SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

Taxes

Tax Appeal Deadline July 31

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The deadline to file an appeal with the Shelby County, TN Board of Equalization  is rapidly approaching.  If you want to challenge your recent property appraisal by the Shelby County Assessor’s Office, you have until July 31st to file.  I will be filing appeals for several properties.

You can download the forms you need and file online here.

A word of caution though, if you file online you will not get a receipt.  There will be no record that you have filed.  I would recommend printing out your forms from the link above and actually taking them in person to the office to get a receipt.  You do not want to “get lost in the mail” so to speak.

Update #3 – Property Reappraisal Challenges

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This is the third installment of my posts regarding challenging the property reappraisal process by the Shelby County, TN Property Appraiser.  You can see the first two posts here and here.

I have finally received all of my new property assessments.  And in the greatest recession since the Great Depression, my properties have increased in value by about 17%.  Obviously I will be challenging some of these new assessments.

The first step in the challenge process is to go to the assessor’s office and ask to see the comps (or comparable property sales) that were used to determine my properties’ values.  The staff at out local assessor’s office is generally quite helpful and will be glad to do this for you.

The second step would be to then analyze those comps and compare them with your properties to determine if they are a true comp.  Does the comp property mach the characteristics of your property?  Does it have the same number of beds and baths for example?  Does it have the same heating and air systems?  Are the comps in the same general area?  Are you being comped with a much pricier locale?  Location can really make a difference in my location as one block can be a huge change from one right next door.

Third, start looking for your own comps.  This is when it is really helpful to be or know a realtor, as they have access to one of the best databases for this kind of information.  But there are plenty of other sources out there, including the assessor’s database itself.

In looking over the comps for my properties I have several questions regarding how the assessor used those comps.  I have e-mailed the assessor with those questions and I am awaiting a response.  When I get that response, I will blog about it and this continuing process again in the near future.

I Thought Real Estate Was In the Dumps?

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I thought real estate was in the dumps.  After all, all we have heard for the last few years is about foreclosures, underwater mortgages, short sales, falling prices, declining values and so on.  I guess my local property assessor has been listening to some other news source.

Let me start at the beginning.  Every four years in Tennessee each county property assessor is required to reappraise all properties within their jurisdiction and adjust them to the “fair market value.”  2013 is a reappraisal year here in (Memphis) Shelby County, TN.  That means that all properties have to be reappraised since their last reappraisal four years ago in 2009.  What do you think has happened to values since 2009?

So far I have received reappraisal notices for about half of my properties and amazingly my values have gone up almost a quarter of a million dollars!

Now, I do consider myself pretty savvy when it comes to determining a property’s value, and I always look for the good deal, but damn I did not know I was that good! (Insert sarcasm here).

So it looks like I will be challenging several of my appraised values again this year.  It is not really difficult to do and I have done it several times before.  I will be blogging about my experience here.  So join the fun and follow along.  It should be interesting to learn how they developed their “fair market values.”

Podcast – Choosing Your Real Estate Investment Strategy

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Real estate investing is a great way to build wealth, but which strategy is right for you? Should you wholesale, retail or buy and hold? All three offer great opportunities. Listen as Richard Scarbrough, Jo Garner and myself talk about the pros and cons of each strategy.  Originally aired on AM 600 WREC on 2/4/2011.

Choosing An Investment Strategy

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There are essentially three ways to invest in residential real estate.  You can wholesale, retail or buy and hold.  Each has its pros and cons.   Let’s go through each one.

Wholesaling

Wholesaling is acquiring a property for a quick turnaround to another real estate investor.  This strategy is sometime referred to as “flipping.”

Pros

  • You are in and out of the deal quickly.
  • You do not need much capital to get started.  Since the object is to quickly turn the property to another investor, often very little cash is needed, especially if you can just assign your purchase contract to the other investor for a fee.
  • You can earn a quick $1,000, $5,000 or even $10,000 per deal.
  • You do not have to worry about rehabbing the property.  The Rehab is the next investor’s problem.  You may however need to do a little clean up to make the deal work.
  • You do not have to deal with tenants.  Tenants are also the next investor’s problem.

Cons

  • Requires a lot of marketing to both find and sell the properties.  Developing the tools to get sellers calling you and developing a reputable buyers list takes both time and money.
  • Those quick $1,000, $5,000 and $10,000 chunks of cash are considered active income by the IRS and are thus subject to Social Security and Medicare taxes and well as standard income taxes.  So put some aside from every deal you do.

Retailing

Retailing involves acquiring a property to fix up and sell to a retail buyer.  These are generally only single family homes.

Pros

  • The main pro is the big chunks of cash.  The average retailer can shoot for a profit of between $20,000 and $30,000 or more per deal.
  • The pride and satisfaction of fixing up and getting someone setup in a home.

Cons

  • You will need capital to purchase, fix-up and hold the property until you can sell it to a retail buyer.  Holding costs, such as utilities, insurance and property taxes need to be figured into the deal accordingly.
  • You will need contractors to help you rehab the property.
  • Dealing with retail buyers can be tricky.  They can be very finicky and you may have to wait a while for the right one to come along.
  • You will generally need to use a realtor and that adds commissions to the costs.
  • You need to know your retail market backwards and forwards as well as the neighborhoods you are investing in.  Talk to the neighbors and analyze comparable sales as much as possible.
  • Those big chunks of cash are taxed in the same manner as above in wholesaling.  Be sure to set aside some of the profits for Uncle Sam.

Buy and Hold

The buy and hold investor is a landlord.  He or she buys and holds properties to rent for the long term.

Pros

  • This strategy is a huge wealth building machine.  The other strategies provide chunks of cash but this one builds long term wealth.
  • It provides a monthly income from the rents.  You do not have to wait for a buyer to come along to get paid.
  • You are buying a real asset.  You can fix it up and improve the value.  Try that with Exxon stock.
  • Perhaps the best pro is the tax breaks.  Rental income is considered passive income by the IRS.  As such, there are no Social Security or Medicare taxes.  You also get the benefit of depreciation which can significantly reduce active income and thus the tax you pay.  To learn more, pick up this smarter resource.

Cons

  • One word, tenants.  Proper screening can however eliminate many headaches.
  • There are repairs.  Always set aside at least 10% of your gross monthly rental income for future repairs.  Trust me, you will need it.
  • Management is also an issue.  You have to manage your properties in order for them to produce for you.  You need to check on them once in a while and make sure all is ok.  And if you think you can eliminate management with a management company think again.  Now you need to manage the management company.

Which strategy is right for you?  That depends on your personality and what your goals are.  I have done all three but I am generally a buy and hold guy.  I like the monthly income, I can focus on one specific area and I dislike waiting for a retail buyer.

If you are just starting out and need to acquire some cash per haps wholesaling is the right choice for you.  Have cash to invest?  Maybe a couple of houses to hold and rent is the right choice.  Many investors do a little bit with all three.  They like the large chunks of cash, the monthly income and tax breaks from landlording.

Whatever you do, decide to do one of these three strategies today.  You will not regret it.  And if you need to learn more about real estate investing, check out your local REIA group.

 

 

 

 

 

The “Right” Business Structure

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Real estate comes in all shapes and sizes and there are numerous ways to invest in it.  Smarter investors look very closely at how their real estate business is structured because the wrong structure can cost them a lot of time, effort and money, while the proper structure can save and protect their hard earned assets.

There are three basic types of business structures, the sole proprietorship, the partnership and the corporation (including limited liability corporations or LLCs).  Each of these structures, like everything else in this world, has pros and cons attached to it.  Let’s look at each one.

Sole Proprietorship

The sole proprietorship is just what it sounds like, you, the individual investor conducting your real estate business.  Usually individuals set up a business name, such as ABC Properties, and then set up their accounts to read as Joe Investor, doing business as (DBA) ABC Properties.

Pros

  • It is easy.  Pick a name and you are in business.
  • It is simple.  Set up a separate DBA bank account and off you go.  Plus the income tax returns are just included with your personal  1040 form.
  • It is easy to end.  Just stop it.

Cons

  • There is no liability shield.  Everything good and bad passes through to you.
  • You are visible as the owner.  There is no anonymity.

 

Partnerships

Partnerships are created when two or more people get together for some sort of business venture.  In real estate investing, partnerships are usually formed because one or more partners have some sort of specialized experience needed for the particular deal.  Or, one or more partners may be bringing their money to the table to fund the deal.

Pros

  • They are easy to set up and start.  No public documentation is generally required.
  • They can be easy to dissolve and can even be specific to a particular deal.
  • Partnerships can bring together people that will make an otherwise unworkable deal workable.  One partner may have money, rehab experience or a list of potential buyers for example.

Cons

  • No liability shield protection.
  • Enhanced level of bookkeeping and federal income tax knowledge needed.  The IRS Partnership Form 1065 is needed for example.
  • Partnerships can get messy.  A partnership operating agreement is a must and it should be reviewed by a qualified attorney.

 

Corporations and LLCs

Corporations and LLCs are legal entities.  They are separate and distinct from you the individual.

Pros

  • Liability shield is in place between you and your investments.
  • They are fairly easy to set up.
  • They can provide you with a more professional image.
  • They can help maintain anonymity.
  • Depending on your business, they can provide various federal tax benefits.
  • Can be a good way to raise funds.

Cons

  • Require paperwork to be filed with the state along with initial and annual filing fees.
  • The laws and rules governing corporations can be complicated.
  • There are annual paperwork, meeting and filing requirements that must be completed.
  • You will often need to pay for professional legal and accounting advice (In Tennessee for example, a corporation or LLC must hire an attorney to represent it in court for example)
  • There are increased bookkeeping and tax reporting requirements.  You must keep all monies separate if you wish to keep that liability shield in place.
  • Banks will not lend to newly formed corporations.  In general, a corporation must be in place for at least three years before a bank will consider lending to the corporation.  So you will not be able to put your investments in the corporate name anyway.

Which one is right for you?  That depends on what you are doing and what your comfort level is.  For those just starting out in real estate investing, I would keep things simple with a sole proprietorship or a partnership.  Don’t over complicate your life when you are just starting out.   If you are worried about getting sued because you do not have a liability shield (and you should be!), just be sure to get a liability insurance policy of at least $1 million to $2 million.

As your real estate business grows and expands, you may want to consider an LLC or corporation, you may even want to consider having several of them.  Why?  Because it is more advantageous tax wise to put long term holds into an LLC and it is more advantageous to use an “S” corporation if you do a lot of retail and wholesale flips.  So if you do both in your business, you may want both types of structures.  Plus as you continue to read this site and become larger and more prosperous, you will become a bigger target and may want the protection a corporate shield offers.  If you own a lot of properties, you may want several different LLCs to “split up” the properties into different entities for asset protection purposes.

Again, it is all up to you and what you want to do and what your comfort level is.  I know investors with layers of corporations and I know investors who have done hundreds of deals and own dozens of properties as sole proprietors.  It just depends on the individual.  In the end, there is no “right” structure.

Whatever you do, don’t just take my word for it.  Do your own research.   Check with and talk to a qualified attorney and accountant in your local area about these issues.  There are local rules and regulations that may make your situation unique.

Until next time, invest smarter!

5 Financial Reasons to Invest in Real Estate

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Fourplex apartments can be a great cashflow generator.


You have probably heard that real estate is a good investment.  You may even know some people who are active investors.  You may even be thinking yourself that you should get into real estate investing (you should be).  But have you ever thought about why real estate is such a good investment.  My friends and fellow investors Richard Scarbrough, Jo Garner and I briefly went over the reasons why on the radio this past Saturday.  Since we were constrained by time, I thought I would share some more detail.  Be sure and read through for a bonus at the end of this post.

 

There are financial and non-financial reasons why real estate is a good investment. I’ll go through the top 5 financial reasons today and save the non-financial reasons for a future post.

  1. Cahsflow is KING in the real estate investing world.  Cashflow is income from the property such as rent, less expenses including principal and interest payments, insurance, property taxes, 10% repair credit and 10% vacancy credit.*  For example, if monthly rental income is $1,000 and your monthly expenses total $850, that leaves a monthly cash flow of $150 or profit per month. Cashflow is King!  Are you beginning to understand the beauty of real estate?  All of your expenses are paid by your tenants.
  2. Leverage – Leverage simply means having the ability to use other people’s money (OPM).  Think about how you purchase real estate.  You purchase it with a loan or mortgage.  That is using OPM.  You can even purchase real estate with no money out of your pocket, entirely using OPM!  Even better, your first purchases will often utilize a low, fixed interest rate payable over thirty years.  What other investments allow you to do this?  What if you wanted to buy some gold coins (you should be doing that as well, but that is another post)?  Would a bank lend you the money to buy gold?  How about stocks or bonds?  The answer in general is no.  You would have to come up with 100% of the purchase price to buy any of those other investments.  Leverage is a huge advantage for real estate investors.
  3. Monthly Mortgage Paydown – Owning real estate also allows you to build wealth every month.  Every time you make your mortgage payment, some of that payment goes to interest and some goes to principal.  The portion that goes to principal is just like putting money in the bank.  Every month you owe a little bit less on the property and have little more equity on your balance sheet.  Plus, remember who is paying it down for you, your tenants!
  4. Federal Tax Savings – We all know that Uncle Sam takes a chunk with income taxes while allowing fewer and fewer deductions.  Real estate investing is one of the few methods that can actually bring your earned income down to zero!  Yes, zero so you pay little or no federal income taxes.  Now, I’m not doing anything illegal and do not suggest you do either.  However I do take every legal deduction available and there are many.  One of the best is something called depreciation, but that’s another post for another day.  Want to learn more about the tax benefits of real estate investing?  I suggest reading this (Nolo’s Every Landlord’s Tax deduction Guide) book.  (Please note that I am not a CPA or professional tax advisor.  Please consult an appropriate expert before completing any investment decision.)
  5. Appreciation and Equity – You may not think that this applies today with the recent real estate boom and bust.  But part of the art of being a real estate investor is finding the good deals, deals where equity and appreciation are still available.  They are out there.   Find one and get instant equity when you close.  Plus, we are pulling out of this recession and while real estate still has to hit bottom in some areas, it will eventually start to appreciate slowly once again.

 

There you have them, the top five financial reasons why you should invest in real estate.  And here is the bonus I promised.  With any other investment vehicle, such as stock, bonds or precious metals, you might get one, maybe two of these financial benefits.  Owning real estate gives you all five.  There is no other investment vehicle that gives you all of these benefits.

 

I’ll blog again soon about the non-financial reasons to invest in real estate.  Until then, work smarter, not harder!

 

* As a general rule of thumb, always allow for a vacancy credit and a repair credit equal to 10% of the gross monthly income.  If a property’s income is $1,000 for example, then the vacancy and repair credits would be $100 each.