this blog on Tallahassee real estate investment to your trusted CPA and get her/his opinion on whether or not I'm crazy. If deemed sane, then consider my professional opinion on the real estate and let the CPA give you the professional opinion on the taxation.
Going back to the scenario with the average parent spending $1,667 per month to send their child to a Florida college, let's consider how to reduce that effective monthly cost..... Now hang in there with me, because I'm going to be throwing a few numbers around here....
Let's say that the parent decides to buy a home for their child to occupy during the child's five years in a Florida college (I know, it used to be four years....). Here is the scenario:
- Purchase a four bedroom home for $140,000.
- Pay the child to manage it ($100 per month)
- Lease out three of the four rooms (at $300 per room)
- Have the child maintain the house (in return for 10% of the profit in five years after the sale)
So the scenario is set, how do the numbers work out?
Initial investment of 15% down ($21,000).
Cash Flow Before Taxes
- Annual Rents Received: $10,800
- Management Fee to Child: -$1,200
- Mortgage Payment (PITI): -$11,873
- Cash Flow Before Taxes: -$2,272
OK, at this point you're thinking, I invest $21,000 and then lose another $2,272 in the first year in order to save money? How can this be... [This is where we ask our accountant to help us out]
Now remember, we were not comparing this investment to investing in the stock market or another investment. Rather, we were comparing this investment with sending $20,000 per year to our child for the cost of attending a Florida college. So before we can continue with the analysis, we need to estimate our "after tax" cash flow and position with this investment. [Accountants, please roam around this blog and assist anyone who raises their hands]
- Gross Income: $10,800
- Taxes & Insurance: -$3,080
- Management Fee: -$1,200
- Interest Expense: -$7,398
- Depreciation: -$4,225
- Total Taxable Income: -5,103
- Tax Rate Example: 30%
- Total Tax Savings: $1,531
Cash Flow After Taxes
Cash Flow Before Taxes: -$2,272 Total Tax Savings: $1,531 Cash Flow After Taxes: -$741 OK, we've now determined (to be verified by your qualified CPA) that with this investment, the cash flow on this property should be about negative $741 per year (meaning every year the parent(s) are sending $741 out towards this investment). At the end of five years, the total cost of this investment should be the initial investment plus the five years' worth of negative cash flows which would be roughly $21,000 + $741x5 = $24,705.
Now we must figure out the investor's position after five years. Historically in the Tallahassee real estate market and most of the US, this property would appreciate about 4% per year. Since we are in a two-year slide, I will assume the next five years should average below 4%, so I will use 3% for appreciation. You should have your accountant run this example with multiple levels to consider all realistic scenarios.
Total Investment: -$24,705 Cash From Sale: $39,900 Child's 10% Share: -$3,990 Net Return: $35,910
OK, so the investor invested $24,705 and five years later received $35,910. That is a return on investment (ROI) of 7.77% (will be a little less after capital gains tax and depreciation recapture). Not too bad. But the real question is, where are the parents of this child financially versus just sending them $1,667 per month over five years?
We have to look back at that $20,000 per year average cost of college. We have to assume this child needs the same $20,000 as the other "average" children, less whatever benefits the child is receiving through the above scenario. We know the child received free rent plus a management fee each year, so that can be subtracted from the $20,000.
- Average Annual Cost: -$20,000
- Free Rent: $3,600
- Management Fee: $1,200
- Net Cash Needed From Parents: -$15,200
Plan A - No Real Estate
Total Parents Cost: -$100,000 Benefits: 1 college degree
Plan B - With Real Estate
Cost: -$76,000 Parents Profit: $35,910 Total Parents Cost: -$40,090 Benefits: 1 college degree Child's Profit: $3,990
Using a real estate investment to take advantage of taxation and sound investing strategies, parents can save a significant amount of money in the efforts to get their child through Florida higher education. If you find that you are in this situation, or are rapidly approaching this point in your life, I strongly recommend that you speak with a qualified Realtor and a qualified CPA.
Florida Prepaid College Plan
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Joe Manausa is a real estate investor and the Broker and Co-Owner of Joe Manausa Real Estate. He can be reached via e-mail through the Tallahassee Real Estate Website or catch his latest writings on the Tallahassee Florida Real Estate Blog , or by calling (850) 386-2001.
Joe Manausa, MBA is a 26 year veteran of real estate brokerage in Tallahassee, Florida and has owned and managed his own company since 1992. He is a daily blogger with content that focuses on real estate analytics and providing his clients with a tactical advantage in today's challenging market.