Buying a Property with Tenants

Most new landlords entering the market often buy property that is currently rented. This comes with an obvious benefit of having an income stream already in place, but can also be a bit tricky for new landlords. Here are a few things you can expect and some tips for buying a property with tenants.

Tip #1: Know that the tenants are apprehensive about the transition to new ownership. Whether the previous landlord was good or bad, they’re hoping you’ll be better, but are planning for the worst. It’s important you start your relationship with your new tenants on a positive note so they don’t abandon ship and leave you with an empty building that’s costing you money.

Tip #2: Meet with your new tenants face-to-face. This will help ease a lot of the tension and set you up as a professional person. Treat them with respect and show them you expect a cordial business like relationship to develop.

Tip #3: Address your tenant’s concerns in an honest manner. They most likely want to know:

• If their rent is going to increase
• What’s going to happen to their security deposit
• Your maintenance policy
• If you’re going to make it difficult for them to keep their pets

Tip #4: Even though you are going over your policies and expectations in person, give your tenants a written letter when you meet with them. The letter should outline the items discussed and include your contact information should they have any questions. This will make sure you have communicated the information correctly and that you are both on the same page for future discussions.

Tip #5: Use this meeting as an opportunity to walk around the apartment and address any issues your tenants have. Catching maintenance issues early can save you big money in the long run and tenants will like that you are proactive about repairs. This will also give you a good idea about what condition the property is in an what will need to be done when that tenant moves out.

Tip #6: Schedule this meeting in advance. This is common sense, but find a convenient time to meet with your tenants by calling first. It will help ease their mind if they know what to expect in advance.

Photo by: Ian Lucero

Rentals are Still Hot, Hot, Hot

A report released earlier this week by Hotpads.com discussed the rental and housing market trends for 2011 and some predictions for 2012.

Rental Markets
The national housing search engine, found that rental prices for two bedroom units grew 3.75 percent in 2011 while two bedroom units for sale saw a 1.83 percent drop in price across the top 20 most populated U.S. metros.

The report also showed that studio rentals remained the highest growth segment, with a 7.12 percent increase over the year. One and two bedroom rental properties also grew 2.59 percent and 3.75 percent respectively, while three bedrooms actually fell by .31 percent. There were no statistics for apartments with more than 3 bedrooms.

HotPads measured the median listing prices of two bedroom properties across the U.S. and found that popular metro areas like New York, Boston, Miami, San Francisco, Los Angeles, and Chicago had some of the most expensive rental listings. San Francisco appeared to be the most in-demand market since listings stayed active for just 28 days on on the site, compared to an average of 49 days across other top metro markets.

Sales Markets
According to HotPads, homes for sale saw a further decline in 2011. The median sales price for home with two bedrooms fell 1.83 percent across the largest metro areas, while three bedroom homes for sale only declined by .19 percent. In 2011 the most expensive two bedroom properties were located in San Francisco, Los Angeles, and New York.

The company concluded the report with a statement, “While we expect demand for rental properties to remain high throughout 2012, we anticipate a slower growth compared to last year. As the price of homes for sale continues to decline, we believe more home shoppers will consider buying over renting (buy vs rent data below). We also predict more foreclosed and long standing for sale properties will re-enter the market as rentals in 2012, which should increase the rental supply and help ease prices. However, if economic conditions extend consumer uncertainty, we may continue seeing would be home owners continue to rent.”

The data in this report is calculated based on the median listing price of 500,000 concurrently active rental listings on HotPads across the top 20 most populated U.S. metros. For consistency, two bedroom properties were used to determine the rental and for sale year over year price changes. The Buy vs Rent ratio is calculated by dividing a metros median house price by annual rent. Higher ratios mean it is more expensive to buy than rent a comparable home. The 20 metro areas include major cities like Atlanta, Baltimore,Chicago, Dallas, Detroit, Houston, Los Angeles, Miami, Minneapolis, New York, Philadelphia, Phoenix, Riverside, San Diego, San Francisco, Seattle, St. Louis, Tampa, Washington, DC. ‘Metro Areas’ consist of a densely populated urban core and its less-populated surrounding territories, ex: “San Francisco-Oakland-Fremont, CA” and “New York-Northern New Jersey-Long Island, NY-NJ-PA”.

Should You Hire a Property Management Company?

There are several schools of thought when it comes to hiring a property management company to help you with your rental properties. Some say yes and some say no. The biggest question to ask is are you getting your money’s worth?

If your properties require a lot of time, have many maintenance issues, or high turnover rates, a property management company can offer you a lot of value. However, if your properties do not turn over every year, are in good condition, have very few maintenance issues, and do not require too much of your time, hiring a property management company to collect the monthly rent check could be a big waste of money. This is the conclusion Dennis Fassett came to in a recent blog post on Bigger Pockets.

Dennis had employed a property management company for a while when he decided to see what he was getting for the money he was paying. He discovered “their work every month amounts to getting a check in the mail, depositing it, then sending me a check in the mail.” So he was paying a lot of money each and every month to get a consolidated rent check.

After he did the math he realized the 10% off the top wasn’t really number he was paying.

Instead, he saw that he was paying 27.9% off of the net income that he could be taking home. To read more of Dennis’ story and how he came to this conclusion, click here.

Property management companies definitely have their place and are very useful for landlords that have no desire to work on their properties. However, if you’re like Dennis, it might be time to reevaluate how you’re running your business. Could you save money by using a property management software or online rent collection service instead?

The Income & Wealth Producing Potential of Real Estate

We recently compared real estate to other forms of investment like stocks and discussed several reasons why someone would choose to invest in real estate. Another one of the positive attributes of rental property is the potential for real estate to produce not only wealth, but income.

Wealth from other investments is generated through appreciation and it is no different for real estate. Over time, a property gains value and this appreciation compounds tax-deferred during your years of ownership. Taxes are not paid until you sell your property, and even you can roll over these gains into another property through something called a 1031-exchange to defer paying the taxes even longer.

On top of the wealth generation of real estate, rental property investments actually bring in cash through the rents paid by your tenants every month. Of course, this income is offset by the expenses incurred in the management of the property like mortgage, interest, taxes, insurance, maintenance, and association dues. Smart landlords will invest in properties where the rent will at least cover these expenses from the beginning.

Over time, as the monthly rent increases (on average 3% per year) and the mortgage is paid off, the rental income can become significant. This doesn’t even take into account the appreciation on the house, that once it is sold will result in a much larger payday because your tenants have paid off the mortgage for you and essentially bought you a house.

Let us know what you think in the comments below. Why did you get into real estate? Was the income and wealth producing potential too hard to pass up?

Photo by: byrdiegyrl

Why Real Estate is a Good Investment

You hear time and time again that real estate is a good investment, but how does it compare to other investments like the stock market? Let’s take a look.

Risk – One of the risks with real estate is that the value will not rise and might even decrease. The recent economic crisis proved that real estate prices can decrease, but unless you really need to sell during a down market, this temporary situation should not affect your investment in the long term. Holding on to property for at least 7 to 10 years greatly minimizes your risk of losing money. The stock market does not usually follow this same trend. Investments here are much more volatile and usually if a stock crashes, it’s value does not return like with the stock market crash of the early 2000s.

Returns – One of the reasons people invest in real estate is for the potential of healthy returns. The returns from rental income include the monthly rental income in excess of expenses and the appreciation of value of the property over time. On average, real estate returns have been comparable to the stock market as a whole.

Liquidity – This is one of the shortcomings of real estate in relation to other investments. Real estate is not a liquid asset, which means you can not easily exchange your investment for cash. So, if you have your money tied up in real estate and need it for something else immediately, you are out of luck. However, stocks are pretty easy to sell so you can get your money out when you want it.

Tax Advantages – Real estate investments offer several tax advantages over stocks and other investments.

• Deductible expenses and depreciation – Real estate profits are offset by the expenses associated with running it as a rental. In addition, to these out of pocket expenses, depreciation can also be expensed on tax returns. Depreciation is a reduction in the value of an asset with the passage of time, due in particular to wear and tear.
• Tax-free rollovers of rental property profits – Real estate allows for profits made from a sale to be rolled over to the purchase of another rental property. This postpones the taxes that need to be paid on this money to a later date. This same benefit does not exist with stock or other investments.
• Special tax credits – If you invest in low-income housing you are eligible for additional tax incentives that reduce your tax bill from expenditures to rehabilitate and improve these properties.

Leverage – This is often the most cited advantage of investing in real estate and for good reason. With stocks you are responsible for paying the entire value when you acquire it. However, with real estate, you are able to leverage the cost with a mortgage and only put down a relatively small percentage of the entire value.

These are some of the reasons why investing in real estate can be a smart move when compared with other investment vehicles.

Photo: stevendepolo

Landlord Tip – Last Month’s Rent

If you require your residents to pay first and last months rent upon move in, you need to remember to keep up your accounting at renewal time. Every time you issue a rent increase, be sure to charge your tenant the difference in rent to make up for the last month you have in reserves. This will make things easier when your tenant moves out as they expect their last month to be paid for.

RentMonitor named to the 60 Genius Brands to Watch in 2012

Earlier this week, AGBeat named RentMonitor to their list of 60 Genius Brands to Watch in 2012. The 60 brands were narrowed down from hundreds of companies that they covered over the year. The RentMonitor team is honored and humbled to be included on a list with companies like airbnb, Apple, HubSpot, Nestio, and Trulia. You can see the entire list here.

Happy New Year!

2012 is here and it’s promising to be a great year! But before we move on, let’s take a quick look back at 2011. Based on traffic, here are the top 10 RentMonitor blog posts from last year. Do you have a favorite that did not make it to the top 10? Let us know in the comments below.

What Makes a Good Rental Ad?

Landlord Basics – How to Deny a Renter

10 Ways to Improve Your Apartment Photos

What Should I Charge for Rent?

6 Tips for Buying Rental Property

What’s Needed in a Rental Agreement?

How to Choose Good Tenants for Your Rental

Is Rental Property a Good Investment?

Top 10 Rental Property Photos You Need

What is Property Management Software?

Happy Holidays

Tax Questions Answered

December 31st is just around the corner so now is the time to make any last minute purchases or changes to your business if you want them to be included on your 2011 tax return. But tax-time also raises a lot of questions. Many first-time landlords don’t know how much of the money they received from tenants needs to be reported on their tax return or what expenses they can deduct from their rent income.

What Income is Taxable?
Rental Income – The money you collect as rent payments from your tenants is taxable. However, you do not have to pay tax on everything you collect because you are able to deduct expenses for your rental properties from the income. This includes costs to get your property ready to rent and costs to maintain the property as a rental.

Security Deposits – Security deposits are not classified as income when you receive them because they are still the tenant’s money and expected to be repaid if the property is returned in good condition. If the deposit funds are used to pay for repairs this income must be counted, but will be offset by the cost of the repairs.

When Do I Pay Tax on My Rental Income ?
You must report all rental income on the return for the year you actually receive it , even if it should be credited to your tenant for a different year. For example:

• If you receive rent for January 2012 in December 2011, the rent should be reported as income on your 2011 tax return.
• If you receive a deposit for first and last month’s rent, the entire payment is taxed as rental income in the year it’s received.
• If you receive goods or services from your tenant in exchange for rent, you must report the value of the goods or services as rental income on your return for the year in which you receive them.

What Expenses are Deductible?
The expenses you incur while getting your rental property ready, managing it, and maintaining it are usually deductible. Even if your rental property is temporarily vacant, the expenses are still deductible while the property is unoccupied and held out for rent.

Deductible expenses include, but are not limited to; advertising, cleaning and maintenance, depreciation, homeowner association dues and condo fees, insurance premiums, interest expense, property taxes, management fees, professional fees, equipment rentals, repairs, supplies, travel expenses, utilities, and yard maintenance.

All expenses you deduct must be ordinary and necessary, and not extravagant. Travel expenses to your rental property can be deducted if the primary purpose of the trip is to check on the property or perform tasks related to renting the property.

What is Depreciation?
Depreciation is a deduction taken over several years, meaning that although you paid for an item you spread the cost out over its useful life. It’s common to depreciate the cost of business property that has a useful life of more than a year, but gradually wears out, or loses its value due to wear and tear, weather damage, etc.

What’s the Difference Between Repairs and Improvements?
There’s a big difference between how improvements and repairs are handled on your tax return. The cost of property improvements must be capitalized and depreciated over several years (by following IRS depreciation tables) rather than deduct the entire expense in the year paid. Property improvements are actions that materially add to the value of the property or substantially prolong its life, like a kitchen remodel.

By contrast, the cost of repairs can be written off in the year you pay them because repairs are items that keep the rental in good operating condition, such as repairing appliances.

How Do I Report Rental Property Activity on My Tax Return?
If filing as an individual, rental property income and expenses should be reported on Schedule E: Supplemental Income and Loss. The total income or loss computed on Schedule E carries to page 1 of your Form 1040. RentMonitor provides a printable tax report that follows the Schedule E tax categories to make filing your taxes much easier.

The depreciation of rental property should be reported on Form 4562: Depreciation and Amortization. The IRS website, provides complete instructions and detailed explanation for how to complete these forms.

Photo by: alancleaver_2000