Shane Willis: All right. So I wanted to shoot a quick video, because I get asked questions all the time. I’ve given a couple of speeches and I’ve said, “Have you considered real estate for a college fund?” Have you considered doing that, and I get a lot of questions on how does that work? Exactly how does that work? It’s one of the podcasts I recorded. Gosh, I recorded that probably a year and a half ago and it seemed to be pretty popular, so I just wanted to show you what we were looking at. What are you possibly looking at, how real estate could play, probably, the best college fund out there.
Shane Willis: So here’s a property that I analyzed for a customer of mine. I’m gonna do this. I meant to change this back before we shot the video, but that’s okay.
Shane Willis: Okay, so the property cost $250000. It made $26280 a year in rent. So the rent, a little over $2000 a month. Taxes are here, management. We’ve got maintenance. We’ve got vacancy reserves. So our annual expenses on this property are almost $7000 a year. So if we paid cash for the property, then our caprate would be 7.73. And the way you get that is you take your gross rent and minus your expenses, and you get your net operating income. And that operating income divided by the purchase price, that gives me my percentage of return. So now I got a return of 7.73%.
Shane Willis: What happens when we go to do the mortgage on? Well, the mortgage on it, I put a 30-year. Noted five years. We put 20% down. So now, I get my net operating income that we come up with up here, and our debt services is $12884, so my cash flow’s 6500. This deal, on its own, would generate me 12.17%. If I was looking purely as an investment, just for cashflow, this is a good deal. I’m looking over 12%. If you know anything about the rule of 72, 12% interest rate. Your money’s doubling every six years. This is a good deal. But this particular client wasn’t looking for that. So what I wanna change, is I wanna change this.
Shane Willis: Instead of a 30-year note, we’re putting a 15-year note on it. “Now Shane that takes all of my cash on cash return. I’m down to less than 1%.” That’s not what we’re buying this house for. The cash flow’s not necessarily what we’re buying a house for. I’m not looking for cash coming out. Because, basically, now it says $353 a year is what I’m gonna make. So the property’s just gonna pay for itself. What we’re looking at this property for is to put someone through college, so let me change this a little.
Shane Willis: I did put an appreciation rate, 1%, 1% a year. So that means we can have a five year … 5% one year. We could go down 5%. But overall, over 17 years we just averaged 1%. I think I’d be more than that, but you’ve heard me say all the time, appreciation’s a bonus.
Shane Willis: Let’s look at this. This is year one through year 15. We made $353. But what happens in year 16? The house is paid for. The tenants have paid off the 200 … what was it, $250000, a $250000 house you own free and clear. Tenants have paid it off. And so, if we did that the first year the child was born, the year 16 and 17 we get to actually capitalize on the cashflow, $19000 a year, $20000 a year. And this is not even assuming that rents are continuing to rise. This is the same rent that over 17 years. And can you imagine paying the same rent you did 17 years ago? That doesn’t happen. But I wanna try and do worst case scenario.
Shane Willis: So this says that you made $43000, $44000 basically. So now you have a choice when it comes time for college. You can make $20000 a year off of this rental that should take care of the college, or you can sell the house. Take care of the college and put the rest in your pocket. You put out $50000 when you bought the place, but that was it and now the tenants have paid off a $250000 house. I have people right now using this that it’s here, year 18, year 19. Kids are going to UWF, go Argos, and the rent is basically paying everything. All the capital contributions that are required from the parents are being paid for by the rent on that particular property. That’s how you use real estate to pay for college. You just have to understand, that first 15 years you’re not really looking for cashflow but you don’t wanna go negative, so you have to analyze the properties properly. That’s a whole a lot of propers.
Shane Willis: I hope that helps.