Kind of over the idea of sloooooowly investing for college? It takes so long for savings to build, doesn’t it? And if you really think about it, that $100 you invest per week is actually pretty turtle-ish when you consider the returns in traditional investment vehicles.
You may want to shove aside 529 plans, prepaid tuition plans, custodial UGMA and UTMA accounts and leave ‘em in the dust.
Here are some other options you may want to consider — with the caveat that some of these real estate options involve a certain amount of risk (some actually involve a ton of risk).
Let’s dive in — just be discerning before you decide. It’s a good idea to interview people who have been there, done that; ask your financial advisor and more.
Peek Into Real Estate Crowdfunding
Not really interested in figuring out what to do about clogged toilets or broken air conditioners in a rental property? Real estate crowdfunding is the best way to plug into real estate without having to manage broken water heaters and jammed garage doors!
The crowdfunding market was valued at $10.2 billion in 2018 and is expected to reach $28.8 billion by the end of 2025 — it’s definitely found its niche in the real estate market.
Furthermore, you don’t need to come up with millions of dollars. Here are a few real estate crowdfunding options:
Read the comprehensive details about each company before you choose the right real estate crowdfunding company for you.
Real Estate Mutual Funds
You’ve likely already heard of mutual funds: professionally managed pooled investments that invest in a variety of securities, like stock and bonds. However, with real estate mutual funds, investors purchase mutual fund shares, or units, which are bought or redeemed at the fund’s current net asset value.
Real estate mutual funds often invest in REIT stocks, real estate related stocks or a combination of both. However, you can also invest in these items on your own.
This is definitely a passive investment income strategy, so do your homework and find out as much as you can about the underlying assets in real estate mutual funds. Otherwise, you may find yourself in the same boat as if you’d invested in a 529 plan — that turtle-ish investment mentioned earlier?
Real Estate Investment Trusts (REITs)
What’s a real estate investment trust (REIT)?
Put simply, it’s a company that owns, operates or finances income-producing real estate. REITs offer you a hands-off way to own valuable real estate, access dividend-based income and total returns.
Lots of Americans — approximately 87 million — invest in REIT stocks through their 401(k) and other investment funds.
Those real estate mutual funds just mentioned above? Yes, you can invest in REITs using a real estate mutual fund. You can also buy individual company stock as well.
You get to earn a share of the income produced through real estate without managing properties yourself. Here’s how it works:
- You earn a share of the income produced through real estate investment.
- REITs invest in offices, apartment buildings, warehouses, retail centers, medical facilities, data centers and hotels, to name a few. Most REITs focus on a single property type.
- The company generates income, which is paid out to shareholders through dividends. In turn, shareholders pay the income taxes on those dividends.
Real Estate ETFs
You can also invest in REITs using an exchange-traded fund (ETF). Real estate ETFs mimic a benchmark — in this case, it’s the U.S. equity REIT market. These vehicles use a passive investing approach to replicate closely track REIT index funds as closely as possible.
Closely investigate what will give you the highest and most reliable returns. Who needs reminded of slooow-growing mentioned earlier?
Commercial Real Estate
Commercial real estate (CRE) includes many different categories of commercial property, including apartments, offices, retail space and other buildings.
You can earn income and appreciation through tenants’ rental payments. Your commercial real estate can appreciate over time through property value increase.
If you prefer, you can own a diversified portfolio of commercial real estate investments rather than managing commercial real estate on your own.
A few things to consider:
- Compared to residential investing, everything takes longer. Finding new tenants takes longer. Building or renovating properties takes a long time as well.
- Know the market. Know the legal implications, competition, how things rent out and more.
- Understand the risks. CRE offers different risks across the board. What are the implications if you open up a business park suite across the road from another bustling business park? What will you do if you insert a bunch of failing businesses?
- Understand the financial implications. Do you have the capital leverage? Is this really the best way to invest for college — and reap the benefits?
- Consider real estate options. No, in this sense, it doesn’t mean differences between literal types of real estate, like commercial real estate, real estate crowdfunding, REITs, etc. A real estate option in this context means a specially designed contract between a buyer and seller. Here’s how real estate options work (they’re often used by property developers and investors in commercial or high-end residential property deals):
- The seller offers the buyer the option to buy a property by a specified period of time at a fixed price.
- The buyer purchases the option to buy or not buy the property by the end of the holding period. The buyer pays the seller an option premium. If the buyer decides to buy the property or exercise the real estate option, the seller must sell the property to the buyer according to the terms of the preexisting contract.
Good Ol’ Fashioned Real Estate Purchase
One really great option, particularly if you know your child will attend a specific school, is to buy a home in the college town your child plans to inhabit.
If you know your child will need an apartment anyway, why not buy a condo and make money off your daughter’s roommates or your son’s baseball teammates?
Here’s what you need to consider:
- Make absolutely sure that’s what you want. Are you up for taking care of leaky faucets and college students who accidentally stick an elbow through drywall. True, you can call a repair guy, but that’ll eat into your profits.
- Determine whether you’re too far away. Let’s say you’re really, really good at snaking a drain but you’ve got a demanding full time job six hours from your child’s college town. Is buying a condo or house the best idea?
- Do you have the right idea, money-wise? Your down payment is always higher with a rental property. What are the full expenses? Operating expenses and returns? Taxes and insurance? Total all of it up before you move forward.
- What’s the location like? If your daughter’s college is in a rough part of a city (think Temple University in Philadelphia, certain locations of New York University, etc.), it may be a good idea to reconsider a real estate purchase.
The last thing you want later on is a declining real estate area, particularly after your child graduates and you plan to keep the rental property. It’s important to pick a city or area where the population is growing and a revitalization plan is underway. Look for:
- Low property taxes
- Decent school district,
- Amenities like coffee shops, restaurants, malls and more.
- Low crime statistics
- Access to public transportation
- A growing job market
- Factor in extra costs. Landlord insurance, emergencies like roof damage, frozen pipes, etc. Loss of tenants could also happen (your daughter’s roommates move out), etc.
- Know the legalities. You can’t just barge in on your renters whenever you’d like, even if you hear about six broken windows and a flooded basement. Understand tenant rights about security deposits, lease requirements, eviction rules and more (though hopefully, you won’t have to evict your child!).
- Find the right mortgage lender. You need the right lender to get the best interest rate, low closing costs and more — the best possible options for your investment.
What Type of College Savings Fits You Best?
Finally, consider your risk tolerance and timeline.
Investing in real estate can involve a bit of trial and error, so be sure you’re okay with that as well. No matter what you choose, put your goal at the forefront: Investing for your children so they don’t have to take out a bunch of student loans.
Finally, it’s important to make sure you’re not risking money you don’t have. Make sure that money is around for years to come — that it can see your kids through college and yourself through retirement.
Melissa Brock is the Money editor at Benzinga and the founder of College Money Tips. She spent 12 years working in college admission. Nothing invigorates her more than writing about college and money and helping families navigate the college search process.