When you have a child, anxiety comes with the territory.
When your child is very young, your primary role involves teaching them about the world and safeguarding them from its dangers. However, as they grow older and begin contemplating post-secondary education, a new responsibility emerges—navigating the financial landscape of higher education. This can be especially stressful for parents today who are facing tuition and rental expenses for their children that vastly exceed the costs they needed to pay when they were in college 20 or 30 years earlier.
To ensure your children receive the best possible education, two significant investment options in Canada – Real Estate and the Registered Education Savings Plan (RESP) – come into play. Let’s evaluate each to determine which is more effective for supporting your child’s educational journey.
RESP: Government-Backed Education Savings
The RESP is an education savings account, a product of a Canadian government initiative aimed at aiding families to save for post-secondary education. Contributing $2,500 annually rewards you with an additional $500 (20%) courtesy of the Canadian Education Savings Grant. While the prospect of an immediate 20% return is alluring, remember, this is a one-time benefit.
Assuming an 8% annual return and an annual contribution of $3,000 ($2,500 + $500 grant), the total accumulation over 15 years approximately hits $82,000. However, it’s worth noting that these funds are bound by restrictions on amounts and purposes, consequently limiting their flexibility.
Jason Henneberry, Co-Founder & COO with Tango Financial, a full service national mortgage brokerage. Tango Financial helps Canadian Homeowners build their wealth by providing more than $4.7 billion in mortgages annually. Though Jason appreciates the role that RESPs can play in funding education, he also sees the potential problems that come with it:
“$83,000 may appear as an impressive amount, but in reality, the combined cost of post-secondary education and residency currently averages more than $96,000. It’s estimated that this figure will exceed $135,000 by 2040. For a child born today, parents will need to save around $373 monthly, about $4,476 annually, to cover their child’s future educational needs.
That’s an incredible amount of money, even for two parents working full-time jobs! The level of foresight and work required to put your children through post-secondary education today is simply breathtaking and, as helpful as they can be, RESPs just aren’t up to the job of providing a necessary level of financial stability to fund education anymore.”
The Road Less Travelled: Investing in Real Estate
Let’s shift our attention to real estate investment, an alternative path that may offer your child enhanced financial flexibility and control.
The Cornerstones of Real Estate Investment
When asked about a potentially better option to help families fund education, Jason’s response was immediate: real estate investment.
“Ok, now, imagine investing $4,476 annually as interest-only payments against an equity loan on your primary residence, equating to $373 monthly. A rate of 7.2% allows for an equity loan of around $62,000, which could serve as the down payment for a small rental property valued at $200,000 in a resource-rich Canadian town.”
You can see where this is going. With a gross rental income of $1,800 per month and a net income of $272 per month after deducting expenses, the rental income effectively services the mortgage. With an average interest rate of 5.45%, the remaining mortgage balance after 15 years will be around $110,000.
The Magic of Compounding
Typically, Canadian real estate appreciates at 3% annually. Based on this assumption, the property’s value at the end of the 15th year will be approximately $311,500. After accounting for the outstanding mortgage, the net equity stands at an impressive $201,500.
Moreover, the cash flow from the rental property continues to appreciate over time. The surplus cash flow can gradually pay off the source of the down payment, with enough left over for the family to save an additional $72,000 over this period.
The $201,500 net equity, combined with the $72,000 in extra savings, results in a total financial gain of $273,500. That’s nearly double the savings accumulated through the RESP.
Leveraging Equity for Education
When your child is ready for higher education, you now have options! You can sell the property and use the funds for education. You could also refinance to generate a self-funding student loan paid off by the tenant. This strategy retains the real estate investment, allowing continued appreciation while the child attends school.
As we’ve noted, rental income rises with inflation. By the 15th year, net rental income could reach around $2,804 per month.
The child can then refinance the property to access the $135,000 needed for their education. Combined with the outstanding balance of the previous mortgage, the total new funds borrowed against the rental would amount to $361,200. This scenario would result in a monthly payment of $1,377 and a surplus rental cash flow of approximately $300 monthly, thus ensuring the “self-funding” nature of the student loan.
The benefits from this investment strategy extend far past college or university for your kids. Let Jason explain…
“Now, let’s fast forward a few more years. Your child has graduated and even started their career. If they retained the rental for a full 25 years, the property would now be valued at $418,700, with an outstanding mortgage balance of $202,000 remaining against it. That’s a mind-blowing asset to have at your disposal at the age of 22 years old!
Plus, the rental property will likely continue to generate a positive rental income, potentially in the range of $1,000 per month. That income will dramatically improve your child’s quality of life in their 20s, especially if they choose to live in an urban centre with incredibly high rent levels like Toronto or Alberta. Rather than being forced to live with several roommates until their mid to late 20s to make ends meet, they can instead afford their own place where they can start to build their future!”
Passing on Lessons to the Future
To be honest, the most challenging part of all of this will likely be to keep your teenager engaged in the process!
For most teens, their parents trying to explain the concept of compounding interest will likely put them into a sulky coma. But keep at it! The lessons you teach them will not only make them more involved in their own financial well-being but will also teach them invaluable lessons about real estate and investment. They will take these lessons with them throughout their post-secondary education and beyond! They can even continue to leverage this knowledge for significant life milestones like marriage or even pass the knowledge and wealth on to the next generation.
If you want more information about how RESPs and real estate compare to help fund skyrocketing education costs, Jason highly recommends the free RESP vs Rental mini-course from Strategy Hub. It’s filled with details that will help you make the important decisions to set your children on a promising and debt-free future!
Final Thoughts: Real Estate is the Clear Winner
When considering ways to fund education, real estate investment outshines RESP in just about every way. Its robust financial performance, compounded growth, and remarkable flexibility place it in a league of its own. It doesn’t just fund education but can become a perpetual source of wealth and learning, enriching the lives of your children and future generations.
To ensure your children’s financial stability through their post-secondary education and beyond, visit Tango Financial at tangofinancial.ca or contact Jason Henneberry directly at jason@tangofinancial.ca. And to learn more about how you can build your wealth to help your children afford the best education possible, check out the free RESP vs Rental mini-course on Strategy Hub.
