• Comparing Strategies for a College Education Fund

    Can Real Estate Help a College Savings Plan?

Strategies to Help Pay for Children’s Education and Living Expenses in the Future, Including the “Kiddie-Condo”

What’s the smartest way to fund education?

It’s August. Back-to-school lists are circulating, and so are bigger questions for parents and grandparents with children and grandchildren at every stage, from infants to rising freshmen: What’s the smartest way to fund education?

To get oriented, let’s start with a simple mental exercise, comparing an investment property to a 529 college savings plan over time, and then discuss the pros and cons of each. Then we’ll clear up 529 account misconceptions (and how “tuition-lock” prepaid plans compare). Afterwards, we’ll cover how to chose and finance an investment property—including what debt-service-coverage ratio (DSCR) means and the rule of thumb target for a good investment, as well as a legitimate “buy-up” path for families who don’t have 20% down for an investment. Finally, we’ll turn to a question for families with older kids heading to campus sooner: the true “kiddie condo” – is it worth it?

The 18-Year Comparison: Rental VS 529 Account

Let’s cut to the chase upfront, before we get into the numbers—because it matters to how you’ll read the rest. The bottom line is that even if you give the 529 account a head start with a single, $50,000 lump sum deposit when the child is an infant (rather than the slow drip of deposits over time as is more common), the $50,000 investment to purchase a $250,000 property typically outperforms the 529 account over 18 years, even in a modest 2–4% home-appreciation world—and that’s not counting potential rental income. Of course, it’s also not counting the potential downside of expenses and management that vary, too; that’s why the right investment is so essential to success—making how you assess and buy so important to the equation, which we will cover more indepth next month.

That said, is a 529 account better than doing nothing? Absolutely. Would a rental be more hassle? Also yes. So, there is more to consider than the straight-line appreciation/depression models below. But this analysis helps us contetualize the kinds of earning we’re talking about to help determine if it’s even worth it:

At-a-Glance: $50,000 Lump Sum Over 18 Years

529 values are tax-free if used for qualified education. Rental outcomes include loan payoff, 7% selling costs, depreciation recapture, and federal capital-gains/NIIT as noted; operating cash flow is not included.

Comparison of $50k in a 529 vs. $50k Down on a $250k Rental (18-Year Horizon)
Scenario (Home Appreciation) 529 @ 5% 529 @ 6% 529 @ 7% Rental (Middle-Income)15% LTCG Rental (Higher-Income)15% + NIIT
2% annual HPA $120,331 $142,717 $168,997 $162,384 $154,602
3% annual HPA $120,331 $142,717 $168,997 $216,570 $206,366
4% annual HPA $120,331 $142,717 $168,997 $280,479 $267,417
HPA = Home-Price Appreciation (annual average).
LTCG = Long-Term Capital Gains.
NIIT = 3.8% Net Investment Income Tax (applies at higher incomes).

Key Assumptions

  • 529 plan: One-time $50,000 at birth; 18 years; 5% / 6% / 7% net annual return; qualified withdrawals are federal tax-free.
  • Rental: $250,000 purchase; $50,000 down (20%); $200,000 loan @ ~6.58% fixed, 30 years; hold 18 years; 7% selling costs.
  • Depreciation & taxes: 75% building / 25% land, straight-line over 27.5 years; unrecaptured §1250 at up to 25%; remaining gain at 15% LTCG (middle-income) or 15% LTCG + 3.8% NIIT (higher-income).
  • Cash flow: Operating income/expenses (rents, repairs, HOA, insurance, vacancies) are excluded from the table and will move real-world results.

What This Means For You In Brief

  • With modest, “normal” 2–4% home-price growth (not the few past year of hyper-growth, which isn’t sustainable), the leveraged rental property generally finishes ahead of a one-time $50k deposit into a 529 account after 18 years—even before you credit any surplus income earned from the property might have produced or deduct for the funds not deposited in a lump sum at the inception of the 529 account.
  • On the other hand, there is a practical risk of repairs, insurance, HOA dues, and vacancies that can narrow the gap (or on the positive, widen it) in real life.
  • This underscores the importance of the property you buy itself, and the need to assess a good income property, which we’ll touch on below.

But first, let’s understand the 529 savings account option, because it is less effort.

529 Accounts Overview: Misconceptions, Flexibility, and “Tuition-Lock” Prepaid Plans

  • Savings vs. prepaid. A 529 savings plan is an investment account with tax-free growth for qualified education costs—including room & board for half-time+ students (up to the school’s published cost of attendance). It does not lock-in current tuition costs.
  • A prepaid plan “locks in” in-state public tuition for participating institutions, typically excluding housing, and can be less flexible if the student goes out-of-state. IRS
  • What happends if the child doesn’t use it? – You can change the beneficiary, use funds for qualified apprenticeships, or—since SECURE 2.0—roll up to a $35,000 lifetime maximum from a long-held 529 into the beneficiary’s Roth IRA, subject to the 15-year account age, annual Roth limits, and earned-income rules (states may differ on tax treatment). IRSThe Tax Adviser
  • New K–12 flexibility. The One Big Beautiful Bill Act (H.R. 1, July 2025) expanded permitted K–12 uses federally (e.g., increased the annual K–12 cap to $20,000 and broadened eligible costs). State conformity varies; check your plan. Using funds early, of course, reduces long-run compounding. Congress.govmy529San Francisco Chronicle

Bottom line: a 529 is excellent way to leverage your savings for future education and a lot better than doing nothing. But it’s also narrower than owning an asset that can fund college or seed a business or support a skilled-trades apprenticeship—who knows! Your child may be the next Bill Gates, Oprah Winfrey, or Abraham Lincoln. The world is changing, but an asset remains useful to many futures scenarios.

HOW TO PICK AND FINANCE AN INVESTMENT PROPERTY (FOR THE 18-YEAR PLAN)

What DSCR means—and why it’s your first filter.

Debt-Service-Coverage Ratio (DSCR) = Gross Monthly Rent ÷ PITIA (principal, interest, taxes, insurance, HOA). Healthy deals and better pricing typically start around 1.20–1.25×. Below that, risk and rate both climb. This is only a rule of thumb though. For example, if a property has little to no maintenance due to an HOA that covers the structure, and is in a high-demand area or up and coming, then a 1X factor could be fine.

So you’re interested but are not sure about whether you can finance it? – let’s discuss some alternative options:

  • Unable to income-qualify due to complex income, recent changes, or other documentation issues? With good credit, the investor/non-owner-occupied (pure rental) loan may be good for you. If you have the 20% down + closing costs, a DSCR loans can qualify you on the property’s rent-roll rather than your income.
  • Don’t have 20% down?  Here’s a legitimate “buy-up” hack for young parents.
    If your current home would make a good rental, consider buying your next owner-occupied primary now. Conventional programs allow as little as 3% down for qualified borrowers, and other programs even help with downpayment assistance for the 3%. When you close, move into the new home and place the old home in service as a rental. You become a landlord without paying investor-loan pricing on day one.
  • Sometimes Family Can Help. Parents or grandparents who can provide a down payment may be able to treat it as a gift, or as an intra-family loan documented, as needed, to be repaid on a montly basis or at the time of sale. If it’s a gift, remember annual gift-tax limits; if it’s a loan, paper it properly. Either way, it can be treated as an early inheritance or a loan. Speak to your tax advisor.

As of July, new tax laws may sweeten the reasons to buy.

OBBBA passed into law in July this year restored 100% bonus depreciation for many short-life assets placed in service after Jan. 19/20, 2025 (appliances, some finishes, certain improvements). To use it in residential rentals, you generally need a cost-segregation study to separate components with lives ≤20 years. It can improve near-term cash flow, but increases depreciation recapture at sale (often at ordinary rates for §1245 property). Translation: a timing benefit that can sweeten an already good deal—but won’t rescue one that doesn’t pencil out in terms of the DSCR and property value fundamentals. StinsonBipartisan Policy Center

What About a “Kiddie Condo?”

For parents with kids heading to college now, some may wonder if a kiddie-condo makes sense, and if so, what the best structure is financially to fund it.

There are two compliant structures:

  1. A) Parent-owned rental; student is a tenant.
  • Tax: If your student uses it as their main home and pays fair-market rent, the IRS treats it as a real rental—you keep depreciation and ordinary rental deductions. Charge below market and it can become personal use, limiting deductions. Keep a bona fide lease and rent comps. IRS
  • Financing: This is a non-owner-occupied purchase. With ~20% down, a DSCR loan may fit. Roommates are typically fine (mind HOA/local rules).
  • 529 tie-in: If you’re also funding education with a 529, remember off-campus housing is eligible up to the school’s cost-of-attendance allowance for half-time+ students—useful for coordinating rent and 529 withdrawals. IRS
  1. B) Student-occupied primary; parent helps qualify.
  • Financing: Use owner-occupied conventional options for a lower rate; add a non-occupant co-borrower (parent) if needed. This preserves primary-residence pricing, and there is no reason your child can’t have a roommate or even two.  Fannie Mae Selling Guide
  • Underwriting nuance: Counting “roommate/boarder” income for qualification in a one-unit is tightly limited and won’t work on a purchase loan; a 2–4 unit with the student in one unit, or a home with a legal ADU, underwrites more cleanly.
  • Buiding Credit Smart: Including your child on the loan also jump starts their credit history in a very positive way. With four years of paying a mortgage, and with good management of a couple of credit cards, your child’s score could be near 800 while other young people haven’t even applied for their first credit line.

Dot Your “I’s” and Cross Your “T’s” to SaveYou Hassle Down the Line: prepare a fair-market lease (even with a relative), place in-service records for depreciation (considering a cost segregation for maximum short term benefit), and HOA/municipal compliance (occupancy, parking, subletting).

Our Advice Takeaways:

  • If you have a long runway, a well-bought rental has, historically, a good chance to build more total wealth than a one-time $50,000 529 at birth over 18 years—even before counting any income—and with more flexibility.
  • 529s remain excellent: simple, tax-efficient shelter for education (including room & board within limits), now more flexible with Roth rollovers if unused.
  • Kiddie condo decisions: the bottom line whether it pencils out. Four years of rent can add up to a significant downpayment, but then there is the issue of covering the mortgage. Your strategy should pnecil out now have a clear exit strategy, considering the demand in the market as well as personal considerations, such as your relationship to the location beyond 4 years of college.
  • New tax rules (OBBBA) can accelerate deductions via cost segregation, but think of that as a booster, not the engine. New Cost Segregation rules will allow 100% depreciation.
  • In the first year of certain 5-20 years depreciation items, but it won’t turn a bad buy into a good one.

SEPTEMBER BLOG PREVIEW

In next month’s Ritter blog, we’ll go much deeper on how to assess properties beyond DSCR—including market, marketability, cap rate vs. cash-on-cash, HOA risk, campus-adjacent red flags, and how to gauge market stability over the long term.

Meanwhile, have questions about a specific investment property? – or want to throw ideas around given your unique situation? – please reach out. We also have referrals for agents who specialize in evaluating properties. However we can help, our team is here to shepherd you to success with your real estate investing goals.

“Let real estate fundamentals—not fear—guide your next move.”
— Jon Ritter

Works Cited

  1.  Fannie Mae. “B2-1.1-01, Occupancy Types.” Selling Guide, 5 Oct. 2022, https://selling-guide.fanniemae.com/sel/b2-1.1-01/occupancy-types. Accessed 22 Aug. 2025. Fannie Mae Selling Guide “B2-2-04, Guarantors, Co-Signers, or Non-Occupant Borrowers on the Subject Transaction.” Selling Guide, 2 Sept. 2020, https://selling-guide.fanniemae.com/sel/b2-2-04/guarantors-co-signers-or-non-occupant-borrowers-subject-transaction. Accessed 22 Aug. 2025. Fannie Mae Selling Guide
  2. Freddie Mac. “Mortgage Rates—Primary Mortgage Market Survey (PMMS).” FreddieMac.com, 21 Aug. 2025, https://www.freddiemac.com/pmms. Accessed 22 Aug. 2025. Freddie Mac
  3. “PMMS Weekly Archive (30-Year FRM 6.58% on Aug. 21, 2025).” FreddieMac.com, https://www.freddiemac.com/pmms/pmms_archives. Accessed 22 Aug. 2025. Freddie Mac
  4. Internal Revenue Service. Publication 527: Residential Rental Property (Including Rental of Vacation Homes). 2024, https://www.irs.gov/publications/p527. Accessed 22 Aug. 2025. IRS
  5. Publication 544: Sales and Other Dispositions of Assets. 2024, https://www.irs.gov/publications/p544. Accessed 22 Aug. 2025. IRS
  6. Publication 590-A: Contributions to Individual Retirement Arrangements (IRAs). 2024, https://www.irs.gov/publications/p590a. Accessed 22 Aug. 2025. IRS
  7. Publication 970: Tax Benefits for Education. 2024, https://www.irs.gov/publications/p970. Accessed 22 Aug. 2025. IRS
  8. “Net Investment Income Tax (NIIT).” IRS.gov, 1 July 2025, https://www.irs.gov/individuals/net-investment-income-tax. Accessed 22 Aug. 2025. IRS
  9. “Topic No. 409, Capital Gains and Losses.” IRS.gov, 8 July 2025, https://www.irs.gov/taxtopics/tc409. Accessed 22 Aug. 2025. IRS
  10. “Topic No. 414, Rental Income and Expenses.” IRS.gov, 15 Nov. 2024, https://www.irs.gov/taxtopics/tc414. Accessed 22 Aug. 2025. IRS
  11. “Topic No. 415, Renting Residential and Vacation Property.” IRS.gov, 6 Aug. 2025, https://www.irs.gov/taxtopics/tc415. Accessed 22 Aug. 2025. IRS
  12. United States, Congress, House. H.R. 1—One Big Beautiful Bill Act. 119th Congress, Public Law 119-21, 4 July 2025. Congress.gov, https://www.congress.gov/bill/119th-congress/house-bill/1. Accessed 22 Aug. 2025. Congress.gov