We have a 16 year old daughter and are starting to think of this whole process of college.
our main concern is my husband and i have several rental properties (two-3 family homes with 8 apartments in somerville). we have had those over 20 years. this is really our ONLY source of income and we are concerned about what that means in terms of asset on our financial aid as our annual income is not very high however the property value is high, there is a bit or a mortgage but not too high from 22 years ago. we can not sell as that would mean no income and our annual income is below $50 000 a year.
in the past we have been self employed; me as graphic designer and my husband as a carpenter contractor. the last few years have however been dedicated to focusing on the rentals and management and improvement of them.
is the asset value going to hurt our chance for financial aid?
Any real estate that you are not occupying as your primary residence will need to be reported as an asset, minus any mortgage balance. This can present a problem to those who make their living from renting properties and are counting on those assets to fund their retirement, as you are obviously aware.
Does it matter? What are your options?
Sell? Why would you think it’s better to make less money, lower your standard of living, sacrifice what you’ve worked to build up over the years in trade for a temporary situation? It is what it is.
Congrats on building up a source of income!
Start looking for merit aid if possible. Go full throttle on saving and research into schools.
I think OP is just looking for a general answer of whether or not these assets will impact need-based financial aid, and the answer is that yes, they will.
Most colleges will suck as much money from the parents as they can. The OP should consider delaying any major maintenance or renovation items until the year your D is in college. That way, you can reduce your reported income and hopefully boost your need based award.
<<<
in the past we have been self employed; me as graphic designer and my husband as a carpenter contractor. the last few years have however been dedicated to focusing on the rentals and management and improvement of them.
[QUOTE=""]
[/QUOTE]
Now that you’ve made the improvements and they’re rented, is your husband going to go back to work as a carpenter?
Unfortunately the rentals are going to “hurt” your chances for financial aid. I will share with you our situation from the previous years, in 2009 we owned a condo from my husband’s bachelor days 25 years earlier, it was owned free and clear with no mortgage. Our income was under $160K which for some colleges meant we could qualify for a small amount of financial aid. When I did our FASFA our EFC was $60K which made me laugh since that represented 50% of our take-home pay and we live in a part of the country where the cost of living is very high. If we spent $60K on college we would not have anything to live on after paying our mortgage (and we don’t live frivolously). The $60K figure represented 1/4 the value of the condo so over the course of 4 years of college it would equal $240K, the value of the condo at the time. It has been my experience that rental income is treated differently from the family home and is basically an available asset that can be sold to fund your child’s education. Basically the colleges were requiring us to sell the condo and use the proceeds to pay for our child’s college education. Unfortunately we had more than one child so we didn’t want to give child #1 all the condo money and have no money for child #2.
Fortunately we had started early in the college admission process and had our DS focus on schools that give merit money for his level of grades and test scores. We were blessed with him receiving a full merit ride to Ohio State. His merit ride would not be possible today,(they got rid of one of his scholarships) but still Ohio State is affordable for a lot of out of state families since OSU has allowed current students to stack awards like the National Buckeye and the Provost scholarships. Since we would have been full pay at our in-state publics which are about $34K, OSU was cheaper with just one of his scholarship awards.
To show you how crazy rental income can be for financial aid, my next story is even sadder, Our house was basically destroyed in 2014 when water pipes broke while we were attending child #1’s graduation. We had good insurance but they wouldn’t cover the cost of everything so we had to sell the condo. We sold it for $295K and had to pay almost $100K in capital gains taxes and spend about $150K in rebuilding our home. Our EFC last year for child #2 was $159K!! (almost our family’s entire income for the year). I wrote about our home’s issue on our financial aid papers and it seemed to not matter. Fortunately child #2 has some scholarships and is taking a semester co-oping and earning her tuition for next year which we also give us time to save more.
It is great that you have the rental income, but have your child try to get good test scores and grades. Focus on schools that give merit money or participate in tuition exchange programs in your state (like WUE). Read the book “The College Solution” and the website by the same name. We used the advice giving in that book for both our children and it was extremely valuable. There is a college out there for a student at a price they can afford, you just have to find it. Both of our children have no loans, but they took colleges off their list that gave no merit money.
Good luck, You are smart to start thinking about this issue now. Also have your child apply early action to her colleges, we found the better merit money was given in the early action rounds.
I must be missing something here. The maximum long term capital gains tax rate is 20%. How did you end up paying almost $100k in capital gains tax on a sale of $295k, all of which surely was not a gain (unless your husband’s cost basis in the condo was somehow $0)?
Does that $50,000 income include the rents from those rental properties?
The FAFSA and Profile formulas do consider real estate equity other than your primary residence to be assets. The value of these assets is assessed at 5.6% for FAFSA purposes.
If your income is really under $50,000 a year, your family might qualify for,the simplified needs test. You would need income below the threshold which is currently $50,000. And then you would need one of the following in addition:
Eligible to file a 1040 A or 1040 EZ form (not likely with rental properties)
OR
Qualify for a means tested benefit like SNAP or free/reduced lunch. Does your family qualify!
OR
Parent is a dislocated worker (doesn't sound like that is the case either).
If you have the income threshold and one of the above three items, you assets are not counted at all for FAFSA purposes.
However, there isn’t simplified needs test for Profile schools.
One question is what are the rental assets worth? With an annual revenue of $50,000 for that many units, that is a low monthly rent per unit. Of course with a 5% CAP, that’s still one million in assets. I’m not asking you to post the number here for the public but you need to know your net worth to know how much it will impact you. You can find the formula for what percentage of assets you are expected to use to fund your child’s education.
Say it is one million, you could sell 10-20% of your portfolio to pay college. One of you could also go back to work if that is not acceptable. If it makes you feel better, public universities don’t supplement federal aid which is hard to qualify for. It would impact private school grants.
16 year old sophomore or junior? Has she taken SAT or ACT yet? lots of threads about state schools with automatic merit aid from test scores.
thanks everyone for your feedback. my daughter is a sophomore so we have a little bit of time. i’m just trying informatively figure out where we stand and what to expect. several great suggestion and ideas where proposed. our houses are two 3 family homes so 6 apartments in total with 6 individual rents. due to us owning the houses for 24 years we have a mortgage on it that is small about 1/4 of the house value. the last few years the properties have finally after all those years become more of a business and they are generating us with an income. we focus on the upkeep administrative and maintenance and construction. it has become a business and we tread it that way. the just below $50 000 is adjusted gross income.thank you everyone for your valuable input.
Just remember…you are likely taking business and rental property deductions. These might be allowed for IRS tax purposes, but some of them might NOT be allowed for need based financial aid purposes…and will be added back in as income when your need based aid is calculated.
<<<
have several rental properties (two-3 family homes with 8 apartments in somerville)
[QUOTE=""]
[/QUOTE]
Was the 8 a typo?
Just assume that by the time your DD applies for college that you won’t qualify for much/any financial aid due to those assets.
Reading between the lines, it appears that you’re in a situation where you can’t pay much for college. That is different from simply qualifying for FA. For instance, your child may qualify for financial aid at a particular school, but if the school still expects you to pay $35k per year, it doesn’t sound like you can pay that.
If you’re looking for a free ride or near free ride, then you will need to consider schools that give huge merit for her stats.
My advice is to hone in on what DD wants to study, have her take advantage of AP, IB, or dual enrollment at her HS, to take a baseline ACT and SAT at the end of sophomore year (meaning look on line and signing up). Many students do well bringing up ACT score with test prep (both mine did for in-state scholarships). One DD took SAT a 2nd time and didn’t improve her score, so it was work on the ACT.
Take advantage of all educational opportunities in HS. My H was thinking once a kid is 16, to take a PT job - then I showed him the scholarship amounts and he realized that if the kids focused on academics and the ACT test score, they would do so much better towards the college expenses.
We do believe in work (and our kids have a good work ethic). That first job is important to get (both of mine got it after HS).
If you are talking Somerville AL and are in-state, look at your daughter’s HS GPA and what she wants to study. UAH has their scholarship spelled out in a chart on their web site.
Is there a commutable community college or college? That could save room and board, and also she may qualify for scholarship. To go away, you would be minimally paying room/board and other expenses (if she got a full tuition scholarship) so you are looking at maybe $15K a year. Perhaps if you start saving some now, you can have enough of a nest egg to cash flow this type of college expense.
I assumed OP means the Somerville just outside Boston (and with lots of triple-decker buildings.) If so, as the area upgrades, her property values (assets) increase, adding to the pain.