With tuition costs soaring and the stock market not exactly helping those who’ve been saving for their kids’ education bills, some parents are getting creative in paying for college.

With three sons fast approaching college age and not a lot of money set aside for their expenses, Greg and his wife began entertaining the idea of buying rental property in the towns where their kids went to school.   Today, with their first child finishing his senior year and their second one in his sophomore year, their strategy has paid off.  Twice.  Here’s how they did it.

Do Your Homework

When their oldest son started college at a school two hours from home, he spent his first year in a dorm.  That gave him time to build friends, some of which would become his roommates in the house his parents eventually bought.  And it gave Greg and his wife time to learn the area.

“I think it’s important to take your time in getting to know the market and the neighborhoods,” Greg said.  “We looked at lots of neighborhoods.  Some were run down and scary; others were nicer, but we couldn’t afford them. It took some time to find the right place.”

At first, they looked into short sales, but found the process “painfully tedious.”  They ended up buying a duplex directly from the seller for $115,000, using a home equity line borrowed against their primary residence.  Being able to pay cash “puts you in a better position to act quickly,” Greg said.  “The downside is you’re mortgaging your primary residence and the interest rate is variable.”

They converted the duplex into a single-family home, with Greg doing most of the work himself.  “That’s my philosophy.  If I can do it myself, I will.  A lot of your profit gets eaten up if you have to hire out the work.”

After some painting, adding a used washer and dryer, and partially furnishing the house with some of their own furniture and other pieces they bought used, it was ready to go.

They traded a $750-a-month dorm bill into having their son live rent-free.  In fact, after paying the mortgage, taxes, insurance, and maintenance, the property is turning a $300 per month profit.

Know Your Renters

Their first property was completely occupied (5 renters plus their son) from the start of their son’s sophomore year.  At first, everything went smoothly.  However, when one renter transferred to a different school and found someone to take his place in the house, the new guy stopped paying his rent after just one month and had to be booted.  That cost Greg and his wife two or three months’ worth of rent in the process.

Still, Greg and his wife do not run credit checks on prospective renters since they are usually friends of their son.  To create lease contracts, Greg used an online service.

They have students sign a one-year lease, even if they don’t plan to take summer school classes, giving renters the option to either pay half-rent over the summer when they’re not there or sub-lease.  Most choose to sub-lease.

Buying a Second Property

Two years after purchasing their first college-town rental property, they did it again for their second son, who chose a school closer to home.

He, too, spent his first year in a dorm, giving Greg and his wife time to look for a suitable property and giving their son time to make friends who would become renters.

They paid $83,500 for a “neglected” 100-year old two-family house and then spent $7,000 and six months of hard labor turning it back into a single-family home with five bedrooms.  Greg worked on the house almost every day after finishing up his day job.  His son helped as well.  Even the dads of some of his son’s friends who planned to live there pitched in.

Just as with the first property, their son is now living rent-free, and the property has positive cash flow.  To pay for the property, they once again used their home equity line and also a 10-year home equity loan against the first rental property.  They have since refinanced the property with a 30-year mortgage.

Added Benefits

Having a son living in each rental property has saved Greg and his wife from countless headaches.  Plus, their sons have learned how to keep up with home maintenance and take responsibility for resolving roommate disputes

It has also given Greg additional time with his sons as they’ve done repair work together and talked through the various issues that come with owning rental property.

Lessons Learned

Both of the rental properties are close to campus – half a mile away in the first case, nine-tenths of a mile in the other – which Greg points out is essential in order to rent to college students.

Since he is the primary handyman, he also needs to be within driving distance of the properties.  In retrospect, Greg says the first rental is too far away. “Whenever something breaks, because I’m cheap and don’t want to pay someone to fix it, it makes repairs more of a hassle.”

Still, after their sons finish school, Greg and his wife plan to keep both properties, figuring they will provide a nice flow of added retirement income.  As their third son nears college age, Greg says they’d consider doing the same thing with him, as long as he chooses a school that’s within an hour’s drive.

What other creative college funding ideas do you have?

Matt Bell is the author of three personal finance books published by NavPress, including the brand new "Money & Marriage: A Complete Guide for Engaged and Newly Married Couples."  He teaches a wide variety of workshops at churches, conferences, universities, and other venues throughout the country.  To learn more about his work and subscribe to his blog, go to: www.mattaboutmoney.com.