Sample Investment Strategies
Education Fund Model
Objectives: Child's Education Savings
Diversification: Investment Type (real estate + stocks)
Plan:
PHASE I - Purchase a fourplex in the year that the child is born, amortized over 18 years. All extra cash flows are re-invested into the child's 529 Education Savings Plan. If the investment property has a DESIGNATED PURPOSE, you are less likely to use the cash flows for other expenses.
PHASE II - When the child begins college, the property has been paid off. Education expenses are paid using the now-unlevered cash flows from the duplex PLUS the funds in the 529 Education Savings Plan. Your kids can see that their education is being paid for by an asset - a valuable and tangible investment lesson to learn!
PHASE III - When the child is finished with college, the 529 Education Savings Plan is depleted, but the property may continue to provide cash flow and eventually retirement cash flow for the investor (note that after 27.5 years the property is fully depreciated and depreciation expense can no longer be used to protect cash flows from income tax). Alternatively, the investor may choose to exchange it for another investment property.
Monthly cash flows
529 Plan
Example:
Duplex purchase price = $350,000
Down Payment = $87,500
Monthly Cash Flow Year 1 = $2,730 (reinvest into 529 plan)
529 Plan
Monthly cash flows
Example: Cash flows PLUS 529 plan withdrawals now fund education expenses. Now that the property is paid off, the cash flows from the property have increased significantly.
Duplex annual cash flows = $42,500
529 Plan annual withdrawals = $31,000
Annual Education Expenses = $73,500 (or 294,000 for 4-year program)
Example: Congratulations, your child is a college graduate! As you've saved for your kids, you've also been building your wealth for your own future. Your 529 Plan savings is now gone, but the great news is that you now have a paid-off cash-flowing investment property worth over $800,000 (assuming a 4% appreciation rate) and providing you with $6000 in cash flow each month!
(This is a hypothetical example and is not intended to be financial advice. Consult your CPA for tax implications and 529 plan rules.)