Should You Buy A House For Your Child?

As you hold your newborn in your arms, your mind may already be buzzing with plans for their future, including how to finance their college education.

As the years go by, you want to ensure they have the best education possible, but how will you pay for it? One popular idea is to buy a home as an investment and sell it when it's time for college tuition.

But before you jump into the real estate market, let's look at the facts and figures to determine if this is a wise financial decision.

Today's report is a comprehensive examination of buying a median-priced home in Tallahassee, leasing it out until your child turns 19, and then selling the home to generate the cash needed for your child's education.

First, we start with a list of all median-priced existing homes for sale in Tallahassee to give our readers an understanding of the home that serves as the basis for today's analysis.

Median-Priced Homes For Sale In Tallahassee

Median Home Price In Tallahassee

In Tallahassee, the median existing-home price is currently $255K, while the median new-home price is 93% higher at $492K. The overall median home price in Tallahassee is $280K.

Our case study examines the investment strategy of purchasing a home when a child is born and selling it to fund college expenses when the child reaches 19. We will base our analysis on the median existing-home price of $255K.

The typical investment loan will cover 80% of the purchase price and we've included an expected 3.5% in closing costs to purchase the property. Here is how that settlement statement would look:

Selling The Home In 2042

Our analysis assumes we put a home under contract immediately and close on the home on the first of June, 2023. The following report shows how we would convert the house to cash and calculates the tax liability too.

So the bottom line of the report shows that after taxes, we have grown our investment from $60K to $437K, but there is still a piece missing.

19 Years Of Ownership

In the first part of this report, we outlined the costs of acquiring a median-priced home in Tallahassee. The second part of the report calculated the after-tax proceeds from the sale. Finally, our last segment presents the property's annual cash flow.

This next segment of our report appears lengthy, but it's just a year-by-year analysis of cash flows that includes a "what if" for a sale each year. Prior to the sales proceeds at the bottom of each year, you will find the "cash flow after tax" section that includes an additional reason for buying a home as an investment.

See if you can spot it before I point it out!

Benefits Of Real Estate Investment

So many people are peddling real estate investment courses online that it's easy to get confused about wise investment strategies. Unless you are looking for a job, the safest way to invest in real estate is a "buy and hold" approach. As soon as you hear the term "flipping," run away! While people can make good money flipping homes, they aren't doing it passively.

Flipping real estate is a job, and you'll compete with other people who do it full-time. But a long-term hold investment, where you own real estate for years without selling, is something you can do passively by hiring a property manager to handle the operation of the property.

You gain very strong returns by leveraging, which means using borrowed money, such as a mortgage, to purchase a property with the expectation that the property's value will increase over time. The goal of leveraging is to increase the potential return on investment by using other people's money to fund the purchase. In this investment study, we used $59,925 to control a $255,000 asset that grew by 5.6% annually. Instead of gaining a 5.6% annual return, we were able to convert that to an after-tax return of more than 13% using leverage.

Do You Hate Paying Taxes?

Our report's final segment is for readers who hate paying taxes! Like the annual statement above, this breaks down the cash flow for each year of ownership, and it reveals how your real estate investment can return some of your tax dollars. As you go through the numbers in the report below, take note that I've highlighted my favorite line-item (it's the reason we get some of our tax dollars returned).

Depreciation Is A Real Tax Breaker

Did you know the IRS lets you write off (meaning "reduce your taxable income") depreciation?

According to the IRS, depreciation for residential real estate investment is deducting a property's cost over a specified period for tax purposes. It's an allowance for the property's wear and tear, deterioration, or obsolescence that occurs over time. The IRS allows real estate investors to depreciate residential rental properties over 27.5 years, which means investors can deduct a portion of the property's value each year as an expense on their tax return. The depreciation deduction can help reduce the investor's taxable income and lower their overall tax liability.

The case study example includes an annual write-off of $7,696 for depreciation. This is not money you've spent; rather, it's an amount of "loss in value" that the government expects on your property. So even as your property value grows, the government lets you write off a loss! If you hate paying taxes, then depreciation will become your new best friend!

In the previous report, two lines will help you understand the benefit of the depreciation write-off, and I've highlighted them in aqua.

The first is "cash flow before tax," which is the amount of money your property manager sends you, and the second line is "Ordinary Income." Your taxes are based upon ordinary income, and you can see (thanks to depreciation) your ordinary income is negative until 2033. Your first ten years put tax dollars back in your pocket, and the final nine years have you paying lower taxes than you would if you received the income from another type of investment.

Depreciation is a valuable tool that real estate investors can use to reduce their taxable income and lower their tax liability. Overall, by taking advantage of depreciation, real estate investors can enjoy increased cash flow before tax and reduced ordinary income tax liability, making it an attractive investment option for those looking to build long-term wealth (or send their child to school).

So, should you buy a house for your child? Absolutely, and buy a few for yourself too!

Smart Real Estate Is Boring

One thing I explain to young investors all the time is that smart real estate investing (buy and hold) is boring!

The type of property you should target is boring! If you are excited about a property you are about to buy, you’re probably making a mistake. Great long-term hold investments are just regular houses in the right areas. Nothing sexy, nothing crazy; go out and buy houses where the middle class wants to live.

The safest place to be in the housing market is the middle. Should any market correction come around in the future, the homes that stay occupied are the ones in the middle.

Low-end units often have relatively high rents, high vacancy rates, and collection issues (compounded with higher turnover costs between tenants).

High-end units often have relatively low rents and are the first to go vacant in an economic turndown.

Buying homes in the two middle quartiles of any housing market is the safest way to ensure a long-term investment in the housing market.

If you want to learn more about a smart, long-term, residential buy-and-hold investment plan, just let us know how to reach you, and we'll be in touch immediately!