Posted February 26, 2010 by

Strong Investment Opportunity!

<!--StartFragment-->

Hey Everybody,

For this post, I would like to sing the praises of purchasing rather than leasing property to live in near SMU. To do this, I am simply going to give the pros and cons of both leasing and owning.

Leasing

Pros:

1. Very smooth process involved in becoming a lessee. 

2. Requires a very small deposit upfront, which is usually the one-time fee of the first month's rent.

3. You are not required to care for the upkeep of the house beyond simply keeping it from getting destroyed from your own doing.

Cons:

1. You always have a landlord who will be on your case about nearly anything you do. And if you are a student, you may as well expect the landlord to have your number on speed dial for complaints.

2. You have very limited options as to decoration or adding your own touch to the house beyond simply the furniture and a few pictures on the wall.

3. The monthly rent you pay is often very over-priced given what you are getting simply because the landlord has the ability to set the price.

Owning

Pros: 

1. By buying a property near campus, you have a very hot commodity for students to lease. Considering that nearly every remotely nice apartment, condo, or house available for lease near the SMU campus does in fact get leased by students, if you put yours on the market, it is sure to bring in rental income year in and year out. This can be very beneficial to parents because if they buy a property and have their son/daughter live in it with friends, the friends' rent every month would cover the rent of the child allowing them to live for free while often even providing some extra income.

2. Historically, properties near SMU in Highland Park and University Park have gone up in value 7%-10% every year. This means if you buy a property for your son/daughter when they are a sophomore for let's say $500,000 and sell it 3 years later when they graduate assuming a 7% appreciation rate, you can sell it for $612,521.50. That is a very respectable pre-tax capital gains amount. We shouldn't forget any rental income you earned while owning the property as well. So before taxes, you can pocket over $100,000 while having your son/daughter live for free. If you can find a better return on investment, please give me call. My number will be at the bottom of the blog entry.

3. Owning real estate provides some great tax shelter. There are many write-offs you may receive. However, I am going to focus on one tax advantage. It is the ever-popular 1031 Exchange. A 1031 exchange is an tax incentive the IRS allows and welcomes to encourage people to buy real estate. As everything else, there are always more details and specifics to the issue but I will give you a very summarized easy-to-understand version. Let's say you bought that previously mentioned property for $500,000. Now those 3 years have gone by and you have decided that you are ready to sell and cash in on the very attractive capital gains you will receive. But wait! Have we forgotten the capital gains tax the government takes on any money you earn in the sale? Now the amount of the tax will vary but the bottom line we can all agree on is that no one wants to lose pieces of their valuable pie. But there is hope. You can do a 1031 exchange, which is where you can delay the capital gains tax for years by rolling all of the money you earned in the sale of your real estate into another form of real estate of equal or greater value. Now, you did not have to give away any of your precious capital gains to Uncle Sam and you just bought yourself a more valuable investment. Maybe instead of getting a nicer house, you decided to get 2 very nice condominiums and lease them out to students creating 2 streams of rental income and hedging your risk in a way. You can keep doing these exchanges (assuming you follow the specified rules) as many times as you would like! A 1031 Exchange gives you the opportunity to delay paying the capital gains tax to a much later date that you decide on and in some instances, you decide how much they will tax you. Take that Uncle Sam!

Cons:

1. Process for buying a house is slightly more complicated.

2. You and you alone are responsible for upkeep and leasing the place out unless you hire a qualified property management company to do all of that work for you.

3. There is always the risk that the market will get worse and your property will lose value (although in Highland Park and University Park, this is unlikely).

Bottom Line: If you can use a little extra money in your pocket and like the idea of your son/daughter living for free in college, strongly consider buying rather than leasing.

 Here's my number if you have a better investment opportunity and Return on Investment than the one I mentioned above...PLEASE GIVE ME A CALL. 

Michael Sizemore: 949.275.4202

<!--EndFragment-->