SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

Forms, Files and Tools

Do I Have To Send My Plumber A 1099?

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Tax season is upon us.  We landlords will soon be totaling our expenses and calculating depreciation. Before that however, the IRS requires us to send out Form 1099.  Who should receive this form?  Do I have to send my plumber a 1099?

What Is Form 1099?

Form 1099 is used to report the amounts paid to contractors and others for services rendered to our landlording business over the past tax year.  It is a fairly simple form, listing the taxpayer receiving the payment, their tax ID number and the amount they were paid.  Copies are sent to the taxpayer and the IRS. One copy should be retained by you.

Why Are 1099’s Necessary?

The IRS basically has all of us as a part of their compliance team.  By requiring us to fill out and send these forms, the IRS is able to compare income claimed by the taxpayer with the amounts others claimed to have paid them.  If there is any large discrepancy, the IRS can investigate the taxpayer further.

Do I Have To Send My Plumber A 1099?

Maybe.

A Form 1099 is required to be sent to almost anyone who received $600 or more in compensation over the past tax year.  This compensation includes almost everything, from regular pay, to parts and gifts.  Thus, if your plumber did over $600 worth of repairs for you, which really does not take much to hit, then yes, you have to send them a Form 1099.

And it is not just plumbers, but almost everyone you did over $600 worth of business with. This includes both contractors and other professionals such as attorney’s and accountants (The IRS does not trust anyone!). One exemption is if the taxpayer was employed through a “C” or “S” corporation. But most folks work for themselves or perhaps through an LLC, thus a 1099 is required.

It Is Not As Easy As It Should Be

If needed, Form 1099 is required to be sent by January 31 so there is just a little bit of time left. However, you should know that you cannot just download the forms off of the IRS website. You have to purchase special forms that can be scanned by the IRS computer system.  I have no idea why, I suppose the IRS computer system is a bit dated.  

If you need to order Form 1099, you can do so here.  Hurry however, time is running out.  Not only can you can be fined $50 per form, but your contractor may be relying on their tax refund, which they cannot get until they have all of their 1099’s.

Kevin Perk is the founder and publisher of Smarterlandlording.com.  He is the author of Advice From Experience To New Real Estate Investors.  Subscribe to Smarterlandlording here. Contact Kevin here.

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Almost Time For Form 1099

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2019 is almost over.  The new year will hopefully bring good things but one thing it will surly bring is taxes.  As a real estate investor, you have folks, such as plumbers, lawn crews, carpenters, etc., that do work for you.   If you payed any of these folks more than $600 you have to send both them and the IRS form 1099.

I have discussed IRS form 1099 before here.  The thing to understand about IRS form 1099 however is that you have to use a specially designed form.  This form cannot be downloaded and printed from your own printer.  You have to buy them.  This means you need to purchase those forms now.  And since every other real estate investor will also need these forms, you need to buy them now before supplies run out.  These 1099 forms are specifically for 2019 and trust me, they will go out of stock.  So order now.

You only have until January 31, 2020 to send 1099 forms out to your contractors.  That is just over two months away so the time to think about next year’s taxes is now.

Plus, your contractors may be waiting or depending on their tax refund.  They cannot file to get their refund until they get the 1099 form from you.  So be a friend to you contractors and get them their forms early.

You can order your 1099 forms by clicking this link.  Do it today!

By clicking on the above link, Smarterlandlording.com will receive a small commission.  This commission in no way affects the price you pay, but it does help keep this site up and running.

Please help support Smarterlandlording.com by ordering your 1099 Forms by using this link.  Thanks!

Making Offers Sight Unseen With Contract Contingencies

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Can you make an offer to buy a property sight unseen?  Yes, you can and sometimes you should.  Can you can do it with confidence?  Yes, you can do that too.  All you need are a few contract contingencies placed in your offer.  These contract contingencies will protect you and your hard earned money if the property turns out to be a dud.  What are these contract contingencies?  Read on to find out.

Buying Sight Unseen?

You might be wondering who would be bold enough to make an offer on a property sight unseen.  Well, a lot of people are and would do so. In today’s hot real estate market, many properties will have multiple offers just hours after they hit the realtor’s listing system if the are priced right.  With competition like that, there is just no way you can see and inspect these properties before they are snapped up by another buyer.

The key these days to acquiring properties is making offers, often sight unseen.  But, that does not mean you should leave your or your money hanging out there unprotected.  There are ways to protect yourself with contingency clauses in your offer to purchase contract.

Inspection

The first of these clauses is what is known as an inspection clause.  Such a clause allows you, or someone you designate, to inspect the property before you close.  There are many ways to word this clause.  The most common is simply “This offer is subject to and approval of an inspection of the property.”  With such a contingency clause in place, if upon inspection, the property is not quite what you thought, or needs significantly more repairs than you anticipated, you can get out of or renegotiate the contract.

Financing

The second contingency clause to protect yourself refers to financing.  Again, something simple such as “This offer is subject to adequate financing” will often suffice.  What is adequate?  That is up to you to decide.  Such a clause is key because you can never be 100% sure of financing, even if it is your own money.  What if you or your private lender get in an auto accident?  Funds may be needed elsewhere if such an event occurs.  You just never know so protect yourself with such a clause.

The Weasel

Finally, you should include what is often referred to as a “weasel clause.”  A clause such as this gives you the ultimate out if you need it.  What is it?  Something along the lines of “This contract is subject to review and approval of my business partner.”  Who is your business partner? Whomever you want.  All you have to do is tell the seller your business partner did not approve and you are out.

These clauses are to be used to protect you.  You should never make an offer on a property that you do not intend to close on.  Doing so is bad business, underhanded and it wastes everyone’s time.  Today’s hot real estate market however demands that we investors take some risk and perhaps make offers before we even see the property.  But, this exuberance does not mean that you have to make offers where you are not protected and have no way to get out of if something major pops up later on

Now go and make offers with confidence.  These contract clauses will allow you to know what you are getting into.  They will also allow you a way out if you need it.

Kevin Perk is the founder and publisher of Smarterlandlording.com.  He is the author of Advice From Experience To New Real Estate Investors.  Subscribe to Smarterlandlording here.  Contact Kevin here.

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Building Your Banker’s Book – The Personal Financial Statement

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An essential part of any banker’s book is a personal financial statement.  A personal financial statement details your financial history and plays a major role in helping those with the money determine if you are a risk worth taking.  In this post, I want to go over what a personal financial statement is and some of the basic information it should contain.   Plus, I will provide you with a blank personal financial statement in a spreadsheet format so you can get started on putting yours together.

It Is All About Demonstrating Low Risk

First, remember that potential lenders generally care about only one thing.  That thing is getting their money back.  Before they lend their money, they should do some due diligence to determine the level of risk they will have to take in lending to you and what their chances are of getting paid back.  Your task is to demonstrate that you are a good risk and will pay them back.  A well designed banker’s book with a personal financial statement will help you accomplish that task.  It will demonstrate that you have your financial house in order.

As mentioned in the opening paragraph, a bank personal financial statement has been uploaded here.  As a spreadsheet, it has formulas already designed in it to do some of the work and calculations for you.  Download the blank personal financial statement and follow along as I describe the major components.

Filling Out The Statement

The personal financial statement form consists of three pages.  The first page lists all of your income and all of your expenses.  It is here that you describe what you earn and what you spend those earnings on.  You can add or remove the income and expense categories to fit your unique situation.  Once all of the data is compiled and entered, hopefully this section will demonstrate that you are living within your means.  If not, perhaps it is time to explore some of Dave Ramsey’s expertise and develop a budget.

The second section lists your assets and liabilities and creates a personal balance sheet.  It lists what you own and what you owe. What are assets? They are items such as cash, stocks, retirement accounts, real estate, automobiles, jewelry, art, etc.  Assets are anything of value that you own.  In assigning value, enter what you believe they are worth.  For example, if your home is worth $200,000, enter that number.  Do not worry about what may be owed on the asset, that comes in the liabilities part.

Your liabilities are what you owe someone else.  Liabilities include items such as credit card debt, student loans, mortgages, car loans, etc.  Enter the amount you owe on your mortgage for your $200,000 home in this section.  The spread sheet will automatically tally both of those sections and then present you with your net worth as a personal balance sheet.

If for example, your only asset is the $200,000 home described above, but you owe a mortgage of $150,000, then your net worth is $50,000.

The second and third pages provide details of your assets and liabilities.  It is in these sections that you answer several questions.  These questions include: What types of assets? Where are the accounts located?  What is the address of the real estate assets?  Who holds the debt?  How much debt is owed on each asset?

Sign And Date It

Once all of this information is entered, you sign and date the personal financial statement.  Your signature notes two things.  One, it tells the lender how current your statement is.  Second, it notes that everything you have represented is true and accurate to the best of your knowledge.  It therefore has a sort of legal standing so be true and accurate.

It takes Time And Can Be Eye Opening

Compiling the personal financial statement can take some time.  There is often a lot of data to be collected and entered.  It may not be something you can do in a day, but may in fact take a couple of weeks to figure everything out.  Once completed, be ready.  If you have never completed such a document before, it can be pretty eye opening.  You may not have really known where all of your income was going and where you were balance sheet wise.

Better to find out now that you need to get your personal financial house in order before you ask for other people’s money.  Once things are worked out to your satisfaction, you will be very on top of your financial matters and able to clearly demonstrate that you are a good risk to take.

Estimating Rehab Costs – A Checklist To Put It All Together

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My last post was about the importance of accurately calculating rehab costs.  In it, I demonstrated how important these rehab estimates can be to our bottom line.  They can change a potential deal from good to not so good, or prevent us from getting a potential deal.  In this post I want to share a checklist that you can download and use to help you put it all together and accurately estimate rehab costs.

Inspecting Potential Properties

As real estate investors, our business means examining properties.  However, the opportunity to examine a property can be limited or hindered.  For one, there may not be much time to look at a property.  Secondly, there are often a variety of distractions.  These distractions are often other people.  It could be the seller or a Realtor or other investors who are at the property the same time you are.   Because of these time distractions and other people, it can be very easy to overlook or miss something when you are inspecting the property.  The best way to stay on track is to use a checklist.

The Rehab Estimation Checklist

Every time I visit a potential property, I take and use my Rehab Estimation Checklist.  I developed this Checklist over the years through trial and error after visiting numerous properties.  It is simple and straightforward and allows you to make quick notations.

The checklist is a directory of the main components of any property rehab.  It starts on the outside of a property and works its way inside.  When visiting a property, all one has to do is follow the list and check yes or no next to the component.  Marking yes on the checklist shows that the component will need to be rehabbed.  There is also a space for any comments that you might wish to add.

It should take you no more than 15 minutes to a half-hour to completely go through a single property with this checklist.  Once completed, you can return to your office and add costs next to the components you think will need to be rehabbed.  So for example, if you note that the property needs a new roof, you can then use the formula noted here to determine the cost.  If you not that the property will need interior painting, you can use the formula described here to estimate that cost.

Keeping On Track

This checklist serves several purposes.  First, it organizes my thoughts and calculations.  There can be a lot of moving parts in a rehab job.  Being organized right from the start will help tremendously.

Second and more importantly, the checklist ensures that I do not overlook anything.  As I said above, there can be a lot of distractions and it can be easy to miss something.  Having a list ensures that I do not forget to check the water heater, the electrical panel or under the sink.

Third, if there is someone distracting me, the checklist helps stop it.  Sometimes properties are vacant and you will be alone when you see them.  But often there is someone else around and they will, wither purposefully or not, distract you.  Trust me, people just do not seem to know how to leave you alone and let you look over the property.  They will want to show you around.  Having a checklist enables you to hold it up and say something like “I just need to look at these items on my list if you do not mind.”  That will usually get them out of your way.

Download The Checklist

Checklists are an important part of any business.  They help keep you on track and focused.  With potentially expensive rehabs, a checklist is vital to your success.  Download my Rehab Estimation Checklist here.

Inheriting Tenants? Protect Yourself

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When you buy an investment property, sometimes it will come with tenants already in place. These tenants can be a good thing as your new purchase will be immediately generating income. But, these tenants can also be a bad thing because you really have no idea how they were screened, how they have been as tenants or even what the details of their lease are. You can of course review existing written lease agreements, but there are landlords and tenants out there who have nothing more than a verbal agreement. There is no written lease to review.

So what you might ask.

Well, here is the thing with inherited tenants, you are stuck with them. The existing lease, even if verbal, cannot be changed by you just because you have bought the building. Your purchase does not in any way, shape or form alter the lease agreements the tenants currently have in place. You can’t raise the rent. You can’t just evict them. You can’t add rules. You can ask them to sign a new lease. You can offer to pay them to do so, but they do not have to. As I said, you are stuck with them. Stuck with them until the term of their lease is up.

Not a good place to be, especially if you have no idea what unwritten agreements might be hiding out there.

So how do you, as a landlord who wants to add the property to your portfolio, protect yourself? How do you determine what the current lease terms and conditions are?

One way is to ask to review the current leases. But what if there is no written lease? Or, what if the selling landlord is just making stuff up? It happens!

One of the best ways to protect your interests is to use an estoppel agreement. This agreement, which spells out the existing lease terms, is filled out and signed by both the tenant and the selling landlord. An estoppel agreement is a simple one page form that asks some very basic questions regarding a tenant’s living arrangements. Questions such as:

  • What is the term of your lease?
  • Who is listed on the lease?
  • How much is the monthly rent?
  • Do you pay any utilities?
  • How much is your security deposit?
  • Do you own any appliances in the apartment?
  • Are you current on your rent payments?
  • Are there any repairs that need to be made?
  • Do you have any other arrangements with your current landlord?

By getting this form filled out by the tenants you are about to inherit and the landlord you are buying the property from, you will have a legal piece of paper that will offer you some protection going forward.

How?

If a tenant later claims that his verbal lease was for a year and that you can’t ask him to leave you can point to the estoppel agreement that he signed stating that he was on a month to month term.

Or,

If when the tenant moves he claims that his security deposit was $5,000 and that he owns the appliances, you can again refer back to the estoppel agreement to determine if that is indeed the case (If it is the case when you review the agreement before closing you may want to renegotiate the purchase price.)

The estoppel agreement is a very important piece of paper to get completed when buying any property that has existing tenants. Use it every time and make the completion of this agreement a part of your purchase and sale contract. In fact, I think this document is so important I want to make it easy for you to use. So please follow this link to my Smarter Resources Page to download the estoppel agreement form that I use and protect your future buying interests.

 

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Filling Out A 1099? Get A W-9 First

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It’s a new year. And while a new year can bring many good things, it also brings thoughts of something looming right around the corner, April 15 and income taxes. I despise taxes as much as the next person. But I despise even more all of the paperwork that goes along with them. Unfortunately, if you are going to be a landlord, you are not going to be able to avoid some of this paper work, especially if you hire folks to perform various services for you.

You see, the IRS has basically made us their enforcers. Anyone that we pay over $600 to in a calendar year has to be provided a 1099 (with some exceptions for corporations). That means your yard guy, the lady that cleans your apartments, the plumber, your electrician all have to be provided a 1099 with a copy sent to the IRS.

I have written about 1099 forms before, so I will not go into that again. But when you go to fill out those 1099’s, especially if it is the first time you have to do it, you may realize that you do not have all of the information you need. Because the 1099 form not only requires you to report the amount you paid someone, but you also have to report their name, address and social security or tax ID number. Where do you get that information?

You get it by using a W-9 form. The W-9 form is called the “Request for Tax Payer Identification Number and Certification” form and can easily be downloaded from the IRS website here. The W-9 form is a very important form to get completed by anyone (with some exceptions of course) who does work for you. The W-9 form requires a service provider to give you all of the information you need to properly fill out and send a 1099 form.

I require anyone that I have hire to do work for me complete a W-9 form before any work even gets started. In fact, it is usually a part of our contract signing process (You do use contracts with you contractors right?). In this way, I am assured I have the information I need so I do not run afoul of the IRS. Once you have this form, keep it on file, FOREVER. Why? Well, you really never know if the information you have been provided is correct or if they are committing tax fraud. If they are committing tax fraud, you can show the IRS the information you were provided and then you will usually be in the clear. But if you do not have a properly filed out form on file, your troubles may escalate.

What if someone refuses to fill out a W-9? Well, I usually will not hire them. But you can hire them if you want to. When it comes to paying them however you have to withhold 30% of the amount they are to be paid and send it in to the IRS. Much like an employer does with a portion of an employee’s paycheck. It will them be up to the person you hired to get that 30% as a tax refund if it is due to them. What about the W-9? You can simply write refused on it and file it away. But personally, I would stay away from such folks. No need to be on the IRS’ radar screen anymore than you already are.

Remember, I am not a CPA, I am just a landlord with some experience. Please ask your own professional advisers for tax advice.

Self Directed IRAs – A Smarter Wealth Building Tool

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One of the first things I learned about when I was considering getting into real estate investing was the self-directed IRA.  If you have never heard of such a thing, a self-directed IRA is very similar to the more “traditional” IRAs that most associate with their jobs.  The main difference is your investment choices are not limited with a self-directed IRA.  With a self-directed IRA, the sky is almost the limit.

A self-directed IRA is just that, self directed.  You make the choice of where to invest your money.  If you wish, you can go the traditional route and invest in stocks, bonds or mutual funds or you can buy real estate, make loans, purchase options or notes and a whole host of other things.  Like I said, the sky is almost the limit.  This sounded great to me, so I opened one up and have been using it to invest in real estate ever since.

When I was still in the “working” world, I had several of the more traditional type IRAs with investments in stocks and mutual funds.  And they were doing OK.  Before I went into full time investing, I set up mu self-directed IRA and began contributing immediately.  There were a couple of reasons for that:

  • It is easier to set up when you have a job and job related income.
  • Once I quit, I could no longer contribute rental income towards and IRA (rental income is passive income and is not allowed to be placed in an IRA).  So I was able to build up a little bit of a slush fund so to speak.

After I went into investing full time, I discovered another advantage.  Since I was no longer employed, I could now roll over all of the funds from my other, job related IRAs into my self-directed IRA.  This action created a nice lump sum for me to invest with.  But be warned, the companies managing your IRAs do not like to let you leave.  They erect many barriers and roadblocks.  Just be persistent and you will win.

Today I have several rental properties held by my IRA.  These were purchased with the cash I had saved and rolled over.  I looked into leveraging this cash by getting a loan, and while it is possible to do, you may shoot yourself n the foot due to something called Unrelated Business Income Taxes (UBIT).  So talk with a trusted CPA before you do that.

I strongly recommend any real estate investor look at the potential of a self-directed IRA.  The returns can be phenomenal and potentially tax free!  You just need to find a custodian to help you get set up.  I use Equity Trust and have been very happy with their service.  But shop around as there are several custodians out there.

If you do set up a self-directed IRA (and I hope you do), here are some tips for you:

  • Keep some cash inside it for repairs and maintenance.  You cannot co-mingle your own funds with IRA funds.  Any repairs needed to a property held by your IRA must be paid for by your IRA.
  • Invest jointly with your spouse.  You can, for example contribute 50% towards a property and your spouse can do the same out of their IRA.  It is a good way to make your dollar go a little farther.
  • Mix things up a bit.  Buy some rental properties.  Make some loans.  Purchase an option.  Spread out the risk.

So look into a self-directed IRA.  Trust me; you will be glad you did.

Anyone got a good self-directed IRA story out there?  Had a huge tax free return or score a big deal?  Let us know with your comments.

 

Buying Apartments? Use This Form!

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For us landlords, growing our business means adding new properties.  New property additions mean more rental units and more cashflow.  New property additions also mean more tenants.  Sometimes these tenants come with the properties we buy.  I call these tenants “inherited tenants.” 

Inherited tenants pose a special kind of risk to a buyer in a couple of ways.  First, as a buyer you are generally bound by their existing lease agreements.  You cannot just kick tenants out, raise the rent or revise other lease terms just because there is a change in building ownership.  Second, these tenants have not been through your screening process.  You really have no idea about their background or payment history.  100% occupied may not be what it seems.  So if one of these inherited tenants is a rotten egg, you may be stuck with them for a while

One way you can protect yourself as a buyer is to review all of the leases before purchase.  While I recommend doing this, I feel it does not go quite far enough.  I want more protection.  So I use an estoppel agreement as well.

Estoppel is a legal term which means someone is prevented by their own acts by claiming a right on another party.  For those of us buying investment properties and inheriting tenants an estoppel agreement prevents those tenants from making future claims on us after the property is transferred.  The agreement spells things out on the front end before we buy, thus preventing our inherited tenants from claiming something different later on.

Here is what an estoppel agreement should include:

  • Tenant(s) name and who lives in the unit
  • Lease term
  • Renal payment amount
  • Security deposit amount
  • Who pays utilities
  • Who owns the appliances
  • If there are any pets
  • If there are any problems or repairs needed
  • If there are any other agreements with the landlord.

The agreement should also be signed by both the tenant and the current owner once it is completed.

Don’t think for a minute that some unscrupulous tenant will not try to claim that their security deposit was really $1,000 instead of $500, or that they paid six months rent in advance, or that they really do own those window air conditioning units.  An estoppel agreement will stop those claims cold and it will stand up in court.   

Don’t let yourself be taken advantage of during an ownership changeover.  Protect yourself and your business.  Make completed estoppel agreements a part of your purchase contract.  It’s simple and easy to do plus it may just save you a bundle.

Feel free to download the estoppel agreement I use here.

Top 5 Smarterlandlording Posts in 2013

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Here are the top five posts for 2013.  Thanks for reading Smarterlandlording.com and look for lots more in 2014!   Have a Happy New Year!