Which is a better investment: Grad School or Real Estate?
If you’ve never done so, take the next 5 minutes and check out some of the taglines on these financial bloggers websites:
You’ll see things like, “I’ve made 6-figures a month online” or “I’ve paid down $XXX,XXX of debt in 23 seconds” or, “I was able to retire before kindergarten!”
…Ok, it’s obviously not that bad. But I think you get the point. Most, if not all bloggers, want you to consider them an expert in something. Be it making money online, travelling across the world, or sticking up your middle finger to your boss as you walk out the door for the last time, we bloggers want to be considered experts. And some, in their own right, absolutely are.
And while I know a whole bunch about finance (having dedicated 4 years of formal education to it, and over a decade of studying with my dad who retired at 43), I’d be remiss to say that I know EVERYTHING about the subject. Do I know how to strategize options to reduce portfolio risk? Technically, yes, but I’m certainly no expert. Am I a coupon-expert? Not by a long shot. Are you going to find me pinching pennies so I can retire decades before Social Security starts rolling in? Probably not.
Everyone, including bloggers, struggle with some questions sometimes. And today, dear reader, I’m very much opening the floor to you. The question I pose to you is:
Is it better to invest money in attending grad school or in real estate?
Actually, I’m going to refocus this question just a little bit more. What I’m really asking is, “What would you choose: pursuing a Masters in Business Administration or a “buy and hold” real estate strategy?”
Now, I have a LOT of information on both these subjects. I’m going to go through what I know about both of these, and at the end of the article, if I’ve missed something, I would LOVE your input.
… A History Lesson
Here’s why I’m struggling with this question right now: In two years, I will have what is the very last chance for me to get my MBA. I’ve already spent months studying for the GMAT, and have a score that is higher than the average for any school. Anywhere.
While I’m very happy at my current salary (check this out to see how I negotiated up to $56,000), I know that teaching won’t provide me the income I need to achieve financial independence when I want to. So, I’m looking at the MBA as the path of least resistance that would easily double my salary.
However, I’m also EXTREMELY well versed in the benefits of real estate. Both my father and grandfather knew the business very well, and made out like bandits. I know a bit more about commercial real estate as I interned at a brokerage back in college for just over a year. And we all know the statistic that says more millionaires are made in real estate than in any other industry. I’m not sure I put much credence into that, but there are ways to make it happen.
The Arguments For (and Against) Grad School
So, here’s the overarching argument for grad school: the more education you have, the more money you make. Now, I know that there’s WAY more to it than that. Someone from Harvard is generally going to out-earn someone from Bumblefuckstate college. Someone with a Masters in Fine Arts is not going to out-earn someone with a Bachelors in Chemical Engineering. But in general, the more degrees you have, the more money you make.
Second, something like 50% (ISH. DON’T CRUCIFY ME IF I’M OFF BY A COUPLE PERCENTAGE POINTS) of MBA’s that attend a top 10 program go either into Consulting or Investment Banking. Salaries are easily into $100,000 territories, and bonuses can be 25%-100% of that, depending. This means I could double to triple my current salary. That. Rocks.
Third, this is the last chance I have to do something like this easily. Of course, I can go out, take my GRE, and apply to other grad schools. But when I do something, I do it right. I spent 5 months studying for and getting ready for the GMAT. As a result, I kicked it right in the throat. But am I willing to go through all that crap AGAIN because I didn’t take the right exam? I don’t think so.
Fourth, MBA’s are slightly more practical than a masters in art history or some damn thing.
But, any quick google search of MBA’s will bring you hundreds of articles where everyone and their mother takes giant shits on the degree. For one, they’re expensive AS FUCK! I’d be looking at $100,000 worth of debt by the time I graduate. I’d also have to sacrifice two years of working, which isn’t as bad as some others because my salary isn’t THAT high. And there’s no guarantee that I would even get into a good school (though my GMAT doesn’t hurt), and even if I did, there’s STILL no guarantee that I would even secure one of those high paying consulting/IB gigs. There’s certainly risk involved.
Also, when you really boil down the idea of education, you’re really just buying the opportunity to have a better job. Do I really want to spend a ton of money just to find myself a job to have to work a to pay off the degree that I got to get the job to pay off the degree?… you see my point.
The Arguments For (and Against) Real Estate Investing
The alternative that I have is real estate. And why real estate investing, as opposed to stocks or other businesses? Well, in case you didn’t know this, real estate has “allowed” more people to become millionaires than any other industry. It’s as close to a “guarantee” as you can get. And why is it so advantageous, you might ask?
Well, let’s first talk about the concept of leverage. When you use debt to finance an investment, the expected return is increased significantly. If you buy a house for $100,000, and sell it for $120,000, you’ve made 20% on your money. But if you buy a $100,000 house, and financed 80% of the house with a mortgage, that means you’ve only spent $20,000. If you sell it for $120,000 you’ve not made 20% return; you’ve made 100%! So while real estate prices themselves only increase 2-3% a year (on normal years), those returns are multiplied by 5-10 by investors. Good luck averaging 10%-30% in the stock market.
Next up, tax advantages. Millions and millions of tax advantages. Ok… maybe there aren’t THAT many. And I’m hardly an accountant, but there are some significant ones that really do make real estate extremely tax efficient. The first is the obvious one: your mortgage interest is tax deductible. Secondly, there are no capital gains taxes on your primary residence, as long as you have lived there for 2 years and you’ve made less than $250,000 on the sale ($500,000 if you’re married). Third is this little bad boy called a 1031 Like-Kind Exchange. Essentially, it allows a seller to roll over any profits from one real estate deal into another real estate investment without any taxes on the proceeds. This allows the investment capital to grow at a substantial rate.
Finally, the history of it all. For thousands of years (yes, thousands) land ownership has been the way to riches. It’s been through land that produced income that the somewhat wealthy become extremely wealthy. And while there haven’t always been internet entrepreneurs, or software engineers, or investment bankers, there’s has been land owners ever since we realized that land can be farmed.
It’s kind of hard to argue with thousands of years of history.
BUT not everything is super rosy with this scenario either. I’ll have to wait a few years until I have enough money for a down payment. I know next to nothing about being a handy man. And it’s not like real estate investing is risk free; I could very well lose money, money that I don’t have/want to lose. Not to mention that this will be a very slow process: with the MBA I could double-triple my salary in 4 years. I don’t think I’ll be able to do the same with real estate.
Which is a better investment: Grad School or Real Estate? – The Wrap Up
Alright guys, now it’s up to you. I want to hear your thoughts on the matter. If you had to pick between one, do you think that an MBA will be more lucrative that real estate investing, or the other way around. Do you think I’ve lost my mind and there isn’t even a question here? Comment below!
For more from The Code To Riches, check out:
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- How Much Is Half A Million Dollars?
- The 10 Best Finance Books Money Can Buy
- 9 Credit Score Hacks You Must Know
- Why I Never Want To Retire
- The Laziest Way to Riches – Investing In Index Funds
- Budgeting Basics – Allocating $$$ Like A Boss
- Fuck You, Frugality
- Why A Million Budgeting Tips Will Never Be Enough
Keep trying to crack the code,
Paul AndrewsFollow me on social media!