Go to College or Skip It to Invest in Real Estate

College or real estate investing? That's a great question.

What if you earn $30,000 more per year after you get your degree than the person who doesn't go to college and you decide to invest the full $30,000 per year extra?

We tackle the age-old question: Go to College or Skip It to Invest in Real Estate in this special class by James.

This class was taught on January 13, 2021 via webinar.

Tammy had sent over an article, Is This The End of College As We Know It, and James decided to do some math to see if the extra earning power of a college degree was worthwhile.

Assumed Cost of College

For this class, I looked up the cost to attend our local Colorado State University.

Cost of College
Cost of College

I ended up rounding down and estimating college was $25,000 per year including tuition, books, supplies, fees, room, board and other expenses.

Difference in Salary for College Grad Versus High School Grad

How much more does the college grad make than the high school grad?

Average Salary Difference College Versus High School
Average Salary Difference College Versus High School

I ended up rounded down and estimated that the college grad earns $30,000 more per year than a high school graduate investing in real estate.

Furthermore, I assumed that the college grad invested the full $30,000 difference each year and both lived on a $50,000 per year income.

Setting Up The Comparison

For the comparison, here's what I assumed is the same:

  • Family has saved up $100K for either college or investing
  • Both kids receive the full $100K upon leaving high school
  • Both invest it in the stock market (or equivalent) and earn 8% (until they spend it)
  • Financial Independence = Replace $50K/year Passive Income
    • Cash Flow (after all expenses on rentals) +
    • 4% Safe Withdrawal Rate of Money in Stocks

Plus, the properties are the same.

  • This property is a Nomad™ property that you live in until you buy your next owner-occupant property. When you buy your next Nomad™ property, this one becomes a rental.
  • This property uses dynamic rules to determine when we buy/sell it in the scenario.
  • Account for down payment, income and expenses for this property: All-In-One Account
  • $350,000 property value and purchase price and it goes up at a rate of 3% per year.
  • 5% of purchase price for down payment.
  • 1% of purchase price in closing costs at time of purchase.
  • No seller concessions.
  • 2.75% is the mortgage interest rate with a term of 360 month mortgage term.
  • Private Mortgage Insurance (PMI) at a rate of 0.5% of the initial loan balance until the loan-to-value drops below 80%.
  • $2,100 per month in rent but rent increases at a rate of 3% per year.
  • 3% of the monthly income is the assumed vacancy rate.
  • 10% of the monthly income is the assumed maintenance rate.
  • 1% of the value of the property each year is the assumed property taxes rate. Based on the initial value of $350,000 that's about $3,500 per year in property taxes at the start and it changes as the property value changes.
  • 0.4% of the value of the property each year is the assumed property insurance rate. Based on the initial value of $350,000 that's about $1,400 per year in insurance costs at the start and it changes as the property value changes.
  • This is a residential property and 15% of purchase price is considered the value of the land (when doing our depreciation calculation).
  • All properties are self-managed.

Is This An Amazing, Unrealistic Property?

Nope. Clients have bought several properties like this in the last year.

Here's the Cash Flow Power Meter™ for it.

Over time, it looks like this:

Cash Flow Power Meter™
Cash Flow Power Meter™

And, here's the Return in Dollars Quadrant™ for the property.

Financing Tangent

Then, in the class I went off on a side tangent about financing with an updated version of my loan type comparisons.

Loan Type Comparisons
Loan Type Comparisons

And, I show the estimated monthly payment for the table above in a variety of new forms.

Estimated Monthly Payments - All Loans
Estimated Monthly Payments – All Loans

Or, just the owner-occupant loans:

Estimated Monthly Payments - All Owner-Occupant Loans
Estimated Monthly Payments – All Owner-Occupant Loans

Or, just the non-owner-occupant (investor) loans:

Estimated Monthly Payments - All Non-Owner-Occupant Loans
Estimated Monthly Payments – All Non-Owner-Occupant Loans

Or, finally, a comparison of all the non-owner-occupant loans with just the 5% down owner-occupant options as well.

Estimated Monthly Payments - All Non-Owner-Occupant Loans Plus 5 Percent Down Options
Estimated Monthly Payments – All Non-Owner-Occupant Loans Plus 5 Percent Down Options

If we looked at each of these loan options (from the table above) in terms of the return quadrant's components of return but in a table, here's what we get.

Return in Dollars Plus Reserves
Return in Dollars Plus Reserves

By the way, you can see this same information for your own portfolio (and even future purchases) by entering your own stuff in the Real Estate Financial Planner™ software.

Continuing, if we take the same info in the Return in Dollars Plus Reserves™ table and created a chart of it, you get the following.

Return in Dollars + Reserves™
Return in Dollars + Reserves™

Since, we're comparing different loans buying the same property, the appreciation and Cash Flow from Depreciation™ will remain unchanged. So, we can eliminate those two (and the total) from the chart to eliminate some noise.

Return in Dollars + Reserves™ - Just Cash Flow and Debt Paydown
Return in Dollars + Reserves™ – Just Cash Flow and Debt Paydown

But, if we are varying the down payment, is it really appropriate to compare getting one cash flow with nothing down versus getting another cash flow with 40% down? Not really.

It would be better if we took the amount of return and divided by the amount we put down (or in this case the equity in the property) to get a feel for what our return on equity was. That's this next table.

Return on Equity Plus Reserves
Return on Equity Plus Reserves

And, taking that table and showing it on a chart for easier comparison, we get the following Return on Equity Plus Reserves chart.

Return on Equity Plus Reserves
Return on Equity Plus Reserves

And, that was the end of my tangent on financing. Back to the focus of the presentation: real estate investing or college.

What's Different

So, we've talked about what is the same between going to college and investing in real estate instead. What's different?

For going to college, I assumed:

  • College costs $25,000 per year – assume this includes room and board too
  • Earns $80K per year after college – adjusts with inflation
  • Saves/invests $30K of their $80K income per year
  • Buys house to live in after college
  • Higher income, likely higher income tax – may mean slightly worse standard of living

For investing in real estate instead of going to college, I assumed:

  • No cost for college
  • Earns $50K per year immediately – saves/invests $0 of $50K income per year
  • Buys house to live in immediately as Nomad™ and keeps buying until they have 10 properties total (9 rentals and 1 to live in)
  • Lower income (and depreciation), likely lower income tax – may mean slightly better standard of living

Comparison Charts

The following are some charts comparing the two  Scenarios.

Number of Properties Owned
Number of Properties Owned

How much True Cash Flow™ does the real estate investor make? Here's a chart.

Total True Cash Flow™
Total True Cash Flow™

And, if you're thinking in terms of today's dollars (non-inflated), here's the same True Cash Flow™ chart in inflation-adjusted dollars.

Inflation-Adjusted Total True Cash Flow™
Inflation-Adjusted Total True Cash Flow™

These are not the most amazing cash-flowing properites. How much negative cash flow did the real estate investor need to endure with this strategy? Here's a chart.

Total Cumulative Negative Cash Flow
Total Cumulative Negative Cash Flow

One of the benefits the real estate investor has over the college graduate is that they get to start earning high rates of return earlier by purchasing rental properties.

Here are a few examples of that with charts showing the Return on Equity for a variety of components.

Total Return on Equity from Appreciation
Total Return on Equity from Appreciation
Total Return on Equity from Cash Flow on Rentals
Total Return on Equity from Cash Flow on Rentals
Total Return on Equity from Debt Paydown on Rentals
Total Return on Equity from Debt Paydown on Rentals
Total Return on Equity from Cash Flow from Depreciation
Total Return on Equity from Cash Flow from Depreciation

How much are all the properties the real estate investor is buying worth?

Total Property Values
Total Property Values

But those are inflated values. What if we adjust for inflation and show the property values in today's dollars? Queue new chart.

Inflation-Adjusted Total Property Values
Inflation-Adjusted Total Property Values

What if we exclude the properties they're living in and just look at the value of the rentals?

Total Property Values - Just Rentals
Total Property Values – Just Rentals

But how much did the real estate investor have to invest—including any negative cash flow—to acquire that many rentals?

Total Invested in Rentals Including Negative Cash Flow
Total Invested in Rentals Including Negative Cash Flow

How much equity does each have in the properties they own (including rentals and owner-occupant properties)?

Total Equity
Total Equity

And, what about the same equity chart above, but adjusted for inflation back to today's dollars?

Inflation-Adjusted Total Equity
Inflation-Adjusted Total Equity

But, how much money do they have in their “bank account” or investment account?

Total Account Balances
Total Account Balances

It is hard to see what is going on in the chart above early in the  Scenario, so let's look at a zoomed in version of just the first 10 years.

Total Account Balances - First 10 Years
Total Account Balances – First 10 Years

And, here's the first 20 years.

Total Account Balances - First 20 Years
Total Account Balances – First 20 Years

And here's how the two compare when we just look at their ending account balance in year 40.

Inflation-Adjusted Total Account Balances - Year 40
Inflation-Adjusted Total Account Balances – Year 40

How about how much equity they have if they were to sell the properties with a real estate broker?

Total Accessible "Sell With Agent" Equity
Total Accessible “Sell With Agent” Equity

That's in inflated dollars. How much “Sell With Agent” equity do they have if we adjust back for inflation to today's dollars?

Inflation-Adjusted Total Accessible "Sell With Agent" Equity
Inflation-Adjusted Total Accessible “Sell With Agent” Equity

That was equity if they sold with an agent. How much equity do they have for cash flow refinances instead?

Total Accessible "Cash Out Refi" Equity
Total Accessible “Cash Out Refi” Equity

If we adjust for inflation?

Inflation-Adjusted Total Accessible "Cash Out Refi" Equity
Inflation-Adjusted Total Accessible “Cash Out Refi” Equity

Net worth takes into account account balances and equity. Here's the net worth comparison.

Net Worth
Net Worth

That was in inflated, future dollars. How about net worth in today's dollars?

Inflation-Adjusted Net Worth
Inflation-Adjusted Net Worth

And, here's an easier way to see how net worth compares in year 40, adjusted for inflation.

Inflation-Adjusted Net Worth - Year 40
Inflation-Adjusted Net Worth – Year 40

Sure, the real estate investor has some good net worth, but they had to take on some real estate debt to do it. How much was the total amount in mortgage balances?

Total Mortgage Balances
Total Mortgage Balances

Next, let's dig a bit into the income (paychecks) coming in at various points of time.

Paychecks After Tax
Paychecks After Tax

The chart above shows each getting cost-of-living adjustments for inflation. The chart below shows paychecks if we adjust back for inflation to today's dollars.

Inflation-Adjusted Paychecks After Tax
Inflation-Adjusted Paychecks After Tax

How much is each saving? Let's start first with the real estate investor skipping college.

Total Saved - Just Real Estate Investor
Total Saved – Just Real Estate Investor

And, here's the college graduate's savings rate.

Total Saved - Just College Graduate
Total Saved – Just College Graduate

And, let's look at the total amount saved for both on the same chart.

Total Saved
Total Saved

And, if we adjust the total amount saved for inflation and show it is inflation-adjusted dollars.

Inflation-Adjusted Total Saved
Inflation-Adjusted Total Saved

What about personal expenses?

Personal Expenses Including Real Estate
Personal Expenses Including Real Estate

If we adjust personal expenses for inflation?

Inflation-Adjusted Personal Expenses Including Real Estate
Inflation-Adjusted Personal Expenses Including Real Estate

The Reveal

So, who achieves financial independence faster?

Goal of Financial Independence
Goal of Financial Independence

Looks like the real estate investor has a significantly faster pace to achieve financial independence.

Achieved 100% of Financial Independence Goal
Achieved 100% of Financial Independence Goal

But, additionally, check out just how much more than their goal (dotted red line at 100%) they each achieved.

Financial Independence Goal
Financial Independence Goal

Comparing Risks of Each Plan

But, which is more risky? One way to measure risk is to look at how much total debt they have compared to their net worth.

Total Debt to Net Worth
Total Debt to Net Worth

And, another way we look at risk is how many months of reserves they have.

Months of Reserves
Months of Reserves

It might be hard to see the first 15 years or so in the chart above, so let's zoom in and take a look at that period.

Months of Reserves - First 15 Years
Months of Reserves – First 15 Years

Can The Real Estate Investor Qualify For Mortgages?!

With an income of $50,000 per year, can the real estate investor qualify for ten 5% down payment loans? It is super close.

Minimum Gross Monthly Income Required
Minimum Gross Monthly Income Required

An Alternative Way Of Thinking About This

When you go to college, you invest $100K to earn $30K more per year in income.

When you skip college to invest in real estate, you invest $100K to earn the following with a property…

…but remember, you're getting 4 of these properties!

So, you're getting 4 times those numbers per year.

Nomad™ Unfair Advantage?

When we compared skipping college to invest in real estate to someone going to college, we assumed the real estate investor invested using the Nomad™ real estate investing strategy and the college graduate invested in a home to live in and then stocks.

Is the Nomad™ real estate investing strategy an unfair advantage? What if our college graduate Nomads™ after finishing college? Is that better?

They acquire 10 properties in both cases.

Number of Properties Owned
Number of Properties Owned

They get the same great returns from owning real estate, but the college graduate is staggered out by a little more than 4 years.

Total Return on Equity from Appreciation on Rentals
Total Return on Equity from Appreciation on Rentals
Total Return on Equity from Cash Flow on Rentals
Total Return on Equity from Cash Flow on Rentals

And they also enjoy similar True Cash Flow™, but also delayed by a few years.

Total True Cash Flow™
Total True Cash Flow™

If we adjust for inflation, Total True Cash Flow™ looks like this.

Inflation-Adjusted Total True Cash Flow™
Inflation-Adjusted Total True Cash Flow™

Eventually—since they're buying the same properties—they have 10 properties worth the same exact amount in total.

Total Property Values
Total Property Values

If we adjust that chart for inflation, we see they eventually both own about $3.5 million in real estate.

Inflation-Adjusted Total Property Values
Inflation-Adjusted Total Property Values

The college graduate ends up with high mortgage payments (because they waited and bought slightly more expensive properties).

Total Mortgage Payments
Total Mortgage Payments

Here are the comparative mortgage balances.

Total Mortgage Balances
Total Mortgage Balances

How much did each need to invest—including negative cash flow—to acquire the 10 properties (9 rentals and the 1 owner-occupant)?

Total Invested in Rentals Including Negative Cash Flow
Total Invested in Rentals Including Negative Cash Flow

What about account balances?

Total Account Balances
Total Account Balances

It is hard to see what is happening with the account balances early on, so here's a zoom of the first 20 years.

Total Account Balances - First 20 Years
Total Account Balances – First 20 Years

How quickly do they achieve the goal of financial independence now that they're both Nomading™?

Goal of Financial Independence
Goal of Financial Independence

It helps a lot…

First Achieved 100% of Financial Independence Goal
First Achieved 100% of Financial Independence Goal

And, similarly they can now enjoy a higher standard of living as well.

Financial Independence Goal
Financial Independence Goal

And much better net worth, but still not quite as good as skipping college to invest in real estate.

Net Worth
Net Worth

Here's a quick comparison of net worth, adjusted for inflation in year 40 between the three  Scenarios.

Net Worth - Year 40
Net Worth – Year 40

But how about risk? A little riskier for the college graduate?

Months of Reserves
Months of Reserves

If we zoom in to see the first 15 years, we can see more about what is happening with reserves.

Months of Reserves - 15 Years
Months of Reserves – 15 Years

Looking at the Total Debt to Net Worth chart to estimate a measure of risk, we can see that going to college keeps with a higher risk and for a longer period of time.

Total Debt to Net Worth
Total Debt to Net Worth

Can the college graduate afford the mortgages? Yes. Much easier than skipping college and investing in real estate.

Minimum Gross Monthly Income Required
Minimum Gross Monthly Income Required

Real Estate Investor – No Roommates

For our original assumptions, the real estate investor that skipped college got roommates for the first 4 years at $500 per roommmate per month ($1,000 per month total).

What if they don't get roommates?

First Achieved 100% of Financial Independence Goal
First Achieved 100% of Financial Independence Goal
Financial Independence Goal
Financial Independence Goal

And they still enjoy a very high standard of living.

Financial Independence Goal
Financial Independence Goal

And, finally, comparing net worth for the 4  Scenarios.

Net Worth - Year 40
Net Worth – Year 40

Not Discussed

While we did cover 4  Scenarios, there are a number of things we did not cover.

For example, we did not discuss paying off properties early including selling properties and using the equity to pay off other propreties.

We did not discuss doing cash out refinances to retire early while we are waiting for the other properties to improve cash flow when we reach true financial independence.

Nor did we discuss coasting into retirement.

And, our assumptions were static. 3% appreciation, rent appreciation and 8% return in the stock market. We did not discuss modeling variability in returns. Nor did we do any  Monte Carlo simulations.

We did the basic  Scenarios and did not venture into advanced strategies.

If you decide this is your investing strategy, I'd strongly encourage you pursue these advanced options to better understand the pros and cons before implementing.

Change My Assumptions

As I mentioned in the class, you're definitely going to want to change my assumptions and run these  Scenarios again yourself with your own assumptions.

Rather than starting over from scratch entering in the details, copy any of my examples into your account and just modify.

Login to copy this Scenario. New? Register For Free

Copy  Scenario into my Real Estate Financial Planner™ Software

Go To College with 2  Accounts, 1 Property, 7 Rules,
Or, read the detailed, computer-generated, narrated  Blueprint.

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Copy  Scenario into my Real Estate Financial Planner™ Software

Go To College - Nomad™ After with 2  Accounts, 1 Property, 7 Rules,
Or, read the detailed, computer-generated, narrated  Blueprint.

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Copy  Scenario into my Real Estate Financial Planner™ Software

Invest in Real Estate with 2  Accounts, 1 Property, 4 Rules,
Or, read the detailed, computer-generated, narrated  Blueprint.

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Copy  Scenario into my Real Estate Financial Planner™ Software

Invest in Real Estate - No Roommates First 4 Years with 2  Accounts, 1 Property, 3 Rules,
Or, read the detailed, computer-generated, narrated  Blueprint.

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