Dont use a home equity loan to pay for your childs college education. Use a home equity loan to buy a house for your child to live in and rent out while he is at school! The house will pay your childs college costs. This method will work if the college he/she is attending has private student housing. What you will do is you buy a house or condo in the immediate vicinity of the school with at least 3 and preferably 4 bedrooms; 2 bath rooms is ideal. A 2 family house is even better as it has 2 bath rooms and 2 kitchens. The idea of course is to have your child occupy one bedroom and rent out the others to other students. Your child will be the official property manager. His or her name should be on the deed to the house as well. This will also give your child a greater sense of responsibility, which is a good thing. The fact that your childs name is on the deed may qualify you for first time home buyer status as well, plus it will be a benefit as far as down payment and interest rates go. Speaking of down payments, instead of a home equity loan, a loan from your IRA or retirement plan as the source of the down payment is not such a bad idea, as you will see later. Actually, you cannot borrow from your IRA, but you are allowed to withdraw funds toward a down payment without penalty, even if you are under 59 years of age, although you will still have to pay taxes on the amount withdrawn. If you have a 401(K), you should be able to borrow the down payment from it and receive up to 5 years to repay. Perhaps your companys pension also has a provision to let you borrow from it to buy a house. You can furnish the house in early American furniture (1960s!), the cost of which will be tax deductible. Be careful Not to get separate leases from the other students. While this may sound strange, the reason is that if there should be some type of insurance claim, fire, water, etc. the presence of the leases would be evidence that you were using the house as a commercial rooming house without insuring such a use and the insurance company could legally deny payment of the claim. Just try to get the parents of the other students to pay the years rent in a lump sum, just as they would with the schools housing. The rents from the other bedrooms should more than cover the mortgage and operating expenses of the house and perhaps provide Junior with a little tax deductible spending money, as management fees are tax deductible; in addition to write offs for the mortgage interest, insurance costs and real estate taxes. You can also deduct your percentage share of the depreciation. Taking furniture, such as a TV set or chairs to the house is also a business expense. You would also have the right as a property owner, twice during the year, to visit your investment, which just happened to contain Junior! The property appreciation during the 4 (5-6?) years that Junior is in school, combined with the cash flow and tax deductions, should pay for his entire college tuition costs! You could either reimburse yourself from the sale of the property or, if feasible, use the cash flow from the continued rental of the property after he graduates to pay off the loans you took out to finance your childs education. This way, the house can finance Juniors education And help finance your retirement, especially if it were 10-15 years away. If the distance makes it infeasible to continue to rent the property, consider selling it on a wrap-around mortgage, (ask your realtor) whereby the new owners payments will give you a profit after deducting the cost of your mortgage payments for the next umpteen years. Of course, there is no reason you could not use this strategy with 2 or more houses, if you think about it. It could be the launch of Junior Trumps real estate empire! |
