SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

The Business of Landlording

Is a Property Manager the Answer?

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The answer to that question is maybe.  It will depend on what you as the landlord do once you hire a manager.

To many a tired landlord, hiring a property manager seems like the way to go.  No more phone calls, no more showings, no more tenants, no more, no more, no more.  And while hiring a property manager or someone to help you manage has many advantages and benefits, it also opens the door to a whole new set of problems and responsibilities.

When you are managing your properties yourself, you were on the front line.  You see what works and what did not.  You were able to make necessary changes quickly.  You were in your business. 

Things change with a manager.   You will not be as up close and personal.  You will delegate many of your responsibilities to the manager.  But I caution you not to delegate everything to the manager.  You must now work on your business instead of in it.

Now is the time for you to develop systems for the nuts and bolts of your business.  Systems to screen and approve tenants.  Systems to handle maintenance requests.  Systems to collect and deposit rent payments.  Systems to make your business successful.  Only with well scrutinized systems, can you begin to trust others with your business.

These systems need to keep you, the landlord, in the loop.  You simply cannot walk away or abdicate all of your responsibility.  If you do, it is too easy to lose.  People can embezzle your rents, like this property manager did, or they can ease up on rental standards causing  a slow erosion of your tenant base.  You simply have to manage your manager.

So yes, property managers are perhaps part of the answer to some of your landlording problems.  But smarter landlords stay involved.  They work on their business and build systems that will foster growth.

If you are just beginning to think about building systems for your business, the best place for you to start by far is the E-Myth by Michael Gerber.  Check it out!

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Empty Pockets Ahead?

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Realty Trac just released a report showing that the average estimated monthly house payment increased 21% form one year ago.  Seems there has definitely been some appreciation in the housing market.

To many real estate investors, increasing payments may sound like a good thing.  We think that with rents going up we will make more money.  We think that with home prices going up we can flip them for more profit.

But rents and home prices are not the only things increasing.  Almost everything is increasing in price these days.  Have you checked out your grocery bill lately?  Ground beef for example rose about 5% in price in 2013 and it is predicted to jump another 5% to 7% this year.  Coffee is up over 20%.  Gas is also at a 5 year high.

One has to wonder if everyone can afford all of these higher prices.  Will we see increased stress from our renters with more late payments? Will they be moving to more affordable locations or adding roommates?  I have a feeling we will.  Time will tell. 

What do you think?  Are your rents going up?  Are you still able to command higher rents?  Are you seeing any payment stress from your tenants?  Let me know with your comments.

Pet’s Only Please!

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Here is a wonderful example of how you can discriminate against potential tenants.  The local CBS station in Los Angeles reports:

“Judy Guth owns a 12-unit building in North Hollywood.  Not only is Guth pet-friendly, she doesn’t want a tenant who doesn’t have a pet.  All pets welcome — cats, dogs, birds.”

Many think that you cannot discriminate against anyone for any reason. But that is simply not true.  While landlords cannot in most cases discriminate against the seven federally protected classes, race, color, religion, national origin, sex, disability and familial status, many other items are in play.  And you should be discriminatory in who you choose to rent your properties to.

You may not want folks with an eviction or bankruptcy in their past.  If you do not want to rent to lawyers, you do not have to rent to lawyers.  If you do not want to rent to people who own motorcycles, you do not have to.  If you do not like pets, then there are no pets.  Or if you like pets, it can be all pets as in the story above.

They key is to be consistent.  You cannot pick and choose which lawyers you will rent to for example or let some in with a bankruptcy while keeping others under the same circumstances out.  It has to be all or none.  Whatever you decide, be sure to write your rental standards down and keep them in a handy file just in case someone, like a fair housing officer, asks to see them.

Landlords – They Are Changing The Laws

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Where the landlord laws are made.

I have written about this topic before but it is important so I will say it again.

Landlords need to keep up with what their state legislatures are doing. 

Most landlord/tenant laws are written at the state level.  So it is important to keep up with what is going on in your state capital. Every year they try to change the state laws that outline how you run your business.  For example, many state laws dictate:

  • If you can charge a late fee
  • How much that late fee can be
  • If and how much of a security deposit you can take
  • What clauses should be in your lease
  • When you can evict
  • When you cannot evict
  • How difficult it will be for you to evict if you have to
  • What to do if a tenant abandons your property.

The list goes on and on.

As a landlord, would you not want to know if someone is proposing a law to make it more difficult to evict someone? How about if a law is being proposed to restrict how much a security deposit can be?  Would you not want to know about any law that will make you job as a landlord more difficult, like this one proposed here in Tennessee (Does a tenant who has been legally evicted really need another 48 hours)?

Of course you would.  These laws directly affect your business and you would likely want to voice your opinion on those proposed laws.

On the flip side, perhaps a law is being proposed that will make your job as a landlord easier.  Sometimes laws are proposed that might actually help us out, such as this one here in Tennessee which shortens the eviction appeal process.  Would you not want to know about and perhaps voice your opinion on those as well?  Of course you would.

As landlords, part of our job is to watch what those folks in our state capitols are doing, because what they do or do not do can really have an impact on our business.  Of course I would much rather focus on my business but every year I have to devote a little bit of time to watching what is going on in Nashville because my business could depend on it.

Where can you find out about these proposed laws?  I think the best place is your local REIA.  Most of the time someone there is focused on the state legislature and will report what is going on.  Plus, as far as lawmakers are concerned, numbers matter.  So get informed and watch what those legislators are doing. Your business may depend on it.

Do Not Enter – Respect Your Tenant’s Home

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It can be difficult to find good tenants.  It takes time to show your property, take applications and screen out the bad guys.  Then there is the lease signing and move in processes.  After going through all of that, you want to keep the good tenants for a while right?  Of course you do. So don’t do things that will drive them away such as not respecting their privacy.

Once you find a good tenant, sign a lease and let them move in to your property you have given certain legal rights of possession to your tenant.  You have provided them with a home and as they say “a person’s home is their castle.”  You as the landlord have to respect that, even though you own the building you cannot just go into to a tenant’s apartment any time you fell like it.  If you do, not only are you a sloppy landlord (and kind of a jerk) you could be charged with a crime.

Check out this recent news story headline.

Tenants claim landlord broke into apartment overnight, heat still not on

The story continues:

Sievert rents an apartment for her daughter at a complex in Muskego near Woods Road and Racine Avenue.  She says Wednesday morning the landlord came by unannounced…

“He broke into my apartment.”

Sievert locked the doors to her apartment Tuesday night when she left.  When she came by to get her car this morning, she saw locks were broken.

“We noticed that doorknobs and locks were removed. The screw that we had screwed the door shut with was broken in half. The chains ripped off. The door was broken.

Muskego Police are involved and might give the landlord a municpal citation for criminal trespassing. But they want his side of the story.

“He’s sneaking around. He’s hiding his car in the garage.”

Certainly there is a lot going on in this story such as non working heat, code violations and a hiding landlord.  Plus why did he not have keys to his own property?  Who knows? But the story demonstrates my point.  A landlord can get themselves in trouble by “just going in” a tenant’s apartment.

But, what if there is an emergency such as busted pipes?  If there truly is an emergency, then yes, you are going to be permitted to go in unannounced to protect your property and fix the problem.

Otherwise, your local laws are likely going to dictate when you can and cannot enter a tenant’s home.  Here in Tennessee, the Uniform Landlord Tenant Act does just that.  Section 66-28-403 specifically addresses access by the landlord.  It states in part:

 (e) The landlord has no right of access to the premises except:

   (1) By court order;

   (2) As permitted by this section, § 66-28-506 and § 66-28-507(b);

   (3) If the tenant has abandoned or surrendered the premises;

   (4) If the tenant is deceased, incapacitated or incarcerated; or

   (5) Within the final thirty (30) days of the termination of the rental agreement for the purpose of showing the premises to prospective tenants; provided, that such right of access is set forth in the rental agreement and notice is given to the tenant at least twenty-four (24) hours prior to entry.

Your local rules may be completely different.  Local differences such as these are one reason it is so important to find a local REIA and understand your local laws.

Sure, there are other times when a landlord can have access to the property, such as to do a quarterly inspection, for a property appraisal, for insurance purposes, or if the tenant has requested maintenance.  But a good rule of thumb is to provide at least 24 hours notice and spell out when, where and why you may come into the property in your lease.

So be a smarter landlord and respect your tenant’s privacy.  After all, would you want someone barging into your home unannounced?

Real Estate Tax Benefits – Are You Ready To Claim Yours?

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Real estate investing, especially landlording, can provide you with many tax benefits.  Are you ready to claim yours?

For example:

  • Do you use the internet to search for properties?  Do you read the classified ads in the local paper?  Do you buy notepads, folders, pens, etc?  These are all business expense deductions.
  • Do you work out of your home?  You may qualify for a home office deduction.
  • Do you “drive for dollars” with your car?  Do you travel to and from your rental properties to show them to possible tenants or do maintenance?  You may be able to claim the car mileage deduction.
  • Did you need to make some repairs?  Of course you did, you are a landlord!  Those repairs are likely deductible.
  • Rental income for the most part is not subject to self employment (social security or Medicaid) taxes.
  • Plus the biggest bonus of all, depreciation. 

All of these deductions came before you even take your standard deduction and other exemptions, significantly reducing your adjusted gross income and the amount of income tax you owe. 

There are many more tax benefits that real estate investing offers.  These can include such things like “real estate professional” classification and cost segregation.

Taxes however, make a lot of people nervous.  But they should not.  Taxes are not rocket science.  Taxes are really are just some basic accounting along with some addition and subtraction.  I have done my own taxes and while they are time consuming they are not that difficult to do.

Two things have really helped me understand taxes.

  1. I am no CPA, but I have one that I can call upon if I hit a road block.  She has experience working with real estate investors and understands my business.  Where did I find her?  At my local REIA group.
  2. This book has been a great help.  If you are new to landlording, have a couple of properties or a couple of dozen, Every Landlord’s Tax Deduction Guide can really help you.  It is written for you, the investor, not the accountant.  It will help you make sense out of income taxes.  I cannot recommend it enough.  Click on the link and order it today (I do get a small commission on every order, just so you know, but I really do think the book is worth every penny)!

 

Better hurry though.  April 15th will be here before you know it.  Are you ready?

5 Questions and Answers About 1099’s

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Happy New Year!

Now, with that out of the way, let’s get to work.  And by work, I mean taxes.

The New Year means it is tax season again.  It’s time to close the books on 2013 and get all that paperwork together for Uncle Sam.

Part of that paperwork, is IRS Form 1099, specifically form 1099-MISC.

Why Should Landlords Care About Form 1099-MISC?

As a landlord, you are engaged in what the IRS calls a “trade or business” (I am assuming here that you are in the business to make a profit, well so is the IRS).  Therefore you are required to file form 1099-MISC. 

What Is Form 1099-MISC?

Form 1099-MISC is a form for reporting miscellaneous income to the IRS.  The IRS uses this form to help them determine how much a taxpayer made during the past year.  You are basically helping the IRS enforce the law.  The form has three parts.  One part goes to the IRS, one part goes to the payee and you keep the other part.  It’s pretty easy to fill out and the instructions can be found here.

Who Do You Fill Out Form 1099-MISC On?

You must fill out a 1099-MISC on anyone who provided you with a good or service in the past year worth over $600.  Did you have painters paint a house for $1,000?  Fill out a 1099.  Did you have a plumber do various jobs totaling over $600?  The plumber gets a 1099-MISC.  You get the picture.

One good thing, if your contractor or plumber is part of an incorporated business like an LLC, you likely do not have to file a 1099-MISC.  You can learn more here.

Will I Need Any Specific Information To File a 1099?

Yes, you will need the taxpayer’s tax identification number (TIN).  Usually this is a social security number but may not be.  To get that information you should have another form in your records, form W-9.  Get your contractors and others to fill out this form.  You can get and use form W-9 here.

When Do I have To File These Forms and Where Can I Get Them?

Yeah I know, that is two questions but they are important.  You have to file form 1099-MISC by January 31st.  But if you want to be a good guy, file it as early as possible as your contractors may need them to get a refund.

You cannot download the forms from the internet since the IRS uses special forms for their scanners.  You have to get and use their specific forms.  You can get the forms for free from the IRS, but they often get backed up.  I would suggest going to your local office supply store.  Go now however because they will sell out.

Let me close by saying that I am not an accountant.  I am a landlord who has done their own taxes over the years.  I seek competent advice from my CPA regarding taxes, and so should you.  The above are just some highlights regarding 1099’s, please seek advice if you have further questions. 

 

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!

 

Jenna’s Real Estate Resolutions for 2014

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If you’ve ever read anything on building businesses or obtaining personal success, you know that statistics show that you are more likely to achieve a goal if it is specific, measurable and written down somewhere.

With that in mind, here are my 2014 Real Estate Resolutions, all of which should be accomplished no later than December 31, 2014. Some are simple; some are not—but they are all important to my success as an investor.

  1. Buy a ladder and a water key.
  2. Purchase another multifamily property.
  3. Complete the wooden fence around my triplex.
  4. Read at least 3 new books on investing and/or entrepreneurship.
  5. Purchase an external hard-drive to store all of my RE documents.
  6. Every week, schedule time for house work, exercise and friends/family.
  7. Create a home-office to include a locked file cabinet and paper shredder.
  8. Develop a close relationship with 5 more contractors and 5 more investors.
  9. Renovate the kitchen of my apartment with new cabinets, floors and counter tops.
  10. Review my credit report and dispute all inconsistencies no later than June 30, 2014.

 

What are your Real Estate Resolutions for 2014?

 

Getting Over the Fear

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It’s Halloween, a time for all things that instill fear and scare us.  The thought of real estate investing for some causes fear.  They are fearful that they will loose a lot of money.  They fear that tenants will destroy their property and contractors will rip them off.  They are fearful that they do not have the right skills.  “Why would anyone ever invest in real estate?” they think, “It is just too scary.”

To tell the truth, I was scared of real estate at one time.  Heck if you are not a little scared about dropping tens of thousands of dollars into a project for the first time then there is something wrong with you.  But I got over the fear.  How?  I did it through education and action.

Fear generally arises from the unknown.  Knowledge therefore erases fear.  The way to gain knowledge is through education.  I spent a lot of time on my real estate education in the early years.  I like to tell folks it was like going to graduate school.  Here is what I did.

  • I turned off the TV.
  • I went to the library and read almost every book they had on real estate.  You can’t beat free and they had a lot of great resources for beginners.
  • I subscribed to and read local and national business journals.  If I was going to be a business person, I needed to begin thinking like one and I needed to know what was going on in my local market.
  • I joined my local REIA group and went to every event I could.  I met folks, made new friends and networked.
  • I read blogs, like Smarter Landlording and biggerpockets.
  • I bought several real estate courses and other books.  They were expensive, but I considered them an investment and they have paid off many times now over the years.
  • I built a team of people that could help me achieve my goals.  These included a realtor, an attorney, other investors, a CPA, etc.  I had folks on my speed dial that I could call whenever I had a problem or situation arise.

Sound like a lot doesn’t it?  Well, it was and it ultimately took several years, but that was the easy part.  The second part, the action, was harder.

Overcoming fear and putting knowledge into action is one stumbling block that many cannot get over.   All I can say here is just do it!  You have to take that first step.  Once you do the second one becomes easier and the third one even easier.  Before you know it, you have taken 10 steps forward and are well on your way.

Yes, you are going to mess up at times.  Yes, you are going to fail at times.  Yes, you will have to take a step back every once in a while.  But the smarter investor learns from their mistakes.  They know failure is part of the process and keeps moving forward.  Remember that every step back can be met with two steps forward which will still keep you going in the right direction.

Don’t want to take a huge step?  Then how about starting small?  You don’t need to buy that 20 unit apartment building right off the bat.  But how about getting a house in your own neighborhood as a rental property?  Or perhaps you could get a duplex and live in one side and rent out the other?  Don’t even want to start that big?  Wholesale a property to another investor for a few thousand dollars.

These are small steps that will help you learn along the way and give you the confidence to do bigger deals later on.  These small steps will lead to bigger steps and with each step that fear will get smaller and smaller.

So enjoy your Halloween.  Eat some candy.  Then get over the fear by learning and doing!