WARNING: If you think an RESP will pay for your baby’s college education, you’re wrong

Last week at Toastmasters, our club president gave a speech about Registered Education Savings Plans (RESP).

He determined that the cost of a 4 year post secondary degree, away from home, will be well over $100,000 in 15 years (he estimated as high as $180,000, but that may have been a US statistic). The RESP he was ‘selling’ would 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 contributiUniversityon is maxed out at $42,000, and annual contributions are maxed at $4000 a year – hardly enough to grow to a six figure sum by the time little Josh 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 $12,500 (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 2 bath condominium in Kitchener for $125,000.

Since you have a $12,500 downpayment, you now need a mortgage for $112,500. We’re going to use a 20 year amortization period, and we’re going to make payments on the mortgage every two weeks – making the effective amortization 17.2 years. At a 6% interest rate, the bi-weekly accelerated payments would be $400.50 every two weeks, or $801 per month. Condo fees are $200 a month, and municipal tax are about $100/month.

Assuming the unit is rented for $950 a month + hydro, there is a negative month to month cash flow of about $150 a month. When you compare this $1800 a year against the $4000 you would be contributing to an RESP, it is a much smaller figure. In fact…

Your annual contribution is 55% less than it would be under a traditional RESP plan

If the condominium does not appreciate one penny between now and 17 years from now – which is when you’ll need the money for Junior’s college tuition – it will be completely paid off and worth $125,000. Great return on your investment !

That will cover most of the cost of tuition, and it’s about double what the value of the RESP will be.

The condominium market has appreciated ~8% in the past year, and if it continues to appreciate, even at 5% a year, your Real Estate Investment will be worth north of $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 opportunity real estate offers you.

Call me for a free consultation. We will look at your needs – retirement, education, a second home – and develop a plan to get you where you need to be.

Are you interested in how you can start investing in real estate, but not sure where to start ?  Do you want access to proven systems from millionaire real estate investors? Come out on September 20th to a FREE workshop.  All the details are at http://www.kwinvestments.com

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One response to “WARNING: If you think an RESP will pay for your baby’s college education, you’re wrong

  1. We recently compared Real Estate v. 529 plans for college savings: http://www.pdxrecafe.com/college-savings-and-real-estate/

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