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529 versus Real Estate

June 16th, 2017 at 10:31 am

So we're doing our ESA at $2k/year for each kid. We have mentioned adding to that around $2k/year each kid into a 529.

Right now we are positioning ourselves to be financially independent soon enough not including college. DH will be 52 and I will be 50 when our youngest goes to college. I always had it as a goal that we would be Financially independent by 45 and I think it'll happen. But realistically I think we may have to wait until age 55 for DH to "retire" so that we could cash flow college.

But reading more about investing in real estate and I think in 2 years we could save enough to perhaps consider investing in it. I wonder if it would make sense to do a rental property for each child and use that instead of 529?

There are a lot of negatives including we're starting late, they won't be paid off and the cash flow might not work. Plus we'd need at least 2 homes for each child. But I wonder if this would make sense?

I can't do it for something that generates $100/month cash flow even with the depreciation tax break. I think that means we'll have to invest in something away and be an absentee landlord to make it happen.

Plus I need DH to get on board. I know he'll be anti-real estate. So anything I find has to make a lot of financial sense.

Any thoughts or experiences? Do you think this is a good idea? This is a long term play so I think with our financial situation we need at least 2 years of stability right now and planning. I need time to research to present my report to DH about where and how we will invest and who will manage the property for us. This is not something I feel we can jump into since we'll be needing to foot most of the cash down payment, emergency fund at first.

3 Responses to “529 versus Real Estate”

  1. AnotherReader Says:

    In your shoes, I would not consider doing this to fund college. Were you planning to use the cash flow or sell the properties in 10 or 15 years? Do the numbers. Unless you buy free and clear properties in high rent areas, the amount of money you will need then will be more than the net rental income. Selling may not work, either. The market could be down by 30 percent or more just when you need it.

    You have no experience at the rental business. If you buy the wrong property in the wrong location, get stung by bad tenants, and find yourself selling in a downturn because there is too little or no cash flow, you will lose some or all of your investment. How will you recover in time to write the tuition checks?

    A diversified portfolio of stocks with some low-risk, uncorrelated bonds added in as you get close to needing the money, makes much more sense.

    If you want to dabble in real estate, do so with your speculative investment money that you won't need until well into retirement. That way, if you lose money, you will have time to recover.

  2. Dido Says:

    I'm with AnotherReader. The real estate investing market is too risky for this purpose. There are just too many real estate horror stories with bad tenants, property managers, etc, to take the risk. Stick with the 529 plan and invest enough to fund as much of you can of a public college education and about 2/3s of a private school education (private colleges have lots of endowment money they use to give scholarships so the 2/3s funding is my firm's guideline recommendation to all of our clients).

  3. rob62521 Says:

    As enticing as it is, I'm not sure I would consider real estate either. There was an article in our local paper this morning about how fewer young people are buying houses in our area, instead wanting to rent, but aren't staying very long because they tend to move on which makes owning real estate a hassle if you don't have renters who stay for any length of time. When DH's mom passed on, we had property that he and his brother shared. Neither wanted to rent it out because although the brother was handy, DH isn't and we didn't want to headache of dealing with tenants. I don't know about renter's rights where you live, but it seems the renters have more rights than the owners...a friend of my mom's had rental properties. If the renter claimed that something was broken, they didn't have to pay the rent. They called for everything, including changing a lightbulb. I know there are horrible slum lords out there, but this person wasn't. He had to go to court to get a 30 day notice to evict, a ten day notice and then a five day notice, all costing him money. It wasn't worth it.

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