How Apartment Investing Pays For Your Kids College Education
As a species we humans started as hunter/gatherers, then becoming civilized we moved to being agrarian, then in the Industrial Revolution populations moved to cities and became workers, performing manual labor. Now, with technology transforming the economy and work we are in the Information Age. Many pundits have tried to label what the next “Age” is going to be; the Wisdom Age, the Communication Age, and so on. None of that really captures it for me.
What I see coming next is the Entrepreneurial Age. The Age of taking nothing for granted, where you are entitled to precisely nothing. With populations and need growing on a Hockey Stick trend line, if you don’t know how to solve problems and create value, in the coming years you will be “dead”. Almost literally.
You can see the beginnings of it now; people in mid life whose jobs have been eliminated by technology, looking for another job where they can employ their existing skills, that unfortunately don’t exist. The hard truth is, many job seekers have to go back to school and learn new skills so they can be employable for jobs that are available today.
OK. Wow. A bit of a rant brewing here.
Actually, I didn’t mean to go out on such a bender on this topic. What I want to say is, whatever “Age” we are moving into next, today we are most decidedly in the Information Age. If you work as an employee, there is a roughly 85% chance that you are a Knowledge Worker; meaning the tool of the trade you practise is the specialized knowledge you have in a certain area, and you are employed based on your ability to use or implement that knowledge somehow.
Knowledge is evolving daily, and the way it is used and applied is also changing right along with it. So all of this is to say, if your kids want a chance at prosperity in the coming years, be that as an employee, or a business owner, they need an education. A college education maybe, though not necessarily, nevertheless an education that gives them the chance to be relevant in the workforce of today and tomorrow.
My contention is mere education will not be enough (witness today’s glut of PhDs); whether an employee or business owner, kids will need the Entrepreneurial Mindset, understanding who their constituents (their markets) are, what problems those people face, and then being able to solve those problems, adding value to peoples’ lives. When your kids know how to solve problems, then provide enough value that others are willing to pay for the solution, your child will never be out of work and be positioned to succeed brilliantly in life.
So how do you make sure your kids’ education is paid for, be it college, technical school, or whatever, so they have an education and are in a position to succeed in life? No surprise, apartment investing can produce the income to easily cover the expense of an education in a number of different ways.
Let’s say you are aiming high and you want your son/daughter to go to Yale. Tuition, room and board, books, personal expenses, travel, will come to approximately $51,000 per year. For a four year undergraduate degree that will total $210,000, or more, taking into account the inevitable fee increases and inflation.
This is a daunting number for a parent on a fixed income. Not so for an Apartment Entrepreneur.
There are three ways, as an Apartment Entrepreneur, you can go about making sure there is $210,000 in your son/daughter’s college account so the funds are there and ready for when the first bills come due.
Scenario 1: Let’s say you are getting a good head start. Your daughter is twelve, and six years remain before the first bill to Yale is due. The slow, steady certain course would be to buy a large, undervalued apartment building, stabilize the property, bringing it back up to its full value, and let the nice, fat positive cashflow stream you have created accumulate in your daughters college funding account.
If you buy a 100 unit property in the Midwest (it could be anywhere, I’m just more familiar with the Midwest), the value plays are a 30% vacancy, below market rents, and rehab. After rehabbing all the vacant units, rehabbing the exterior, then leasing the property up to 90% occupancy, let’s say that results in a positive cashflow of $50 per unit. With 90 units producing income that would be $4,500 per month free cashflow, or $54,000 per year. Taking away one year to stabilize the property, that would leave five years of $54,000 accumulating each year, or $270,000 in total, going straight into your daughter’s college funding account.
Mission accomplished, and of course we are leaving out that $50 per unit per month free cashflow is a very conservative number for a value add deal.
Scenario 2: Let’s say you have always intended to set up a college funding account, but never got around to it, but your son turning 16 has brought the situation into stark relief, and now in Grade 11, he’s talking about “going to Yale”. There are two years between now and when the first bill to Yale is due. Time to get on it.
You buy a 100 unit property, Class C with value plays. It has a 30% vacancy, with vacant units needing light repairs, a few being complete gut jobs. Outside there are cosmetic repairs needed. You buy the property for $2.1M using a bridge loan and with private money covering the down payment and cost of repairs and closing costs.
After completing interior and exterior repairs, a small rent raise, and leasing up to 90% occupancy, the property is now worth $3.9M. At the 12 month mark you get started on your refinance loan application and by month 18 of your ownership your refi closes. You have long term financing at 75% LTV, putting a loan of $2,925,000 on the property. After loan fees of $100,000, paying off the bridge loan, returning principal to private lenders, and paying interest, for a total of $2,270,250, loan proceeds of $554,000 go to you; from which you shoot $210,000 directly into your son’s college funding account.
Mission accomplished, and of course with long term mortgage rates as low as they are, you have a healthy positive cashflow as well.
Scenario 3: For whatever reason you have found yourself with your daughter at the beginning of her senior year. excelling at school, and making noises about wanting to go to Yale. One year to go, college has always been the plan, but you don’t want her to have to burden herself with student loans. $210K by year end would be good, but $51K at the very least, is needed. Crunch time!
You work hard on dealflow and find the 100 unit property in Scenario 2. It is 30% vacant, needs repairs, and current rents are slightly below market. Your deal analysis reveals that after repairs and being fully stabilized the property is going to be worth $3.9M. You negotiate hard, douse the Broker’s case for the property in cold water and get an LOI accepted and Contract signed at $2.1M. You then market the property massively at $2.35M and find six “serious” investors who say they want the property. You take all of them through your qualifying process. Four drop out, two remain. You offer both the opportunity to take the property. One wants his attorney to look at the paperwork, the other signs your paperwork, sends it back to you by FedEx and wires the earnest money to the closing agent. Thirty days later your new Buyer’s bridge loan funds, the deal closes, and the closing attorney wires a $250,000 assignment fee into your bank account. You take $210,000 of that and transfer it to you daughter’s college funding account.
Mission accomplished, and in fact, looking back on it, you are wondering why you didn’t get started earlier, because as grueling and challenging as this all was, you never had so much fun in your life!
For the Apartment Entrepreneur the financial objectives of these goals are achieved relatively easily, and your son or daughter will have their education. The irony of all your effort may be though, that while the certainty of your child’s college funding is assured, the greater part of their education may come from them watching you, the Apartment Entrepreneur, creating value in the marketplace, and being paid handsomely for it.