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One Way to Use Real Estate to Pay for College

Author: Haydn Zeis, April 21, 2020


Recently, my wife and I welcomed a beautiful little girl named Lily in the world! She’s 9 months old and will be ready to go to college before we know it. While Colleen was pregnant with Lily, I started thinking about college and how we might pay for it. Since I’m a real estate investor, the most obvious route to go is real estate.


You’re probably familiar with different ways to save for college, the 529 plan, simply saving, or getting loans. Though, an alternative way to invest, is through real state! My favorite way to save for college is through real estate syndication, or passive real estate investing. This allows folks to focus on work and family time (I wrote an article about passive investing vs. active investing, you can check it out here).


Below, I’m going to lay out a scenario explaining how you can use real estate to pay for college. These numbers are based on a real investment and don’t consider earning more than the preferred return. This is a very conservative example and numbers are rounded to keep focused on the example.


Side note: I’m not going to get too far into the weeds on all number crunching in this article, if you’re a numbers person, let me know and we can geek out together on the details of the investment. hzeis@lonicerainvestments.com


Assumptions


  • You’ve got a 3-year-old kid.

  • If they start college at 18, you’ve got 15 years to save.

  • Future college costs will be around $200,000

  • You believe in “skin in the game” and will have your kid pay 25% of their way through college. Meaning you’ll be picking up the remaining $150,000 of the tab, or 75%.



Investing Strategy


  • Your initial investment is $50,000.

  • You invest into a real estate syndication.

  • The average cash-on-cash return is 8%.

  • The annualized return is 11.5%

  • The general partner on the deal will sell the property at year 14.

  • Syndication deals normally have one property you have ownership in, some have multiple. In this case you would have ownership of one multi-tenant building.


Investment Detail

  • Yearly cash flow is $4,000.

  • Cash flow over 14 years is $56,000

  • When the property gets sold, you’ll receive around $174,000. This is from principal pay down and appreciation. Think of your house. You take care of it, you invest in it to make improvements, and it continues to increase in value. The same is true for investment real estate.

  • The total cash in hand after 14 years is $230,000.



Scenario Explained


Your Share


Your initial $50,000 is invested with a real estate syndicator, by which point you’ve vetted the sponsor and understand how your capital will be put to use. This scenario, your $50,000 represents a certain percentage ownership stake in a deal that owns one multi-tenant commercial building. This means you’ll get your pro rata share of the rental income, less expenses; you’ll also get the same for the equity when the property is sold.



Yearly Cash Flow


This example says your average cash-on-cash return is 8% of the $50,000, meaning you’ll receive a yearly cash flow of about $4,000.


The reason 8% is used, is because this example is based off a deal that has a preferred return of 8%. Many times, in a real estate syndication there will be a preferred return. The preferred return represents the rate of return the preferred investors (you, the limited partner) will receive before the sponsors (general partners) on a given deal. So, if the investment doesn’t live up to its expectations, the sponsors don’t get paid for their work. This type of structure is a waterfall and is designed to protect the limited partners (you) from the sponsor investing in poorly performing deals.

14 Year Cash Balance


Each year you’ll have $4,000 of cash that you should set aside in a safe investment that’s unlikely to lose value. So, after 14 years, you’ll have accumulated $56,000 of capital from your investment, plus whatever interest accumulates.


When a sale takes place, 14 years after the initial investment, you can expect to walk away with around $174,000. This cash is coming from the principal pay down and appreciation of the property. The total you’ll have in hand is the $56,000 you’ve been saving from the cash flow plus the $174,000 from the sale of the property. You’re total would be $230,000.

It’s very important for you to know that investing in a syndication is passive, meaning you don’t have to do any work. Your rental income will come to you each quarter.



Summary


Real estate is resilient and backed by something tangible, the land and building. Think about your house, you care for it, pay your mortgage, mow the lawn, make improvements, and it continues to increase in value. If you purchased your house within the last 4 years, you’ll likely see it has increased significantly in value.


The only difference between investment real estate and your house is you’re walking away with cash from rental income and someone else is paying down your mortgage.


This strategy can be a very effective way to pay for college. It’s always a good to know your options, which is what we’re trying to accomplish here. And remember, when investing, there’s not a one size fits all scenario.


I wish it were more complicated than this, but it’s not. Please contact me if you’d like to learn if this strategy can work for you.


Haydn Zeis - Principal

Lonicera Management, LLC

hzeis@lonicerainvestments.com

April 21, 2020

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4248 Tuller Road Suite 202, Dublin, Ohio 43017

HZeis@LoniceraInvestments.com  |   740.935.0289

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