Real Estate; A Career or the Means to A Career

Being conflicted as to whether to write about financing an education with your real estate OR having your child enter real estate as a career, I thought perhaps with some effort I could figure out how to do both at the same time. So here we go.

Let’s consider financing an education with your real estate. I know from firsthand experience that those first 18 years of your child’s life fly by like they’re on a meteor. The next thing you know is that you’re receiving tuition bills that you’re just not prepared for. So, you can do your best to acquire student loans and that may just handle some of the problem, but chances are pretty good that you’re going to need more. Where you going to find it? Well, I suppose you could sell the younger children, but since that’s probably not acceptable where you’re from, there is always the house. Now I guess you could sell the place and move into the dorm with Junior, but since you have probably outgrown that lifestyle, here’s a better idea: just refinance the homestead.

When it comes to refinancing you have a couple of options. You can either refinance your first mortgage or you can get a second mortgage. Both options have their advantages and disadvantages. The primary disadvantage of both is that you are putting yourself in debt again after spending a number of years paying the thing off. I don’t want to take a tone with you, but if you didn’t want to find yourself here, you should have made a plan for this when Junior was in Pampers, or did you think we would have socialized education by this time?

Here are the pros and cons. Refinancing your first mortgage will get you the absolute lowest interest rate; banks like being the first lien on your house, and so they are willing to give you an incentive to do that. The con, of course, is that the closing costs involved are rather steep. How steep? Remember when you first purchased the house and got your first mortgage? That steep. You’ll save a little, because you won’t have to escrow for taxes again (or at least you will receive a credit from your current mortgage for the escrow account they are holding). Because it is not a purchase, you will save purchase related costs like transfer tax and the cost associated with recording the deed.

Option two is to get a second mortgage. Leave your current mortgage in place and obtain a second to release your equity. The con: interest rates are higher than those charged for first mortgages, not outrageously higher but several points higher. The advantage is that there are virtually zero costs associated with a home equity line of credit (HELOC), and it is always available for you, so if you can get it paid off before Junior’s sister starts her freshman year you can just write yourself another loan from your HELOC and allow the pain to commence once again.

“What if I don’t have enough equity to do the job?” you may ask. Never fear; there are lenders out there who will still allow you to borrow 100% of the value of your property. For instance, if your home is worth $100,000 they will allow you to borrow $100,000. I know it sounds crazy, but I guess they trust you. The really great news is that borrowing equity, whether by refinancing or HELOC, for educational purposes, makes the interest you pay totally deductible under most circumstances. Be sure to check with your tax consultant anyway.

Let’s suppose you are living under a lucky star and Junior decides that what he would really like is a career in the real estate business. You should welcome this as great news as you can forget everything we have said thus far regarding tuition and refinancing. In order to enter the real estate industry the cost of tuition, books and state licensing fees will probably set you back about $500.

The requirements are rather simple: a high school graduate simply takes two courses, Real Estate Fundamentals and Real Estate Practices. Modern Real Estate Practice in Pennsylvania, is the preeminent text on the subject and is used in both courses. I would go so far as to say, if you find a school teaching these courses that does not use this text, go somewhere else, as that text is the only one written for real estate the way we do it in PA, and is a great reference tool once you have entered the business.

Now don’t misunderstand, if Junior decides to follow this career path, he will have his work cut out for him. There are thousands of folks involved in our business locally, the competition is fierce and the chances of stardom are remote. Ninety percent of the business is done by about 10% of the agents, but if you click, the rewards are fantastic. I know many who are making impressive six-figure incomes, the equivalent of professionals who spent years in advanced education programs. There are very few careers in which the earning power is so great compared to the initial investment made. So if your child chooses this road, good luck. If not, the mortgage application process is painless.

Gary Straub is an independent real estate consultant and real estate professional for 36 years.