It’s recently been determined that the cost of a 4 year post secondary degree, away from
home, will be well over $100,000 in 15 years. An RESP could cover less than half of that cost. How can this be?
While the RESP is billed as “a clear choice for families wishing to save for their children’s future education costs,” the reality is that the lifetime contribution is maxed out at $50,000, – hardly enough to grow to a six figure sum by the time little Adam goes to university.
What is the alternative? Invest in real estate, and benefit from leverage and having someone else paying off the loan.
Imagine you did this: Take $27,000 (from savings, home equity, stocks etc), and use that as a down payment on a real estate investment property. In this case, we’ll purchase a 2-bedroom 1-bath condominium in Kitchener for $135,000.
Since you have a $27,000 downpayment, you now need a mortgage for $108,000. We’re going to use a 20 year amortization period, and we’re going to make payments on the mortgage every week – making the effective amortization 18 years. At a 5.25% interest rate, the weekly accelerated payments would be $181.00 every week, or $784 per month. Condo fees are $215/month, and municipal tax are about $120/month.
Assuming the unit is rented for $950 a month + hydro, there is a negative month to month cash flow of about $170 a month. When you compare this $2025.00 a year against the average amount of $4,000/year you would be contributing to an RESP, it is a much smaller figure. In fact…
Your annual contribution is almost 50% less than it would be under a traditional RESP plan
If the condominium does not appreciate one penny between now and 18 years from now – which is when you’ll need the money for little Adam’s college tuition – it will be completely paid off and worth $135,000. Great return on your investment!
That will cover most of the cost of tuition, and it’s more than double* what the value of the RESP will be.
The condominium market consistently appreciates, anywhere from 3%-8% per year. If it continues to appreciate, even at 4% a year, your Real Estate Investment will be worth well over $150,000.
The smart choice is to buy an asset with borrowed money, and have someone else pay off most of the loan. That’s the beautiful opportunity real estate offers you.”
Intrigued? Call me for a free consultation! I will look at your needs – retirement, education, a second home – and develop a plan to get you where you need to be.
*A note of caution: Government Grants are available to families who contribute to RESP’s, as much as $7,200. Remember: the money in the RESP is strictly for post-secondary education. It can be used in Canada or abroad at a qualifying institution. However, if your child decides to not pursue university, college or an equivalent, you may need to return the grant money and pay high taxes on the earnings.