Hey everyone, and welcome to Passive Real Estate Investing. I’m Melissa Nash, your guest host Jumping in for now. Let’s dive in.
Today I’m sharing a personal story that’s kind of a big deal and most people don’t even know about this strategy. Now, I really wish that I had known about this for my older kids a long time ago, and it’s how one single rental property is going to pay for my youngest daughter’s entire college education. You guys. Yes, you heard that, right? So if you are a parent worried about rising college costs or a grandparent or an aunt and or an uncle or just somebody who’s going to assist the parents paying for college, or honestly, if you’re just looking for practical real estate investing strategies that goes beyond building wealth, well then this episode is for you. I am going to walk you through the exact numbers, the timeline, and most importantly, the four different exit strategies that we have available.
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Now, let me take you back about 10 years ago. My daughter was eight years old at the time, and like most parents, I was already thinking about college costs. My older kids were already in high school, and I was thinking about this, but instead of opening a traditional college savings account, I decided to try something a little bit different. Now, I found a rental property in Alabama through my network that we have here, and this was an off market deal, of course, because this is where you find the best opportunities. Now, this property was already renovated and it came with a local property management company in place. And by the way, I still use the exact same property management company today, 10 years later. So definitely finding a good property management company is gold. Now, legally, since my daughter was a minor, the loan had to be in our names, but this property was intended to be hers.
It was going to be her college fund essentially, and it was just a little bit different than most parents choose. So let’s talk real numbers because that’s what you’re here for. Now, we bought this property for about $60,000. Now, yes, at the time, that was a C class property. If you’re looking to spend $60,000 today, I would mostly advise against it. It’s probably gonna be a de class property. But anyways, that same property today is worth about probably 130 to $140,000 in 10 years. The property has essentially doubled in value through steady, consistent appreciation. Nothing crazy, it’s just in a solid rental market in the south. But here’s where it gets interesting. 10 years ago, this property was generating, I think it was about around $250 a month in positive cash flow. Now, when I say cash flow, I’m talking about after all the major expenses that you have to pay every month.
So the taxes, the insurance, the property manager, and the mortgage. After those were taken out, I had consistently a positive cash flow right around $250 a month. Now today after years of rental increases, now some of them weren’t every single year. Some of them we went a couple years without raising the rents, and then all of a sudden we would raise the rent in a bigger chunk. The property is cash flowing now between five to $600 a month. Now, that may not sound very exciting to some of you guys, but it’s more than doubled the monthly income from this single property. This is just one property we’re talking about. Okay? Now remember when I bought this property, I didn’t pay $60,000 for it. I got a loan and I put 20% down on this property. So our initial cash investment was about $15,000, which is again, pretty awesome.
Why we love real estate, you can’t do this with anything else. Try doing that with stocks or whatever, or try doing that with a traditional college savings account. No, they won’t let you do that. You, if you wanna put down $60,000, you can’t take a loan for a college savings account. So anyways, if I had put that same $15,000 into a traditional college savings account 10 years ago, even with decent returns, it wouldn’t even come close to what we have now. Now don’t you worry, I am going to do a deep dive in comparing those two numbers. I’m gonna save it for the end because it absolutely blew my mind and was staggering. So I’m gonna do those numbers and I’m gonna compare it side by side. So sit tight. I’m gonna finish this episode and then we’ll cover that there at the end.
Now, here’s what’s been happening behind the scenes. While we have been collecting those rent checks, the tenant has been paying down our mortgage for the last 10 years. Every single month they’ve been building equity for us while we collect cashflow. It’s literally like having someone else save for your kids’ college <laugh>. They’re literally paying for it. That monthly cashflow that we’ve been earning hasn’t exactly been sitting around either, so we’ve been putting it into other real estate investments. So it’s been creating sort of a compound effect that a college savings account really isn’t going to achieve. And again, I’m teasing you with those, those numbers, but we’re gonna dive into it. So here’s where it gets really exciting. As my daughter is preparing for college on the west coast, we don’t just have one option. We have four distinct strategies that we can choose from.
Now we are gonna decide and see which one makes most sense for us at the time. But let me tell you how exciting it is to have these four strategies. And not only that, you guys, this is a learning lesson for us all as we’re making these strategies into a lesson for my daughter. She is learning. She’s learning exactly what we’ve done, how we’ve done it, and why. So I can’t think of a better learning opportunity than this. So let’s dive into it. Option number one, pay student loans during college. So let’s say she takes out student loans initially, but remember as of today, the property is cash flowing, you know, between five to $600 a month. So we could use that cashflow to pay on the loans while she’s in school. By the time she graduates, she’s gonna owe very little because we’ve been aggressively paying them down for four years.
Option number two, cover postgraduation payments. So we let her take out the loans, keep growing our own rental portfolio, we’ll just take that money and invest it elsewhere. And then when she graduates, the monthly cash flow will cover her student loan payments. So essentially her student loans become our tenant’s responsibility. That’s a great option. I love this one. Now, option number three, cash out refinance. This is where having all of that equity becomes really powerful. We can do a cash out refinance on the property, pull out a significant amount of cash to pay for college directly, and then we have a new loan on the rental property. So yes, when we recast it and take that equity out, the cash flow will be lower, but essentially we’ll still keep the house, still have cash flow, and that house will have literally paid for her college education.
That one sounds pretty good to me. What do you think you guys? Option number four, sell the property. Now this is my least favorite option because of capital gains taxes, but it’s still definitely a consideration. We could sell the property and use the proceeds for college even after paying those taxes, we would have substantially more than any traditional college savings account would have provided. Now, here’s something that most parents don’t consider when setting up a traditional college savings account. What if your child decides not to go to college? What if they get scholarships or choose a trade school or a community college, or what if they want to use the money for something else entirely? With the 5 29 college plan, you’re pretty much locked into education expenses, and if you use the money for anything else, you’re gonna pay penalties and taxes on the earnings.
So it’s really restrictive and inflexible. But with this rental property approach, we have complete flexibility. If my daughter decides she wants to start a business instead of going to college, we could do a cash out refinance and give her startup capital. If she wants to buy her first home, we could sell the property and help her with the down payment. If she wants to travel the world, this property can fund her adventure. The property doesn’t care what she uses the money for. It’s just been building wealth regardless of her future decisions, and that’s the beautiful part. If she decides she doesn’t need the money at all, well, we can just keep it part of our rental portfolio and it builds generational wealth and we’re gonna pass it down to her anyway, try getting that kind of flexibility from a traditional college savings account. Now, drum roll please.
Let’s dive into the actual comparison between a traditional 5 29 plan and real estate. I know this is what you guys really came for. So what I did is I, I’m going to just preface this and say this is not perfect math. I’m gonna be using some estimations, but I want you guys to get the general idea here. If I had instead taken that $15,000, remember I only put 20% down on that $60,000 property. So I’m just gonna use that dollar amount right there to compare. If I had put that $15,000 into a 5 29 plan 10 years ago, here’s what I’d have today with compound interest. Now, if we’re just going to use a conservative 5% annual return, which is typical for many of those college savings plans, that $15,000 would approximately be around $24,000 today. Now, what if I had been a little bit more aggressive and average 7% annually I’d have about $29,000 in that account, even with an optimistic 8% return.
I’d be looking somewhere around the $32,000 mark, which is awesome. That is great. I’m not saying that is bad, however, I’m going to compare it to what I actually have. Now, this is real life. Melissa owns this property. This is what this property did. I am not promising this to you that this is gonna happen to you with your property. I’m gonna be very careful about that. This is my exact property and what it’s done. So my property is now worth 130 to $140,000 today. It is generating between five to $600 in monthly income. After all expenses are paid now with significant equity that has been built up by someone else’s rental payments. Plus, I’ve collected roughly around $40,000 in cashflow over the past 10 years. That is about $40,000 that went into my pocket while the property appreciated, and I’m not gonna get into it, but I have also gotten tax benefits from this property.
So instead of having, you know, let’s say 24 to $32,000 in a college savings account, I have $130,000 asset plus over $40,000 in cashflow that I’ve collected. That’s $172,000 in total value. We are talking about a difference over $140,000 more with the real estate approach. You guys, that difference is absolutely staggering. If your jaw is not on the floor, I don’t know what else I can say or do, and I’m not even including the tax benefits, and I’m not even including that. I actually did reinvest the cash flow the property was earning into other investments. I’m not even going there yet. I’m not even going there talking about hedging inflation. There’s other things that we could add into this that make it even better. I’m gonna keep straight to the facts. And the facts are the difference is absolutely in sane, a difference of about $140,000.
Now, why does this strategy work? So let’s look at what I did. Right now. The success is built because of several key factors. Number one, leverage. As I mentioned earlier, I only invested $15,000, but I controlled a $60,000 asset when I bought it. That appreciated on the full value. Okay? That is the difference when you’re investing in a stock account or a college savings account or whatever, if you wanna control the full value, you have to invest the full value. So I did not put $60,000 in on this real estate. I only put $15,000 down. That is the power of leverage. Next is cashflow. The property pays me monthly while appreciating, unlike stocks that only provide returns when you sell them. Next tenant paid appreciation. My tenant has been paying down the mortgage building equity that I didn’t have to save for next flexibility. Unlike a 5 29 plan with restrictions, I have multiple exit strategies that I can adapt to changing circumstances as I already went over earlier.
Next, inflation hedge real estate and rents typically keep pace with or exceeding inflation, which protects my purchasing power. Now, I want to be clear, the exact numbers that I shared will be different. If you’re starting today. Properties that cost $60,000 10 years ago might cost 90 to a hundred thousand dollars today, but the strategy remains the same, and the relative returns can be even better in many other markets than the one I bought in and I only bought in a C class area. When you buy in better areas, they appreciate more, and there are markets that appreciate more. The key is finding the right market, the right property, and most importantly, the right property management. This isn’t a get rich scheme, it is a strategy, a long-term approach that requires patience and the right team. Now, after 10 years of the strategy, here are the biggest lessons that I have learned.
Start early. The power of this approach multiplies with time. Starting when your child is young will give you the maximum runway. Now, again, if you’re not starting when your child is young, do not be frustrated. Even if I bought a property today, there is still value in that portfolio to help pay for college. If I bought that property today and it was cash flowing $250 a month, which is still a typical return for many of the properties that we have, I can still use this strategy. I can use that $250 a month, and I could make loan payments for a loan while my child is in college. I can wait and when she graduates, that money can help pay for those. That student loan bill, when it comes in, the property’s still going up in value. What if she decides to go to grad school or go to more school?
The property’s only gonna go up in value while she’s in school. There should be opportunities for appreciation if I’m buying in the right market. So some of these strategies are still going to work. They just aren’t gonna work as much or as quickly as when I did it using that property that I bought 10 years ago. So next, property management matters. Finding a good property management company is crucial. The fact that I’ve used the same company for 10 years speaks volumes. Next, location stability. Choose markets with steady job growth and population growth. Not necessarily the hottest markets or what you see in the newspaper article or you know, when everybody years ago was talking about Austin, Texas being the big market and everybody rushed to Austin, Texas. You know, we’re not necessarily going after the hottest markets. We’re going after the most strategic markets. Now, also, I want you to plan for multiple scenarios.
Having four exit strategies gives you flexibility that college savings accounts can’t match. So can one rental property pay for college? Absolutely, and as I mentioned before, it requires thinking differently about college savings, understanding real estate fundamentals, and having the patience to let the strategy work. Essentially, my daughter’s college education is being paid for by a tenant in Alabama who’s been helping us build wealth while they think they’re just paying rent, and that is the power of real estate done right? If I had waited, we would not have the options we do today. I am so grateful for that nervous, Melissa, that I was back then to just take that bravery and get started because I’ve always remembered this quote, and I heard this quote long time ago. The best time to plant a tree was 20 years ago, but the second best time is today. If you want to learn more about this strategy or others or get access to our turnkey out-of-state rentals that actually cashflow while you do none of the work, there is a link in the show notes to book a free strategy call with myself or one of the other investment counselors here. Just mention this episode and I look forward to speaking with you.
Thank you, Melissa, for sharing your insights and experience. We hope you found this episode informative and full of valuable takeaways. If you haven’t already, be sure to subscribe so you don’t miss out on future episodes. We’re grateful to have you with us. Thanks again for listening, and we’ll see you in the next episode.
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