With mortgage rates at historical lows and Canadians migrating to Alberta, new parents are eyeing up rental property ownership with their children’s futures in mind.
Having a child is not inexpensive. Clothing, formula, strollers, childcare, school supplies, and extracurricular activities all contribute to a series of expenses that can make parents cringe. The cost of post secondary education can be the most costly of all, with tuition expenses reaching into the tens of thousands if not hundreds of thousands.
However, parents who plan ahead could end up funding their child’s education with ease by investing in real estate while their children are still young. Many new parents are doing just that by purchasing rental properties that will be paid off by the time their children reach their 18th birthdays.
Consider the following example. The Smith’s, who have recently had their first child, purchased a rental property that rents for $1500 a month. Their mortgage, taxes, and other expenses also total $1500 a month. The property is not generating any cash flow, but is paying down the mortgage with each passing month. As time goes by the rents increase with inflation and they are able to increase their mortgage payment allowing them to pay off the mortgage in 18 years, right about the time their first-born is entering university.
With no mortgage, they instantly have cash flow that allows them to pay tuition and perhaps have a little extra left over for savings, retirement, or a nice family vacation. When little Jackson or Amelia is done university, they continue to own a property that will give them an income throughout retirement.
To go one step further, lets assume they purchase one revenue property for each of their children, making university tuition an expense that won’t be a burden, and creating a retirement income that will rival most pensions.
Furthermore, the returns on revenue properties often exceed 20% when you factor in the principal reduction of the mortgage, and that is without factoring appreciation into the equation, which far exceeds most investments in the financial markets. Factor in appreciation as well, and the Smith’s could be sitting on quite the nest egg when they retire.
While investing in revenue properties doesn’t come without its fair share of potential risks and headaches, and the need for a 20% down payment, it can be a sound strategy for ensuring that your children get the education they deserve.
When you consider net migration into the Wild Rose province and a need for housing, not owning revenue properties almost appears to be the equivalent of throwing your money away.
For more information on purchasing revenue properties to fund your children’s education or as a generally good investment give an Accredited Mortgage Professionals (AMP) at Mortgage360 a call.
Nolan Matthias holds a Bachelor of Arts Degree in Economics, is the co-founder of Mortgage360, and the author of The Mortgaged Millionaire
