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The Taxpayer Roadmap

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The Taxpayer Advocate Service of the IRS has developed a pictorial representation called the Taxpayer Roadmap depicting just how complicated tax compliance can be for the average US taxpayer.

As you can see, there are a lot of twists and turns through this maze, especially if you disagree with a finding made by the IRS, or worse, they make a mistake.

Now, repeat this map again and again for items that we real estate investors (and other business owners/operators) will have to navigate, including LLC returns (Form 1065) and S corporation returns (Form 1120S) before we even begin to “gather data” for our personal returns.

Having done both my personal and corporate returns, this map does not feel quite Byzantine enough.

I wonder how how many hours and taxpayer dollars were spent by our “advocates” to produce this roadmap?

To get a high resolution version of the map, click here.

Do you do your own tax returns?  Ever been through an IRS audit?  If so, how does this map look to you?  Please share your experiences with a comment.

 

H/T to Real Estate Investing Today

First Time Real Estate Investor Surprises

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Real estate investing, like life, is full of surprises.  This is especially true for the first time real estate investor.  Surprises arise in part from the fact that every investor and every property are different.  These differences keep things ever changing and churning.  So what first time real estate investor surprises might be in the works?  Here are four that stand out to me.

People Do Not Keep Their Word

This may not at first seem like much of a surprise, but because of the nature of real estate investing your eyes may still get widened.  Real estate investing, perhaps more than other lines of work, often relies on someone’s word.  We have to have a good faith in this business that when someone says they have a deal, they really have it.  When we develop a scope of work to be performed by contractors, we have to trust that it is what they will do.  When given times for the completion of rehab jobs, appraisals and inspections, we have to assume that people will do things when they say they will.

Yes, getting things written down and solidified into a contract helps.  But when it comes down to it, a lot of this business is based on someone’s word.  Unfortunately, sometimes that does not go very far.  And for me at least, I was surprised by the number of people who do not keep their word when I got started.

The Price Is Not The Price

Buying real estate is not like buying airline tickets.  Sure, you can shop around and compare prices but have you ever tried haggling with an airline to get them to lower the price?  It is not going to happen.  The price is the price.  Not so with real estate.  Everything is negotiable.  In fact, most will expect you to negotiate.  You can negotiate almost anything, including the price, the time frame for the closing, who pays for certain aspects of the deal and on and on.  Negotiation on almost any price in real estate is not only common, it is expected and this is a surprise for most first time real estate investors.

Repairs Are Always More Expensive

Repairs are a part of most real estate investor’s world.  Rehabbing is often how we investor’s add and create value.  We all try to do our best at estimating repairs but trust me, repairs are always more expensive than you thought they would be.  Even very experienced contractors can have trouble here.  There is always a surprise hiding in the wall or down in the basement.  An “oops” portion of any repair budget is absolutely necessary.

It’s Harder Than You Think

Despite what you may have heard on some podcast or seen in a video, real estate investing is harder than you think.  Real estate investing takes work.  This is especially true as you are first getting started and climbing the learning curve.  Real estate is just like any other endeavor that is worth doing.  There are items to be learned and challenges to be overcome and they will not always be easy to do.  But the potential rewards are so worth the effort.

Real estate investing is full of surprises.  Even to this day after more than 15 years in the business I am still surprised at what I find.  Experience has taught me many lessons but these surprises are what make real estate investing such a fun and interesting thing to get into.  You just never really know what will turn up  with your next deal.

What surprised you about real estate investing?  Please share with a comment.

 

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The Effects of Rent Controls

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I wrote about rent controls here a few months ago.  I closed that post with a quote from economist Assar Lindbeck.  “Next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities.”

Since writing that post, New York has enacted more rent controls and the destroying effects of rent controls are now beginning to appear.

From The Wall Street Journal:

Barely a month has gone since New York passed its new rent-control law, and the predictable problems are fast emerging. Blackstone Group , which owns the Manhattan developments of Stuyvesant Town and Peter Cooper Village, is putting renovations on hold, reports Crain’s New York Business.

“In light of the recent legislation, we are in the process of evaluating capital investments at Stuy Town,” a Blackstone spokeswoman said. Maintenance, such as fixing leaks, must legally continue. But Crain’s, citing an unnamed source, says “renovations to vacant units would stop, as would potentially larger construction projects.”

Together the two properties cover roughly 24 city blocks. They include more than 11,000 apartments, some of which fall under the state’s rent regulations. Because the complex was originally built in the 1940s, sprucing up is necessary.

The old rules at least gave landlords some leeway to recoup costs. When an apartment became vacant, rent could rise 20%. If rent passed $2,774, the regulation ended, and the market rate could be applied. The new law axed those provisions, lowering the incentive to invest and update properties.

Stuy Town and Blackstone are making the news because they’re enormous, but the same logic applies to every building owner. Economists are more or less unanimous in calling rent control destructive. The only short-term winners are people who’ve already locked in.

The Stuy Town tenants association favored the new rent law. No wonder: Its president told another newspaper in 2016 that she moved in 35 years ago and was still paying less than $1,400 for a one-bedroom. You might call that the low price of stagnation, but wait until neighboring apartments deteriorate around her.

In Oregon, which implemented statewide rent controls recently, Karen Sale notes in a comment at this post that the law “dramatically affects Oregon landlords. Many are putting their long term rentals on the market for sale.”

H/T to economicpolicyjournal.com 

Landlording Is Not Worth Getting Killed Over

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There have been several headlines lately regarding landlords getting killed by their tenants.

Here is one in the Miami area.  Here is another one near Pittsburgh.  One more headline is from the Milwaukee area.

We landlords have to remember that the landlord-tenant relationship can easily become confrontational.  We have to remember that a situation can quickly spiral out of control, in a matter of just minutes.  Things can be said and actions taken that cannot be taken back and that are later regretted.

When dealing with tenants, it is always a good policy to keep things on a very professional and businesslike level.  You can never be sure what is going through somebody’s head, or what sort of day they have had or where their breaking point is.

Tenant Screening Is A Good Start, But…

Of course the first step landlords can take towards preventing confrontations is good tenant screening.  Good tenant screening will screen most problems out.  But, even the best tenant screening techniques will not always prevent potential problems.  Tenants can become mentally ill, fall off the wagon, stop taking meds or have a host of other problems.  I, for example, once had an otherwise good tenant proceed to scream at me from the top of her lungs because I had disturbed her by knocking on her door.  It did not matter that we had a pre-arranged appointment.  What mattered was that she had stopped taking her medication.

When faced with such a situation, smarter landlords know to back away and to try to diffuse things.  As the title to this post says, landlording is not worth getting killed over.  And you just never know what people are capable of.

It Does Not Matter Who is “Right”

Trying to force the issue and prove your point, even if you are completely in the right, may not be the best way to go.  Doing so may only ratchet things up.  Again, it is not worth losing your life over.  Leave and diffuse the situation.  Remember that you as the landlord will ultimately have the upper hand.  It is after all your property, and the laws (most of the time) are on your side.  You can “prove” your point later on if you have to. But do it from a safe distance.

If a situation with a tenant starts to spiral out of control, remember that the goal is not to win the battle then and there, but to win the war so to speak. You could end up losing both the battle and the war if you let things escalate too far.   Let the angry and irrational tenant win the day.  Go home, calm down, regroup and come back later to resolve the issue.

Ever had a scary tenant experience?  Please share how you handled things with a comment.

Florida Landlord Law

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Here is a decent overview of Florida Landlord Law for my readers who do business in that state.

Always remember that landlord/tenant laws can vary widely from state to state.  Be sure you know your local laws.

The Qualities of the Best Tenants

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A good tenant is worth their weight in gold.  Finding them is one of the keys to a successful landlording business.  As landlords, we must strive to find people who will pay, stay and respect our properties.  Doing so is mostly done with tenant screening and background checks.  But finding the best tenant goes deeper than screening.  Smarter landlords have learned what the qualities of the best tenants are and to look for them.

What are these “best tenant” qualities?

The first quality landlords should seek out is stability.  Tenant turnover is a cash flow killer.  You want someone who is going to stay in your property for the long term.  Look for tenants that do not move every year and have held steady jobs.  People who move from place to place and from job to job may not have the qualities you are looking for.

A second quality is reliability.  You want tents that will do what they say they will do.  Have they paid their bills on time?  Have they kept a job?  Did they show up to their appointments with you on time?  Reliability can be hard to find in this world so if you do find this quality in a potential tenant, make an effort to get and retain them.

Third is politeness. Lots of people can look good on the reports you get back from your screening service, but how do they act in person?  What is their demeanor?  How do they treat you or your staff?  Were they rude or considerate, loud or even toned?  Whatever they are, if you let them move in it is something you will have to deal with.  Try your best to get a good feel for a potential tenant’s personality as you interact with them and then think about that person on the phone asking you for a repair.  Shy and quiet is one thing, demanding and disrespectful is another.

A final quality is thoughtfulness.  I am not so much speaking of a prospective tenant’s attitude, rather, have they put some thought into where they want to live?  Someone who puts some active thought into where they want to live, checks out the market, and does their own screening process on potential landlords is likely to make for a better tenant than one who does not.  Think about it.  Would you rather have a tenant who looked around and choose your place or someone who said that “this will do?”

We landlords can often get a good read on potential tenants as we interact with them through the application and screening process.  Looking for the above qualities will help you make a good decision and avoid many dreaded tenant problems.  This may take a bit of practice on your part, but it is something that must be done.

What are the best qualities do you think are the best to look for in a tenant?  Please let me know with your comments.

Thoughts on Cash for Keys

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Some agree that Cash for Keys can be a good option to use.  Others however argue that it is the stupidest thing they have ever heard and something they would never consider doing.  Do these dissenters have a point?  Yes, they do.  In this post I want to look at Cash for Keys in a bit more detail.

First off, I want to make sure everyone understands what Cash for Keys is.  I have written on it before.   In a nutshell, if you have a tenant that you need to go away, instead of evicting them you pay them to give you the keys and leave.

A key point made by several who were against using Cash for Keys is the use of strict tenant screening procedures and a tough stance when it comes to your lease, rules and policies should preclude the need for such a thing.  I could not agree more.  Proper tenant screening will eliminate most of your problems.  Being firm and strict when it comes to your house rules will help even more.

However, even the best tenant screening and the strictest landlord will not always prevent the need to get rid of a tenant.  This does not mean that the landlord was duped or scammed by the tenant.  It more often means that sometimes bad things happen to otherwise decent people.

What Bad Things?

Have you ever had a tenant fail to pay you because they were diagnosed with cancer and exhausted their resources?  I have.  Have you ever had a tenant fail to pay you because they were involved in a horrific accident that was not their fault and made them unable to work?  I have.

When these bad things happen, these otherwise good people can put their head in the sand in hopes that the problem you present will go away.  Unfortunately, I cannot be a charity.  After all, the bank is not allowing me to stop my payments to them.  I can however cut these folks some slack. I do not have to pile add an eviction to their list of problems but I do need them to realize the situation and make arrangements to move on.

Sometimes all that takes is a little cash for a moving truck.  Other times it could be a little cash for a deposit at a less expensive rental or to move in with someone.  I am going to have to spend something to get them out of the place, why not nudge instead of force.  Force can lead to some negative consequences.

It Is About Incentives

Another argument against Cash for Keys comes down to incentives.  Many argue that Cash for Keys rewards bad behavior.  Landlords should instead “Teach these people a lesson!”  I understand all of that and generally agree.  I am all about incentives.  My house rules and strictness from the outset are designed to incentivize good behavior.  Again things happen.  But, if a tenant wrongs or takes advantage of me, then I have and will go after them with an eviction.  They know that on the front end.

I understand that larger companies those with larger apartment complexes may not want to use this tool.  Word can get around and tenants “learn” very quickly.  Cash for Keys may not be a reasonable tool to use in those situations.  But for me and my business it is a tool that sometimes comes in very handy.

And that is really what it comes down to.  What is the right thing for you and your business.  There is no one way to be a real estate investor.  You have to choose what works for you based on your particular circumstances and sometimes Cash for Keys, despite the negative aspects, is right for me.

The SmarterLandlording Podcast – Loans For The Beginning Investor – With Herb Hyman of Iberia Bank

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Download the podcast here.  Or, check out the SmarterLandlording Channel on iTunes

Items we discussed.

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Memphis Investors Group

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Connect with Herb with Iberia Bank Mortgage directly by e-mail at mailto:he********@ib********.com” data-original-string=”XRspXXSjx+5PfosIgwf5ZA==2bfLLlwCFYMpr44aVRADHR5q6T6MGl0BLAbSN8det9Z3zE=” title=”This contact has been encoded by Anti-Spam by CleanTalk. Click to decode. To finish the decoding make sure that JavaScript is enabled in your browser.  or call him on his cell at 901-262-4039.

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Like the Intro Music?  Check out my good friends in the band Kitchens and Bathrooms (Kind of fits right!).  They write and play some awesome, original music from right here in Memphis, TN.

 

Get Off Your A$$ And Knock On Doors

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It’s hard to stay focused on real estate all the time.  To give my brain a break, I like to read “page turners.”  One of my favorite sets of “page turners” is the Harry Bosch series.  If you have never heard of Harry Bosch, he is a fictional character from the mind of author Michael Connelly.  Bosch is a detective in LA.  He is good at what he does.  He always finds the killer.

In the book series, Bosch recalls what a senior detective once told him when he was just a rookie.  To catch the killer, you have to “Get off your a$$ and knock on doors.”  In other words, the killer will not be caught if you just sit at your desk.  You have to get out there and pound the pavement and track the killer down.  The phrase is repeated enough in the books that if you look close in the Amazon show “Bosch” you will see the phrase pinned up in Bosch’s cubicle.

Where Am I going with all of this?  While we landlords and real estate investors are not out there looking for killers, the phrase is still good advice for us.  Why?  Because we are not going to find new deals or solve certain problems unless we get off our a$$ and knock on doors.

Think about it.

There is a lot of competition out there these days searching for real estate deals.  Foreclosure auctions are dominated by hedge funds or other big money interests.  Anything remotely close to a deal that is listed on the MLS has multiple offers within hours.  I even get three or four random phone calls a week asking me if I want to sell.

But, despite all of this, if we get off or a$$ and go knock on doors, if we get out there and drive around, if we seek out the owner and start a conversation, the chances of landing a deal get much higher.  Knocking on doors is something that many people will just not do.  It is easier to sit behind a desk and it is safer to hide behind a voicemail.  Folks, in today’s hot real estate market, you just have to get out there.

Landlords also have to get out there and knock on doors, their own doors.  They need to do property inspections and keep up with what their tenants are doing.  Otherwise potential problems and issues will remain hidden.  Hidden problems fester and often turn into bigger ones later on.  By knocking on doors you can find problems before they fester too long.

Knocking on doors is not easy and can be intimidating.  Trust me, I understand that.  I have been yelled at and told to go away more times that I can count.  Nobody likes rejection.  We instead fear it.  But we have to get over that fear and get out there.  It is how things get accomplished and it is often how we keep moving forward.

Location, Location, Location – It’s All In The Details

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Location, location, location.  Those are the three most important factors determining the value of a piece of real estate.  If you have never heard this saying before, please commit it to memory.  Smarter landlords and real estate investors know this adage well and apply it constantly when making decisions regarding real estate purchases.  They also realize that location, location, location is all in the details and can refer to many different attributes, some very broad and some very specific.

Smarter investors also know that property sellers will hype and promote the positive locational attributes of a property while downplaying the negative.  As investors we must learn to see through this hype and make sound investment decisions.  We have to use our locational knowledge to determine if the hype is justified or not.

Where Exactly?

We have all witnessed neighborhoods become the hot and trendy place to be.  When that happens, real estate prices in those neighborhoods can rise significantly as the demand for it increases.  Property sellers will naturally want to be associated with this trend.  As owners try to ride this neighborhood wave up, it is amazing to watch the boundaries of these hot neighborhoods expand farther and farther out, taking in more and more properties.  Smarter investors however do not fall for it and use their localized knowledge and know what the true neighborhood boundaries are.  They realize that crossing a boundary can change perceptions and thus values significantly.  They are cautious when properties are described as “near” or “in the area” when listed, knowing that the location may just be being hyped.

Another Example

Even the hottest neighborhoods can have their locational drawbacks.  Inherent locational factors will matter just as much as being in the “right” neighborhood does.  Location on a neighborhood boundary, on a busy street, on a corner lot or near power lines are just some of the minute locational factors that come into play.  Thus, while a seller is being completely truthful when advertising their property as being located in a hot neighborhood, they may not be telling you the whole story.  Properties located on major roads or near power lines are not going to generate as high a price as others.  Do your due diligence to understand these inherent locational factors.

One More Example

Associating a property with a major employment center or institution is another common ploy.  In my part of the world there are several institutions of higher learning nearby.  Obviously, being close to an institution of higher learning can be a good draw for tenants.  Many times those words “near” or “area” often come into play again.  It can be amazing how far out some “college areas” go and what some folks definition of “near” is.  Smarter landlords and investors are cautious and use their local knowledge to see past this attempted association.

Property owners who wish to sell will naturally try to create a buzz to get as many eyes as they can to look at it.  There is nothing wrong with that.   In doing so however the truth may be stretched and expanded a bit.  We investors need to be aware of this stretching and be ready for it.