Give Your Kids a Chance (and Fund Your Retirement)

Give Your Kids a Chance (and Fund Your Retirement)

Posted by Matthew Dekort on Wednesday, March 11th, 2020 at 10:08pm.

Do you ever wonder how you’ll pay for your children’s education? Or your own retirement? The solution might be real estate. Consider:

FACT #1: “The Haves and the Have-Nots”
The gap between the rich and poor is growing rapidly. Top 20% average net worth family increased income by 80% over a dozen years; the rest averaged much less (38%).

FACT #2: Post Secondary Education is the Key
Earnings of full-time workers who have a college degree continue to accelerate faster than those with just a high school diploma. In 1979, the average college graduate earned 49% more a year on average than a worker with only a high school diploma. By 1994, the earnings gap had widened to 89%. Each year of formal schooling after high school adds 5% to 15% to annual earnings later in life. (Source: US Department of Labor)

FACT #3: UofC / Mount Royal / SAIT costs are only going to increase
The costs of attendance is $12 - 20 thousand per year (live @ home, vs dorm). Most graduate in 5 years (40% graduate in 4), meaning the total costs are $60 000 - 100 000. If we assume 4% inflation, the costs could be:

Now $100000 In 5 Years $116 986
In 10 Years $142 331 In 15 Years $173 168


FACT #4: Four Choices
1. Pay college costs out of ordinary income.
2. Student works to pay part of costs. Increases dropout risk and might take longer to graduate.
3. Student loans. College graduate starts out in life deeply in debt.
4. Pay college costs out of assets. Buy a rental property that will be free and clear before they start school

The easiest way to pay for the education is to buy a revenue property when your child is young. Here is the equity created over 16 years. Assume a 3% interest rate, 25 amortization, 10% down on a $325 000 property, 4% appreciate (same as inflation above).

Equity Now Equity in 15 Years Equity in 10 Years Equity in 15 years
$32 500 130 190 261 870 419 312

****Rental rates rise with inflation, but the costs of mortgage are fixed. If these extra funds re-invested into the property, the mortgage is paid off in the 16th year. With over 1/2 million in equity, you can pay for up to 3 kids
education (by selling) or pay the monthly education costs using cash flow ONLY and keep the property.

By putting any rental increases (set @ 4%, same as inflation above), you’ll be able to pay off the mortgage in just over 16 years (16 years, 3 months).

Depending on your individual needs, you could pay for your child’s education JUST using cash flow from the rental unit. Current rent is $18 000/a while current education costs are $12-20 000/a. If you have more than one child, it’s possible that as one finishes college/university, the next child is ready to begin, and you could educate the entire family using just this one investment. After the children are educated, the funds generated go can be used for your own or, more aggressively, be used to expand your real estate holding to generate additional future retirement income.One rental home is a VERY nice top-up to your pension/CPP, but it could be MUCH more.  Let’s assume:

1. Children are born when you are 33 3. Home is paid off when you are 51; child starts UofC/MRC
2. Buy the rental when you are are 35 (child is 2) 4. Child start post secondary when you are 51

 

In theory, when you turn 55, a decade away from retirement, you don’t NEED the rental income, but do want to top up your retirement.  If you purchase a 2nd rental property, and put ALL of the funds from BOTH properties (and the inflation rate rent increases) towards paying down the debt faster, it’s paid off in UNDER 9 YEARS.  At age 64, you’ll have 2 completely paid off properties, producing the equivalent of almost $7000/month (or before inflation, about $3000/month, or $100/day in today’s dollar) to supplement your retirement. This is an EXCEPTIONAL investment as your returns are tied/adjusts with inflation (inflation protection).  Not a bad start.  For yourself or your children. 

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