Real Estate Investing vs College Saving: Where Should You Put Your Money

Insights

Suppose you have some extra cash you’re looking to invest but aren’t sure where it will earn the most dividends. Investing in real estate or putting money towards a college savings account both seem like great options, especially if you have a growing family. 

529 funds for college savings have become increasingly popular, with nearly 16 million open (as of mid-2022). A CNBC Make It survey conducted in 2022 also showed that 23% of Americans believe real estate is the best way to build wealth. Based on these statistics, some families choose to put their savings into either college funds or real estate and, in some cases, both.

So, how do you decide where to put your money? Below, we’ll compare what investing in real estate or a college fund might look like.   

Pros and Cons of Each Strategy

First, let’s break down the pros and cons of real estate investing vs college saving. 

Real Estate Investing: Benefits and Challenges

Most real estate investors buy properties intending to build long-term, generational wealth. That’s because of the diverse cash flow opportunities real estate investing offers. For instance, you could purchase an investment property and keep it as a traditional rental that provides monthly rent or transform it into a short-term vacation rental or AirBnB to attract tourists or families on vacation.

Beyond the cash flow benefits of investing in real estate, you can also reduce your tax liabilities by deducting the costs of owning or managing your properties. In general, the value of real estate appreciates over time, so if you invest in the right properties with significant growth potential, you can build sizable generational wealth.

However, real estate investing isn’t always rosy. 

Depending on the type of investment property you’re looking to purchase, there may be hefty upfront costs for financing. For most people, saving sufficient cash reserves for a property down payment takes time—typically several years. If you opt for the lender route, some lenders may request upwards of 20% down on a property before lending you the entire amount to finance the purchase.

When investing in real estate, you’ll also have to account for the costs of managing the property and those related to real estate taxes, repairs, and additional unforeseen expenses.

Pros and Cons of Real Estate Investing

Investing in a college fund is great for families with younger children who still have many years to go before they start college. 

Unlike real estate investing, there’s a low barrier to opening a college savings account and putting money away. It all depends on your target investment goals, the total cost of attending college you anticipate, and how much you’d like to offset those costs with a college savings fund.

The most common tax-friendly vehicles for college savings are 529 accounts (named after Section 529 of the IRS Tax Code), which are state-run plans with specific legal requirements that vary from state to state. When putting money away for a child, you can leverage the gift tax exclusion to put up to $18,000 (in 2024) towards a 529.

However, investing in 529s means you can only use the money for education. Additionally, the types of investment options available are typically limited and restrictions may vary from one state to another.

Besides investing in a college savings account, you can also put money away in a brokerage account. However, you will likely receive fewer—if any—tax incentives, which can be crucial when the account’s beneficiary takes out the money years later to pay for college or other education expenses.

Timelines and Risk for Real Estate Investing vs College Saving

The urgency and risk appetite for real estate investing vs college saving also varies based on an investor’s needs or expectations. 

The risk of investing in real estate typically comes down to identifying properties that will appreciate over time or generate enough cash flow to cover ownership costs. On the college saving side, you may consider choosing investments that grow fast enough within a 529 but with little to moderate risk—especially as your beneficiaries near their college years when they’ll be withdrawing the funds.

A younger family with multiple kids under 10 may be inclined towards saving for college rather than investing in real estate, especially if the parents work full-time in their careers. However, once they establish and become comfortable with their college savings plan, they could start to build a real estate portfolio. However, this same family can decide to create cash flow from real estate investments and use that to save for their children’s college education.

That’s where a financial advisor like Tomoro comes in to help you navigate these complexities.

Invest for the Future with Tomoro

At Tomoro, we believe every family can build wealth with the future in mind. Whether that involves identifying investments that comfortably balance risk and reward or designing an effective path to generate wealth amidst your complex financial situation, we can help you reach your goals.
Contact us to learn how we can help you map your financial future.