PrepWell Podcast


Ep. 185 | $400K In Cash Or A College Education?

This episode explores a thought experiment which poses the following question: Would you rather have $400K in the bank and skip college, or use that money to attend college?

Show Notes:

In this episode, I walk through a thought experiment that asks you to decide between two scenarios?

  • Scenario 1: Spend $400K to attend ABC University
  • Scenario 2: Keep the $400K, skip college

There are many students who, implicitly or explicitly, are making this decision every year.

What would you do?

Show Transcript:

[00:00:24] Hello friends, and welcome back to the PrepWell Podcast. In today's episode, I'd like to walk through a thought experiment that on its face may seem a bit impractical, but I think it's still worth thinking through in order to make a more generalized point. So here's the thought experiment. Which scenario would better set up your child for success? Scenario one or scenario two? Let me lay out scenario one. Your high school son is interested in real estate and he has the opportunity to go to, let's call it ABC University in Southern California to pursue a degree in real estate. He doesn't have a lot of experience in real estate or business or marketing yet, but he sees a lot of his friends parents around who have apparently made a lot of money in real estate from what he's been told. And so he's keen on moving in that direction. And since you're a family where both you and your spouse have full time jobs makes close to $400,000 a year, there will be no financial aid and you will be what's considered a full payer. The total cost of attending ABC University over the course of the four years will be about $400,000. That's room board, tuition, travel, spring breaks. Books. Summers. Spending money. Tuition increases. Inflation. Basically everything. This, by the way, is far from an exaggeration. This is pretty close to what it will cost in the next year or two at a school like ABC University.

[00:02:09] Now, we're not going to get into the details about where you might actually get this $400,000 from. Maybe you've put money away for college. Maybe your son has a Coverdale account from a grandparent. Maybe your son has saved some money. Maybe you're taking loans out. Maybe the parent and the student both take out student loans. Whatever the mode or the mix of financing for our purposes. In scenario one, your family decides to spend the $400,000 in some combination of cash and student loans to send your son to ABC University to study real estate. Let's move on to scenario two. In scenario two, your son has a notional $400,000 in the bank in his name. Let's say from a grandparent who left money from an inheritance with no strings attached. And he decides to pass on going to ABC University and instead to use the money to help him carve his own path in the world of real estate. So the thought experiment is which scenario do you think is better? Spend the $400,000 on a real estate degree from ABC University or skip college and use the $400,000 to do your own thing. Assuming the end goal in both scenarios is to establish a thriving long term career in real estate and not to go to Vegas and blow $400,000 on the blackjack table or to spend the money on cryptocurrency or something. Which would you choose? Scenario one or scenario two? Let's walk through a little bit of role playing. In scenario one where your son goes to ABC University, he will likely learn a lot about real estate and accounting and marketing and amortization tables and commissions and eminent domain and highest and best use principle and plenty of other things with a professor lecturing in front of the classroom.

[00:04:27] He will probably work on a few group projects, analyze some case studies, take tests and quizzes, maybe even visit a few properties out in town. Presumably he'll learn how to use a spreadsheet and how to do some financial modeling. A lot of academic work, one would assume. Which would be great. And I'm sure he will certainly expand his network of friends and professors and alumni, subject matter experts, and maybe even connect with some local real estate gurus. He may even get an internship or two over the summers, even in his hometown. After all, what commercial real estate company wouldn't bring in an ABC university junior majoring in real estate to help them run some numbers over the summer. And again, presumably your son would avail himself to the other typical aspects of college life, while at ABC you including binge drinking and weed, smoking and gambling and partying and video game playing and sleeping in and missing class and other forms of debauchery that often define a quote unquote, good time on college campuses. In other words, he'll also be getting the, quote, real college experience, which we as parents all think is so important these days. And then let's fast forward four years. Your son emerges and graduates with a 3.67059 GPA with a degree in real estate from ABC U. And he now as a 23 year old, begins to embark on his real estate career. Now, in this scenario, the premise was that the $400,000 was left to him by his grandparents. So he doesn't have any student loan hanging over his head, which is a huge relief. And just imagine the same scenario if he had $175,000 in student loan debt, which would certainly be more a more common scenario. And so he starts to pound the pavement looking for opportunities and he goes on interview after interview after interview, and he's not really getting a lot of traction.

[00:06:47] It's not that other candidates are getting jobs over him necessarily, but more so that it's just tough to find a job where he is anything more than a glorified assistant to an assistant to the assistant property manager. And it's hard to blame the H.R. departments because the truth is, your son doesn't have much real world experience. He's obviously learned some academic principles of real estate, but he has little idea of how things really work, how to negotiate, how to assess property values, how to avoid pitfalls, how to source investment capital, how and when to take risk, how to understand the financial markets and interest rates in the real world. And by the way, since interest rates happen to be up, the real estate market is at a low point in terms of activity and opportunities. And this search, with a few missteps along the way, lasts for two years before he lands a reliable job and he ends up taking an entry level job at a big real estate development company where he sits at a cubicle and runs spreadsheets that manage a portfolio of hundreds of properties. He's basically a glorified data entry guy with a working knowledge of real estate terminology that he learned in college. And he gets stuck in that position for a year and a half before he can't take it anymore. He's not doing anything that he learned about or dreamed about, for that matter. He's not making deals. He's not looking for properties. He's not getting his hands dirty. He's not negotiating. He's not making decisions about where to deploy capital. He has nothing at stake. And he has little to no responsibility. And so he starts looking for another job in the real estate industry or even a related field, because he now realizes that he doesn't have much practical experience and that it might take him 10 to 15 years to move up the ranks in one of these real estate shops if there's any upward mobility at all.

[00:08:50] And it soon dawns on him that real estate is not a get rich quick scheme, that magically appears because you have a degree in real estate. Instead, it's a combination of education and market timing and luck and perseverance and savvy and grinding and risk appetite, access to capital, relationship building talent, serendipity. And he may soon come to realize that all of those rich parents who look like they don't really do that much actually have a storied past with a lot of starts and stops and wins and losses and ups and downs. Luck and misfortune. Because as you and I know, this type of financial success later in life rarely comes easy. Let's move on to scenario number two. In scenario two, your son decides to take the $400,000 that he would have spent on ABC University. And do something different with it. And here are some of the things that he does. Number one, he puts 200,000 of the 400,000 away in a money market fund yielding 4%. He spends $50,000 on a down payment for a rundown duplex in a less desirable part of town where he can live in one unit while he remodels the second unit. And for this, he's carrying a $400,000 mortgage. He spends 1500 dollars and four months getting his real estate license, all part of an online tutoring course. He spends another 1500 dollars and another four months getting his real estate appraisal license, which also includes an online tutoring course. He spends $4,000 on a beat up Ford Ranger that he can use to haul around his tools and his materials. Over the first three months, he spends $12,000 on his own personal tools that he buys, and he uses YouTube videos to learn how to do some of the more basic repairs and remodels.

[00:11:02] He does some demo work, he does some drywall, some painting. He then pays $15,000 to a contractor who helps him with the kitchen remodel in the empty unit, and he watches the contractor do the work and slowly begins to pick up some of the skills. He shadows the contractor every step of the way and even helps him out. He then spends $5,000 on plumbing materials and invites a friend over who knows how to redo a bathroom. He spends another $5,000 on flooring materials and invites a family friend over who helps him install the flooring. And after spending close to $30,000 on the remodel, that second unit is ready to rent out. So he takes out an ad, he finds a renter who's paying him 1600 dollars a month, which of course, begins to help him pay down that mortgage. He then begins to remodel the unit that he's been living in for the last nine months and $30,000 later, that second unit is now ready to be rented and he finds another renter for another 1800 dollars a month, which when you put those two together, covers his entire mortgage and then some. So by now he has positive cash flow from the duplex. He's learned a lot about construction and design and tools and materials, sourcing and legal paperwork and how to deal with contractors and how to find tenants and market trends and how to deal with banks and how to ask for assistance. He's also begun to build up his credit. And now he has a relationship with a local banker. And of course, he's had a place to live during this transformation. So after renting the duplex, he now has nowhere to live. So he begins to sleep on his friend's couch until he can find another duplex.

[00:13:01] And within three weeks he finds a similar duplex. This time he puts $70,000 down because the property is in a nicer part of town. And it's easier the second time around because now the bank considers him a better credit since he's shown a track record that he can generate revenue from properties. And he once again lives in the second unit while he remodels the first unit. The neighbor who he lives in is nicer, so he's less worried about getting his tools stolen out of his truck overnight. He's much more savvy this time around. He doesn't have to take quite as many return trips to Home Depot. He buys more tools to add to his growing cache of professional equipment. He begins to establish a good working relationship with that contractor he worked with on the first project, and he begins to learn a lot more about the construction industry. And those two become fast friends. He spends 1200 dollars on an online accounting class and an Excel spreadsheet class and an intro to architecture class. And he spends an hour and a half to 2 hours every night working on these classes. And within nine months, he has a much better grasp on how to run his books, how to manage his money, how to use space more efficiently, how to minimize his taxes. At this point. Your son is 21 years old. He then runs into some issues with the city for not pulling the right permit, and he gets hit with a big fine and a $7,000 job to redo the water line into the house that he screwed up. He also finds out from the inspector that he needs to upgrade his electrical panel, which will be another $3,000 that he wasn't counting on.

[00:14:46] He then gets another $800 fine for not pulling a permit for solar panels, which he had no idea was a thing. And then one of his tenants stops paying rent and he has to pay a lawyer to help him navigate the complicated eviction laws in the state. That whole debacle sets him back five grand and to make some extra cash to make up for these missteps, he starts to work with his contractor doing basic construction work, dry walling, light electric framing, plumbing, whatever his contractor friend needed. And his friend is paying him $30 an hour. And, of course, he's still learning a lot. And since he's spending some of his time working as an apprentice contractor, it takes him twice as long to finish remodeling that second duplex. He finally finishes it and he gets two reliable tenants. And since his skill level has gotten a lot better and his eye for design has improved and the craftsmanship has been upgraded, he's able to rent the second duplex at a much higher rental rate. He also decided to leave the second duplex empty for a month and lose a lot of potential income because he wanted to be more careful this time about his choice of tenants. He actually paid for a background check this time around. He didn't want to get caught again renting to someone unreliable. He'd been burned on that already and he wasn't going to make that same mistake again. And over the next four years, he repeats this duplex process three more times. Each time he puts as little money down as possible, using his other cash flow positive properties as collateral. His financing terms seem to get better and better as he becomes a better and better credit. He was a lot more savvy when it came to picking the properties with a lot more potential because he's already done it several times.

[00:16:40] Now your son is 25. He now has his general contractor's license. He owns five duplexes that are all cash flow positive. The $200,000 that he left in the money market fund four years ago is now worth $250,000 because of a favorable short term interest rate environment. He's got a garage full of professional tools and five years of contracting experience. He's a landlord who manages five properties and ten tenants. And he's thinking about outsourcing their management to an outside firm. He's also considering hiring someone part time to manage the properties. And these are all important decisions he needs to make. And now he's setting his sights on something even more ambitious, given his track record. Maybe a four plex or maybe some other type of small multi-unit complex. Because remember, he's got $250,000 of capital in the bank untapped. He's got five years of building experience, renting, financing, legal compliance, city admin litigation, building contractor relations, networking, managing multiple duplexes, collecting rents, evicting tenants. And he knows a little bit about all the traits. He obviously doesn't have a perfect track record. But every issue, every fine, every problem, setback, unreliable tenant, has given him invaluable experience. And he's also become a lot more in tune with the real estate market. And he's actually received some bids from others to purchase several of his duplexes. And he's using the lessons from his accounting and his real estate classes to determine if these are good deals or not. I could go on, but I think you get the picture here. Think about where the ABC University graduate from. Scenario one is at age 25. Sitting at home looking for entry level real estate jobs compared to the scenario to student who took all of the money that would have gone to a BCU and instead put it to work in the real world, both on the investment front and the tangible building and learning front.

[00:18:55] And I think we would all agree that as I've laid out the facts, that there's no comparison here. The scenario to student, I would argue, is an order of magnitude ahead of the ABC. You graduate across the board. And that individual is on track in another 15 to 20 years to become one of those wealthy 48 year olds at the barbecue in flip flops who quote unquote works in real estate and looks like they don't do anything. When the reality is that they've been grinding and making bets and taking risks and getting lucky and unlucky and figuring things out for 20 years. That's not to say that the ABC U grad will be unsuccessful. The obscure grad may indeed get lucky and find himself. After a decade of bouncing around in a small real estate firm that mentors him and gives him opportunities to learn and be challenged and make his own way. But it likely will not be fast nor easy. And he very well may end up as a middle manager at Cushman Wakefield for the rest of his career. Not that there's anything wrong with that. One of the takeaways here is that $400,000 is a lot of money to spend on college. And if you take the time to step back and wonder how far your child might go if you handed them the $400,000 and told them to skip college and get right into what they really want to do. And yes, of course, this is certainly higher risk and scarier and more unconventional. But $400,000 gives them a lot of runway to figure things out. And I'd like you to reflect on this thought experiment in relation to your son or daughter. Let's say your daughter wants to be a filmmaker.

[00:20:52] Would it be better for her to spend $400,000 going to NYU to major in filmmaking? Or would it be better for her to bank $350,000 for a year and spend $10,000 on a suite of medium end audio, video and editing equipment and $20,000 for an around the world plane ticket where she goes out on the road, out in the world, seeking out stories and experiences worth filming. And if that doesn't work out, she could move to Hollywood, live in a cheap apartment, and work every different type of job in the industry. Grip Lighting Assistant to the Assistant director of Photography, Editing, Props, showrunner everything until she gets an idea of how the industry works. And she'd still have $300,000 sitting in the bank making interest for when she's ready to plot her own path. And she could do that until she finds out what she really likes to do. The amount of money gives her a lot of breathing room. Or if your son wants to work for ESPN, how about skipping college, starting at the bottom in the NEWSROOM, sweeping the floors, taking opportunities when they pop up, adding value when appropriate. Working on stories on your own or video edits or researching interesting sports stories that he could pitch to someone in the elevator. Sooner or later, if he's talented, he'll move from the mailroom to a gofer for one of the main talents. Then he'll get put on as a research assistant to one of the assistant producers, and he'll break a story about some little known statistic that no one's ever thought about. Then he'll find himself on the production team, then working the cameras, then going to assignments with the on air talent. He's spending practically no money. I mean, he has modest living expenses and that's about it.

[00:22:56] He puts the other $350,000 in an interest bearing account so that when he's done learning everything that he can from working at ESPN, he has money, he has $150,000, say, to invest in a digital startup that he and his friend dream up that they want to go and launch online. Maybe it's a kid's version of ESPN, for example. And he's off to the races actually building, doing, risking, trying, pushing. Compare this path to going to X-Y-Z College and majoring in sports management and four years later leaving with a sports management degree with zero money in his pocket and starting from scratch. Again, not that there's anything wrong with that, but where does more growth happen? Where does he get more experience? Where would his career accelerate? And I know there are a lot of assumptions that go into this thought experiment. It's certainly not often such a cut and dry decision. Most families don't have $400,000 sitting in cash to give to their child on day one. If they chose scenario two. That's not particularly realistic, but I hope it makes you think. Ironically, if you don't have the $400,000 in cash to give your child to make this decision and they're forced to take out loans to pursue scenario one, it makes matters even worse. And this is what normally happens. Remember scenario, one assumes that the student graduates with no debt. How many times is that happening? Imagine what life would be like for that student who is, instead of $0 in debt, is $200,000 in debt when they graduate and still moving home and looking for that entry level job. It's even worse. So the bottom line here is $400,000 is a big financial commitment. If you could wave a magic wand and have that type of money, $400,000 in cash upfront.

[00:25:02] Would you still recommend that your son or daughter go to ABC, X, Y, Z University, or would you rather see them take that money and see how far they could go pursuing what they really love without the college degree? Whether or not this is a realistic scenario is not really the point. The point is to think long and hard about where your child will be when all is said and done. After graduating from X, Y, Z College, that costs $400,000. Whether that's paid upfront or over the next 30 years in the form of student loan repayments, especially if they're majoring in something like history or communications or ethnic studies. Are you setting your child up for success? Does your child know what they're getting themselves into? Do they know the stakes? Do they know what they are paying for? Maybe if they knew how much this quote unquote college experience actually cost them or you as their parent. And what they could do. Alternatively, with that $400,000 in the real world. Maybe they would pay a little more attention to their studies and major selection and summer opportunities and relationships and a little bit less attention to the football tailgate, getting wasted two or three times a week, smoking weed, playing video games, watching movies till 3 a.m. missing classes and using chat to write their term papers. Just a thought. Paying for college is not like it used to be. These days, if you're asleep at the wheel and not paying attention to what's going on and just taking loan after loan after loan with no plan for the future. You may be making a mistake that you're going to regret for the rest of your life. Because remember, once you take on student debt, that debt never goes away.

[00:27:04] Not if you're unemployed. Not if you declare personal bankruptcy. It follows you for life no matter what. If your child is in a position to take the $400,000 of upfront cash option instead of opting for the generic four year college education from nowhere, a special university and he or she has a rough idea of what they want to do with their life. And they're motivated and they've shown a pattern of smart decision making. What would you recommend? Would you force them onto the college conveyor belt or would you release them into the real world? I'd be curious to hear what you guys think about this choice. So please put some comments below and give me some feedback. Take the $400,000 in cash or go to ABC University and major in real estate. Which would you do? That's all I've got for you today, folks. Thank you for tuning in. Thank you for your continued support. Case you didn't know this podcast supports prep academies online mentoring program where high schoolers and their parents receive weekly videos from me, where I break down important topics and give timely advice about college admissions, particularly for top tier colleges, service academies, and for ROTC and athletic scholarships. Many parents who listen to this podcast already have their high schoolers enrolled in PrepWell Academy, which is great. If you don't yet, please consider enrolling them. Registration is only open during freshman or sophomore year. After that, we no longer accept new students. So if you have a freshman or a sophomore in high school and you like what you're hearing in these podcasts and you'd like to get more content like this tailored specifically for your child and for their specific grade, with their specific goals in mind. Go to and enroll today.

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