SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

The Business of Landlording

Advantages To Owning Rental Property

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In an effort to provide readers with truly helpful content, I have asked fellow real estate investor, friend and mentor Richard Scarbrough to help. A frequent guest on the Smarterlandlording Podcast, Richard is a wealth of real estate knowledge. His experience in the business totals over 40 years, and it is perhaps best if I let him describe some of what he has done.

When I started investing in real estate, there was hardly any information available. I had great desire and blind optimism to do a lot of different things such as buying homes, moving them, infill lot development, apartments (8, 24, 40 and 216 unit complexes) buying and selling mortgages. I thought if I could own 100 homes I would be rich, so I bought homes from Northaven to Southaven (communities here in the Memphis, TN area), any type property, anyway I could finance it. I also bought, rehabbed and flipped to retail buyers over 400 homes. Along the way I tried numerous management companies that always seemed to manage my properties in a way that I had no cash flow. Some of the above ventures lost money (which I call “seminars” ). But what was more important and cost the most was the lost TIME, as it took me almost a decade to get to back to even after the “216 unit apartment seminar.”  Now at age 71 looking back at 40 years of investing I realize that about a third and maybe half of my investing time was spent recovering from mistakes, therefore anyway we can educate others to avoid these errors is time well spent.

From time to time, I will be publishing some of what I am going to call “Richard on Real Estate.” I hope you will find these posts helpful and entertaining. Let me know what you think or if there is a topic you would like to learn more about by leaving a comment below.

Without further delay then, here is Richard on Real Estate.

The Advantages of Owning Rental Property

There are four major advantages of owning rental property:

  1. Cash Flow – This is usually defined as the difference between the monthly income and the PITI (principle, interest, taxes and insurance) monthly payment. This one gets all the conversation, but is not the most beneficial until the property is paid for.  You should also allow for repairs, maintenance and vacancy loss.  You will get maximum cash flow if you are the manager.
  2. Equity Build Up – Equity build up is gained from the loan being paid down each month, depending on the term and interest rate of the loan.  Equity buildup can be several hundred dollars a month. With a fixed rate amortized loan, equity buildup increases every month.
  3. Price Appreciation – As our government prints money to solve problems we will have inflation.  Real Estate is one of the few investments that benefits from inflation, as inflation increases the property values and pushes rents up.  
  4. Tax Savings – You can depreciate your property as if it was a piece of equipment wearing out and deduct actual dollars off your income tax.  This saves you real dollars while you own the property.  This tax advantage is the main reason I started investing in rental property.  It was very distressing to work so hard and pay more than one third of my income in taxes every year.  Not paying taxes legally is real money.  

Each of the above benefits should be figured as a return on your investment, and each one may be worth more to you in different seasons of your life.  The great thing about real estate investing is that you get all four all the time.

It has always amazed me that if you say the words “Rental Property” to anyone, you get a flood of negative comments.  The only things people think and talk about are all the problems with tenants, such as not paying, tearing up the property, etc.

When confronted with this I always ask people if they have ever had a problem with their car. Yes is always the answer.  I ask further if they think they might have a problem with their car in the future.  Yes again.  Going deeper I ask if these problems mean that you do not want to own a car.  No, is the answer. People want a car because the car takes you from where you are to where you want to be, even though you might have problems.  Rental property can do the same thing – take you from where you are to where you want to be. This is what people do not think about.

Rental property gives four major financial benefits outlined above along with many other non-financial ones.  It can give you monthly cash flow as the tenants pay off the mortgage, inflation will pull the rents and property value up higher, and tax benefits that can lower your income taxes to almost zero.

Just as traveling is easier with a car, advancing your financial position is easier if you have rental property. There are a lot of good people who are in different seasons of life who will pay on time and take care of property. Owning residential rental property really does offer many advantages.

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Landlording And The Coronavirus

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The Coronavirus is here and the reaction is unprecedented.  Large gatherings are being canceled (What am I going to do without March Madness?), supplies are being hoarded and people are social distancing. Whether all of this reaction is justified or not remains to be seen but what we can say is that the impacts will be wide ranging.  We landlords will not be immune so to speak from these impacts. Have you considered what some of these impacts to your business might be? Have you considered how you might handle them?

Te impacts right now are few. The effects of the virus and the public health reaction to it are just beginning here in the US. People are just now beginning to travel less, eat out less frequently and generally close themselves off and stay home. It may seem like a vacation to many right now but in a couple of weeks things are likely going to feel very different.

In the coming weeks, we will all be trying to avoid unnecessary contact with others in order to keep the spread of the virus to a minimum. Consider what this means for your landlording business. It means that some of your tenants will likely loose sources of income.  Think of those that work in restaurants or in other service jobs such as driving for Uber. They may very well take a significant hit to their pocketbooks and the resources they have will be stretched thin. Many may be able to make it through this month but what about the next?

It is likely you will get calls from tenants regarding late rent payments because of this lost income. I have written before about how some tenants are being squeezed. The potential loss of income in the coming weeks means that tenants may have to make some difficult choices between food, gas and rent.  What should your reaction be?

If they have been otherwise good tenants I suggest working with them. This epidemic and the reaction to it is like nothing we have seen in our lifetime. But, it will pass.  Thus, if you can, it might be best to work out a payment plan with your struggling tenants. Discuss with them what they can and cannot do right now and develop a written plan to get them over the hump. Most will appreciate it and will follow through. And besides, where are you going to find new tenants now anyway?  No one is likely going to be out and about looking for a new place to live.

Repairs and maintenance are also likely to suffer a bit as well. Everyone will likely want to keep their distance or may be sick. Major rehab jobs where there is little contact with others might be able to keep going but tenants may be worried about people coming into their homes. So perhaps it is best to put off anything non-essential for a while.  

What can we landlords do right now to help get through this? If you are not doing so already, go virtual with your tenants and contractors. Connect with everyone as remotely as you can. Thankfully our modern day phones and property management systems make that pretty easy. There really is no need for contact, other than showings, anymore.  Use this time as an experiment to see how you can better streamline your business using virtual technology and take yourself out of some of the day to day hustle and bustle.  

Most of all, be patient, as this too shall pass. Be patient with your tenants.  Be patient with your employees and contractors. Everyone is being impacted by this crisis. Give people time to recover and get back on their feet again. There is really no reason, for example, to pull out the eviction hammer right now. You may very well not be able to file anyway as I see that some courts are closing down. Plus, other jurisdictions are talking about enacting a moratorium on evictions. Do not fuel those flames. Patience is the name of the game right now.

Ask for patience as well. Everyone and every business is going to feel the effects of this virus. Hopefully things will blow over pretty quickly. Until they do, repairs and other business needs may not get done as quickly.  Ask everyone for patience until the virus passes.  Let folks know that you are working and doing your best but things are a bit uncertain. Most will understand, but you have to communicate and let them know.

What are you doing with your landlording business to get through the Coronavirus?  How has it affected your business, if at all? Let us know with a comment.

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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Can I Paint My Walls? Dealing With Tenant Redecorating Requests

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Most tenants are quite content to move in, pay their rent, live and be left alone. They understand that while your property may be their home, it is not theirs to do anything with that they please. Most tenants are this way. Others never seem to be content. They always want to change or tailor your property to better “fit” them.  

These tenants will want to do “improvements” to your property. They will have renovation requests such as “Can I paint my walls?” or “Could I plant some flowers?” I have even had tenants ask if they can put up wallpaper or install tile.

At first, these requests may sound reasonable to you. You might think that what the tenant wants to do will actually improve your property, that your property will look better when the tenant is done. In other words, what could go wrong? Lots. Let me dissuade you from these thoughts.

Many people devise grand ideas for things they want to do. Especially when something, such as school, a job or a place to live, is new and fresh. Think of the times when you were in school and said to yourself “I’m really going to buckle down and study harder this year!” Did you? Perhaps you did. But, if you are like most people, other things in life got in the way and as that feeling of newness wore off, often so did the ambition. Or that ambition was re-focused on other new things that arose in life.

Tenants are no different.

Over the years, we have said “yes” more that once to these types of tenant questions.  And 9 times out of 10, we have regretted it. Why, because the wall painting never really does get completed. Or the paint job is so bad that it has to be redone when the tenant moves out. Or they did not use drop cloths and splatter paint all over the hardwood floors. Other times, the tenant lies (shocking I know!) and paints the walls a totally different color than what was requested and approved. Do you have any idea how many coats of primer and paint it takes to cover black or bright green paint? I’ll save you the hassle by telling you at least four.

I have learned from experience that you simply cannot trust your tenants to do what they say they are going to do when it comes to these matters. Plus the picture of the completed job that you have in your head will not match the one your tenant has in theirs. All of this leads to aggravation and drama for both you and your tenant. Best to just avoid it in the first place by saying no.

Be glad however that at least your tenants are asking and not just doing. Hopefully the reason they are asking is because you have strict clauses in your house rules stating that tenants shall not make any property improvements or alterations without your approval. Hopefully you also made this clear when they moved in. If you do not tell them on the front end, believe me that many will just assume that making such alterations are OK.

The bottom line is that saying yes to these types of questions usually just ends up costing you time, money and aggravation.  Most of the projects that tenants attempt to take on have to be redone, and/or constitute a recurring maintenance issue. It is therefore best to make it policy that your property cannot be altered by your tenants.  No, you cannot paint your walls.

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.

Subscribe to Smarterlandlording and receive a Free Report: 21 Tenant Screening Red Flags

Keeping More Of What You Make

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Any business is all about the bottom line. If you are not keeping more than you make, then your business is doomed. Keeping more of what you make is not easy. There is always someone trying to get into your pocket. Learning how to keep more of what you make and keeping people out of your pocket begins with learning what is in your pocket to begin with. Keeping more of what you make has to start with you.  

You might have read the title to this post and thought I was going to provide tips about taxes or cost cutting. While those things are important, this post touches on something a lot more basic, knowing what is coming in and what is going out. You might be thinking “well duh”! But you would be surprised at how many I talk to have only a vague idea.

Keeping more of what you make begins with getting your “business house” in order.  You cannot just throw receipts in a shoe box to sort out later, or write checks here and there. The receipts will only pile up, money will keep going out and later will never come. A income and expense record with a filing system is a must. This system does not have to be fancy or complex. The key is to just have one and enter data and keep it organized at least once per week. A simple spreadsheet and bankers box may do the trick, especially when you are just starting out.

Start by setting up a simple spreadsheet for each property. At the top, list the source of income such as rent, late fees, or utility reimbursements. In lower rows, list expenses. Develop general categories for your expenses. The real estate expense categories used by the IRS on Form 1040, Schedule E are a great place to start. Doing so will save you a great deal of time and effort when tax season rolls around. You can always adjust your spreadsheet to fit your specific needs as you grow.

And as you grow, you will need to adjust. The record keeping just gets harder and so complex that simple spreadsheets may not be able to keep up. As you grow, you may want to hire professional help or move towards some sort of accounting software such as quickbooks or quicken. Be prepared however, as this step involves another learning curve. You will either be learning about the software or learning what your professional bookkeeper needs. There are also several property management software packages out there that get better and better every day as far as their functionality goes. We have graduated to using Appfolio, but if you are just starting out, such a system is not worth the cost.

Keep in mind also that as you add to your business, in terms of properties, loans, lenders, partnerships, LLC’s and trusts, you will be adding bank accounts, checkbooks, forms, tax obligations and other paperwork. It will all become much more complex. This complexity will include lots of numbers and data that has to be sorted, maintained and reviewed.  

It can all be quite overwhelming, especially for someone who does not have any accounting or money handling experience. But keeping close track of what is coming in and going out is a must. If you want any chance at all to keep more of what you make, it will start with you and the systems you set up as you begin and grow your real estate business

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.

Subscribe to Smarterlandlording and receive a Free Report: 21 Tenant Screening Red Flags

Sometimes Technology Causes New Problems

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I am constantly amazed by technology and the benefits it brings.  As a child of the 1980s, having more than three TV channels along with a source of communication and all knowledge right in your pocket is astounding.  But sometimes I think too much technology can be too much of a good thing. As a landlord, it seems that instead of being helpful, technology sometimes causes new problems.

When you own multiple rental properties, the last thing you want to create for yourself is more potential problems, another maintenance issue or something else you have to keep on top of. We landlords have enough of that already with all of the roofs, yards, accounting and personalities we must deal with.  Technology has certainly made many things better.  Cell phones make communication, scheduling and completing tasks much more efficient for example.  But technology also seems to create its own problems.

Take thermostats.  Yes, I’m talking about the simple device that controls the heat and air conditioning.  They are not so simple anymore. Gone are the days when a thermostat had two switches and a lever to control the temperature.  Today they have batteries, long instruction sheets and need to be programmed.  Sure, there are benefits to these things but batteries die and need to be replaced, instructions get lost and programming gets deprogrammed.  All of which causes a hassle for me and my tenants that I would not have if I had the simple, old style, analog thermostat.

Appliances are another example.  Appliances have always been a maintenance issue. They breakdown, get abused and worn out and must be replaced.  This can be such a problem that some landlords shy away from even providing them.  Technology has made this problem worse.  As a landlord I want simple.  I want indestructible.  I want something that even a small child could figure out and use.  Technology is moving us away from that.  Stoves, washing machines and dishwashers used to have simple switches or knobs.  On was on and off was off.  Not so anymore.  Electronic control boards have changed all of that.  There are now so many circuits, switches and buttons that can break or malfunction to render the appliance useless and in need of replacement.  No longer can one just replace a knob or a switch in a few minutes, now the entire appliance has to be replaced.

Sometimes I feel like I am just yelling at a cloud and turning into an old fogey with these sorts of rants.  Perhaps I am and I guess it will happen to the best of us.  I truly get many of the benefits that technology has and is bringing us.  I like the LED lights that save on electricity and hardly ever need to be replaced for example.  But I do not need or want technology to create new or increase problems for me.  It seems that sometimes the old technology was simply better.

What do you think landlords?  Am I wrong here?  Am I just not keeping up with the times? What technology do you think is great? What just causes you more problems? Let me know with a comment below.

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.

Subscribe to Smarterlandlording and receive a Free Report: 21 Tenant Screening Red Flags

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.

Subscribe to Smarterlandlording and receive a Free Report: 21 Tenant Screening Red Flags

Top Landlording Business Posts Of 2019

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Happy New Year!

I wish everyone a successful and prosperous 2020.  

My previous post described the top five posts for 2019. That list demonstrated that tenant issues are a major concern.  While tenants can certainly cause us some headaches and distractions, we landlords cannot forget that we are in business.  And to be truly successful we have to work on and develop that business.  Keeping that in mind, I thought I would bring you the top landlording business posts of 2019 to help you better your business.  

Is Your Rent Increase Legal?

Landlords! Use House Rules.

What Does Normal Wear And Tear Mean?

Rental Standards

Security Deposits

As always, thanks to everyone out there for reading.  If there is a particular topic you would like me to write on in 2020, please let me know with a comment or an e-mail.

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.

Subscribe to Smarterlandlording and receive a Free Report: 21 Tenant Screening Red Flags

Who Should Not Become A Real Estate Investor

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Its the end of the year, the time to reflect on the past and plan for the future.  The time to dream dreams and make resolutions to achieve those dreams.  One such resolution might be to get into real estate investing. There are many who dream of striking it big in real estate, but there are some who should not become a real estate investor at all.  Who could this be?  Read on to find out.

Someone Who Wants To Get Rich Quick

Being a real estate investor is not a get rich quick process.  Instead, it takes time to build wealth with real estate, especially buy and hold real estate. Sure, some quick bucks can be made flipping houses and if you want to get into real estate investing you should consider doing some flips.  But the real, long term wealth is in buying and holding.  The old saying really is true – don’t wait to buy real estate, buy real estate and wait.

Someone Who Wants To Be Hands Off

Being a real estate investor is not hands off.  In fact, the way to earn the best returns is to be very hands on.  Being hands on will likely mean doing a lot of things yourself, at least at the very beginning while you learn the ropes to keep costs down.  Being a real estate investor is more than just buying property. It is about building a business that will enable you to fulfill your dreams.  Even if you choose to use a management company for your investments, you will have to manage the management.  There is no way around it, being a real estate investor will be a hands on process.

Someone Who Wants To Invest and Forget

Real estate investing is not a way to park your money and forget about it.  If you want to do that, you need to find and annuity with a guaranteed return. Real estate investing takes work. Work at finding investments, then managing and maintaining them.  But, because there is work involved, the returns are some of the best you can get.  

Someone Who Does Not Like Working With People

Real estate investing is a people oriented investment.  To be successful with it, one has to work with many different people.  Who are these people? There are property owners, Realtors, tenants, other investors, contractors, bankers, appraisers, accountants and lawyers just to name the ones I could quickly think of.  All of these people are those that you will need to help you make the most of your investment.  You have to be able to work with people as a real estate investor.

Someone Who Cannot Handle Mistakes

Real estate investing involves a lot of moving parts, a lot of different people and has a large learning curve.  Because of these qualities, there are a lot of places to make a mistake and as a real estate investor, you will make mistakes.  If you cannot handle making mistakes, learning from them and moving on the the next investment property, than look for someplace else to invest.

Who then should become a real estate investor?  The answer is those that can and are willing to work towards making their investments be the best that they can be.  If you can learn and adapt (which I think most can) than you can be a successful real estate investor.  So dream big. Start to climb that learning curve and do not wait another year to get into real estate investing.

Readers, who would you add to the list of folks who should not get into real estate investing? Have any thoughts?  Please share with your comments.

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.

Can Landlords Require Their Tenants To Pay For Repairs?

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Can a landlord require a tenant to pay for repairs?

Repairs are a constant in the life of a landlord. Things break and need repairs.  The repairs never, ever stop.  Unfortunately, repairs cost money. Some repairs are bigger ticket items like HVAC equipment, but most repairs are the smaller nickel and dime variety.  Either way it adds up.  Can landlords shift some of these costs to tenants?  Can landlords require their tenants to pay for repairs?  If so, should they?  Read on to learn more.

It Is Done With Commercial Properties

In a word, yes.  Landlords can make require their tenants to pay for repairs, even the ones they did not directly cause.  All that needs to be done is to include certain language in a lease, have the tenant agree to that language and sign the lease.  In fact, requiring tenants to make and pay for repairs is quite common with leases on commercial property.  

A residential lease could theoretically do the same thing (as long as there are no local laws prohibiting it).  Or, as I know a few landlords do, a clause could be inserted into a lease that would make the tenant responsible for any repair under a certain dollar amount.  $100 for example.  Sounds easy right?  Why are more landlords not doing this?  Perhaps because making tenants pay for repairs is not so easy to do and it may in fact cost a landlord more later on.

It Is Perhaps Not That Easy

Making tenants pay for repairs, even minor ones, is just not very common in the residential rental market.  The residential rental market here in most of the US has evolved with the landlord responsible for maintenance.  This fact means tenants have choices in the market.  Because they have to agree to pay for repairs before signing the lease, they can search for properties where they will not be responsible for repairs and then choose to live there.  Of course, if a rental market is particularly tight, their options may be more limited.  On the other hand, placing such a requirement in your lease may limit the number of applicants and restrict your ability to rent a property.

Plus, a landlord must consider the incentives created by such a policy.  Will a tenant do the repairs their lease says they are required to do?  Especially when they have to pay for it?  Maybe, maybe not.  To avoid a backlog of maintenance when a tenant moves out, a landlord with such a repair policy would need to be very proactive with property inspections to ensure that everything is being maintained properly.  

Do The Benefits Outweigh The Costs?

So in sum, yes, a landlord can make a tenant pay for repairs, if they agree to do so in their lease.  While this may sound like a great policy for a landlord to enact, I am not so sure the benefits would outweigh the long term costs.

Do you have a policy in your lease where the tenant pays for repairs?  If so, what is it and how is it working for you?  Please share with a comment.

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.

Subscribe to Smarterlandlording and receive a Free Report: 21 Tenant Screening Red Flags

Best Books For New (And Experienced) Real Estate Investors

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Have a new or experienced investor on your holiday gift list?  Perhaps you just want to hone your own real estate investing skills a bit.  Well, just in time for the upcoming season and the Black Friday and Cyber Monday deals, I have put together a list of Smarterlandlording’s best books for the new (and experienced) real estate investor.

Smarterlandlording.com’s Advice From Experience To New Real Estate Investors – Honest, thoughtful, real world advice for the new real estate investor.  Experience is the best teacher out there.  Learn from my experience to help you build the best business you can.

Property Management For Dummies – A concise and easy to read guide to property management.  Buying the properties is easy, managing them is the hard part.

Every Landlord’s Tax Deduction Guide – It is not what you make, but what you keep.  Learn how to keep more of what you make.

Real Estate Investments And How To Make Them – A very thorough book on all every formula you need to know.  Learn what numbers matter and how to calculate and track them with this guide.  A book I often refer to again and again.

Multiple Streams

Multiple Streams of Income – Real estate provides a great income stream, but having more than one income stream provides security and builds real wealth.

What books are in your real estate investing library? Which books have really helped you? Please share with a comment below.

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