There have been a number of conversations on BiggerPockets.com relative to the validity of college education in today’s economic environment, and how this type of education can help or hinder one’s chances as a real estate investor. The question posed by some of the younger visitors on BP is:
Should I go to college, or should I just dive into real estate since that’s what I really want to do with my life?
Let me see if I can get to the bottom of this…
This Used to Be an Easy Call
A few years ago this question was a no-brainer. Education was more or less affordable and the job market was healthy. College education resulted in better income-potential and job security. This is why most of us grew up with our parents and teachers repeating to us the same refrain – get good grades in high school; get into a good college; do what you love and believe in, and money will follow. They weren’t lying to us; it really was like this in the past.
There are two obvious problems with this, which young people are intuitively sensing more and more. I could provide you with statistics relative to unemployment and underemployment among college grads – I won’t do that. Instead, next time you drive through the pick-up window at you local coffee joint, pay attention to who hands you your Latté, because chances are it’ll be a college grad! Do you see what I am saying?
Kids posing these questions on BP know exactly what I am saying! They also know that unlike the yesteryears, college education today is expensive. In fact for most of them it is no longer achievable without assuming substantial levels of debt. As such, the question can be frames like this:
I’d like to go to college to pursue the thing I love, but does it make sense to spend $60,000 for tuition, books, and room & board for 4 years just so that I can graduate and make $35,000 pre-tax – that’s if I can get a job in the field? Or worse, does it make sense to graduate with $25,000 on average of debt into a career that affords $2,000 of monthly take-home pay?
All of this is giving young people a moment of pause – as it should…
If you are interested in pursuing real estate investing; if you feel that real estate is going to provide an answer to the economic realities of today, here are some things you need to realize:
A Job Helps You Save!
The reality of real estate investing is that it is a cash-intensive sport. Even if you follow my lead and pursue 100% financing, you’ll still need access to some amount of capital with which to manage your assets. This gets easier after you’ve built a sizable portfolio, but when you buy your first 4-plex, this is very much an issue. Having W2 income helps. If it’s high enough, and if you learn to live below your means, W2 income will allow you to save some money with which to start out in real estate investing.
A Job Helps You Get Loans!
Unless you’ve inherited a boat load of money, you will need to utilize leverage in order to buy real estate, which is a function of your ability to borrow. Institutional lenders have numerous qualification requirements for lending, of which W2 income is at the top of the list.
This makes sense – the lender’s thought process is that if something goes wrong with the one and only 4-plex that you own, then you will at least have your W2 income to cover the mortgage payment. Their approach changes once you own a large portfolio of real estate, because at this point it is your portfolio that’s qualifying for the loan more so than you personally. After all, if you have a $50,000 annual W2 income, you could never cover debt service on 1.5 million dollars worth of debt. The lenders know this, and so they give W2 income much less weight once you grow larger. But, in the beginning you will have to prove stable and sufficient W2 income, and having a good job helps!
But, Not Just Any Job!
The reality, though a bit bitter, is rather straight forward if you chose not to ignore it. Not just any job can provide you with stable income that is high enough to facilitate significant savings – you know this. Not just any job can provide you with high enough salary to facilitate borrowing – you know this too. This means, when discussing validity of college education we must reference the fact that just because you pursue a major in the field that you love and are good at, doesn’t make it a good financial choice, specifically if your intention is to leverage it into acquisition of investment property. Let’s face it – you could count on one hand the professions that will fit this bill. You know what those are as well as I do, and unfortunately none of them are in the liberal arts, history, or social work…
College education can be very helpful to you at the beginning of your real estate pursuit; it can help you achieve higher W2 income and significant income stability. Sadly, it is certainly a statement as to the moral fiber of our society that the above mentioned fields do not facilitate financial gain. I, for one, believe that we need the arts for proper development of humanity and we need skilled social workers to properly address the needs of our aging populace. But, it seems that the society at large has decided otherwise…
I am a big believer in trying to make a difference wherever I can. And yet I also believe in recognizing and respecting the rules of the game that is being played. As such, I humble suggest that if you are going to try to leverage your income into real estate investments, you do not have the luxury of pursuing a field solely on the premise of personal and professional fulfillment. If you spend the money to get a degree, and especially if you go in debt for a degree, you must make sure that it is in a field with high income-potential and above-average employment opportunities!
Have anything to add? What are your thoughts on this?
Photo: Will Folsom