I have two children about to start Private secondary school. We have been putting away money since they were born into a separate bank account and have around $80k. is there a better way that we can use this money - I have heard of education funds, but we have not explored. one idea was to buy an investment property with this money (and some top up) and effectively use some of the rental money to pay their school fees and then incur a debt for the fees against the growth in the property?
Hopefully you've had the money in one of the 'bonus' type accounts, where you earn x% per month & if you make at least 1 deposit & no withdrawals during the month, you earn an extra y% ontop of the base rate (my children aren't as old as yours but I've been doing the same thing as you using this type of account since they were born).
I'm not advocating a call either way on the investment property as it may be something you just want to do, but some of the things to consider include:-
- How much of the $80 you have will go into buying costs? You wouldn't want to loose a third of what you've been saving over the last decade of more in 1 go.
- Will the net available rent be enough to make a material difference to the school fees? If we put it in context, if you allow say $25 in buying costs, that leaves you with $55 as your 20% deposit which will mean you can buy something worth say $275 & borrow say $220, unless you top it up as you suggest.
At a return of say 5%, rent would be say $14 p/a (in round numbers) less say $2 p/a for costs (not to mention any capital expenditure, ie. replace hot water system, aircon, etc), less interest on the debt of $11 (no principal), leaves $1 left over.
- What happens if it ends up vacant long term?
- Will the tax benefits be material enough to make a real difference?
- What will be your selling costs when the time comes?
Again, I'm not giving advise & this is only 1 option, but if you went out & bought $80 of decent blue chip shares that pay fully franked dividends, you'd be earning say 4.5% + the franking credit. That'd be a total of ~$5 p/a without the headache of worrying about tenants/the steady income stream/repairs & maintenance, etc.
Others will have other ideas & this is by no means the only option, but all I'm getting it is make sure you consider all options, including the pros & cons, as this is an important decision.
You have done well to save $80k towards the school fees but unfortunately it probably won't get you a long way with two kids in private secondary school these days so investing the $80k to help pay the fees may not be the best option.
Depending on your overall financial position, buying an investment property as a growth asset or as an income stream are both sound strategies to help you build for the future.
Your first step is a good financial planner and then a finance broker experienced in investment structures
If you have any questions, feel free to call anytime
Unfortunately most mortgage/finance brokers are going to tell you it's a good idea to purchase an investment property, why? because they hope you'll choose them to do the lending part for you and they in turn will receive an upfront commission and an ongoing trail commission for the life of the loan, regardless of whether or not it really is a good decision to make. The only opinions/advice that should be taken seriously are those from licenced experienced Certified Financial Planners, of which I am one.
In reality, I don't think that purchasing an investment property with funds specifically saved for the purpose of your children's education is the right thing to do. This also depends on what the annual fee for your children’s education is likely to be. However, with two children about to start private secondary school I dare say these costs are going to we in excess of $10,000 per annum per child?. The major reasons for this are:
1. The rental derived from the investment property is likely to be all used up in loan repayments and other ongoing costs involved in holding an investment property, potentially leaving you in a negative gearing situation. Although negative gearing is not necessarily a bad position to be in, you would need to be extremely confident in achieving a really good annual growth rate in the property to justify not only the out of pocket expenses of holding the investment property, but also for the ability to draw on equity to fund your children's education;
2. What if the property/properties (including your principal residence - assuming your own and are not renting yourself) do not provide the level of growth needed to access the equity required to fund your children's education costs?
3. When (not if) interest rates rise again, your repayments are going to rise potentially leaving you in a position of not only having to still find funding for your children's education costs but also increased holding costs on the investment property;
4. In an emergency or any unforeseen circumstance, you cannot just simply sell off a chunk of the investment property to quickly access cash, you would have to sell the property. The time and costs associated with this would be a huge risk especially when relying on such for your children’s education costs.
For me, the risks outweigh the potential rewards in this case. Don't get me wrong, I am a firm advocate for using investment properties to grow one's wealth, however, this is not really the question you posed.
In saying the above, there may definitely be other ways to achieve both, that is confidence is paying for your children’s educations costs AND purchasing and investment property to grow your wealth.
I am more than happy to have a more detailed discussion with you about this if you like.
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