June 20, 2017
By Mike Hills
Atlas Associate Broker, Mike Hills explains how he is using real estate investment to finance his children’s future, and how you can too.
It was the summer before I started my freshman year of college. I had been accepted to the University of Denver, and in 30 days I was moving to Colorado from California to begin the fall term. I was so excited…and terrified too, although I never actually admitted it to anyone. College. The beginning of the rest of my life. But that’s not why I was lying in bed awake. Earlier that day, my father and I signed a student loan from Wells Fargo to help me finance my college experience. My parents were planning to help and I had earned an academic scholarship but I still had a financial gap, hence the student loans. I hoped it was all going to work out. I had never had a loan for anything much less a loan with five digits.
Fast forward four years: college was over and was a smashing success. I made lifelong friends, entered the professional workforce and was really looking forward to the next chapter of my life. There was one major downside: Debt from student loans (good debt), but a lot of it – $25,000 worth.
Fast forward 15 years. My student loans are long gone. I’ve made and lost small fortunes starting my own businesses. I’m married now and providing for a family of my own. Because of the birthdays of my two oldest munchkins (I now have 4), they are going to be in college one year apart. And with the rising costs of college, how in the world am I going to pay for it? And frankly, I didn’t, and still don’t, want them to have to bear the burden of mountains of debt like so many young people these days. How was I going to make this work?
I interviewed financial planners and got their advice. 529 plans. Post tax savings plans that grow tax free. Then, when my munchkins hit college age, I can use this money to fund all college expenses. It seems logical, but here’s the issue: 529 plans grow at a rate of about 4%. So, if I were to save $5,000 per year PER CHILD (which is really, really tough to do), when that child hits age 18, his or her individual 529 plan has about $160,000 in it. This plan has a few major problems: that assumes I save $5k per year per child for a full 18 years. Anyone who has spent any time in the real world knows just how hard that really is to do. And, if I do accomplish this monumental act of saving, $160k per child isn’t enough to pay for my alma mater today, let alone in 12 years when my oldest is of college age!
A 529 plan isn’t going to work. I spoke with other people. I spoke with young people. I spoke with old people. I spoke with working class people. I spoke with rich people. I spoke with educated and uneducated alike. No one really had a solid plan. People were simply doing the best they could.
One night, the owner and founder of Atlas Real Estate Group, Ryan Boykin, and I were sitting around shooting the breeze. Talks of life, love, children, politics, sports. The things longtime friends talk about. While I’m sure we are not the first to come up with this idea, we were the first in my circle to really nail down solid plans: Rentals on 15 year mortgages. What? How? Why you ask? Let me explain with an example.
I purchased a house in January 2016, 18 months ago. My newest daughter, Zuri, was born in December of 2015. I bought her college fund 45 days later. Follow me on this: I bought a 3 bedroom, 2 bath house in Aurora CO. My renters pay $1725 a month. My mortgage (PITI) is $1575 a month, and that’s on a 15-year note. Yes, you’re reading the numbers right: I only make $150 a month in positive cash flow. And, if you factor in any expenses, vacancies, fixes etc., I barely break even. But, BIG BUT, this house will be paid off in 15 years. The purchase price 18 months ago was $240k. And I don’t really care how the market fluctuates because I’m not selling. Instead, I’m going to keep it rented for the next 18 years, so when Zuri, my sweet little baby, is 18, her college fund will have been paid off for 3 full years, and I will have been collecting rent during all those years. Then, when she enters college, I can sell, or refinance, or use the positive cash flow! I’ll have options. Lots of options. Good options. And in the end, isn’t that what we all want, options?
Do you want to know the real beauty of this plan? It works for so much more than just college. Retirement. Extra income. Wealth building. Generational wealth creation. Your family. Your kids. Your Grandkids. It’s the most powerful tool I’ve ever seen. Best of all, time is on your side.
You, dear reader, can do the same thing. Don’t think you can’t. You can. I did. You can too. Call me. Call us. Let us help you. Have a wonderful day.