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College Housing Guide Research and Development

Research & Development

A great way to begin your internship into REAL life is with a solid foundation of research and development. Gathering information is the most critical phase of your investment, as well as the stage that many potential investors never make it past. It’s a daunting task to sift through pages of information and data but it's crucial. We have done our best to assist you in this process by providing many of the resources you will need on our website as well as in this book.

A. RENTING VERSUS BUYING

One of the first things you need to decide is whether or not it makes more sense to rent or buy. It is often touted that smart investors never “throw their money away on rent.” While this may hold true in many respects, it is not always the answer. There are some important factors to consider. First of all, how long do you plan on owning the investment? If the answer to the questions is less than three years, it doesn’t leave much margin for a weak economy. You should plan on your investment appreciating a minimum of 8% in order to break even. That will cover the costs associated with selling a piece of property and paying out commissions as well as other miscellaneous costs.

Another factor to consider is, “are you certain that the school you enrolled in is the school you wish to graduate from?” If you predict a mid-college transfer in your future, you may or may not want to maintain a piece of property in another city.

Ultimately, if there are other siblings in the family, if graduate school is an option, if you don’t plan to leave your college town immediately after graduation, or if you hope to maintain an investment property, the answer to the question is simple - of course it makes more sense to buy property than to spend money on rent.

B. THE TAX ADVANTAGES

The federal government has made home ownership a very attractive means of investing. A look at the tax advantages will help to explain how our government supports home buyers and what they are doing to encourage home buying.

For many investors of real estate, tax advantages are the main attraction. However, these will mean different things to different people. The reason for this is based on each person’s individual marginal tax bracket. For the purposes of the exercise on the following page, an average of 30% has been used. That percentage can be as high as 40% or as low as 15%. The tax bracket you pay within is contingent upon your gross annual income with the current laws. The higher your income level, the higher percentage of that income goes towards federal taxes.

The reason that marginal tax rates are important is found when you examine the numbers. On the following page you will see how marginal rate affects your monthly tax savings. When you itemize deductions on your federal tax return, the deductions count towards a reduction in your total gross income. Meaning that if you spend $12,000 on deductible expenses, the government will allow you to claim your income as $12,000 less than it is effectively reducing the dollars you are taxed on. If your marginal rate is 30%, then 30 cents from every dollar you earn goes to the IRS. You can save money in one of two ways. Reduce your tax rate, or claim less income. If you are able to reduce your reported annual income by $12,000, you will save the 30% you would have spent on taxes for that income.