Categories
Shortterm Rentals

Overview of Metro Detroit’s Short Term Rental Market

Property investors are attracted to short-term rental properties because they offer an opportunity to make more than long-term leasing, but the short term rental industry has taken a huge hit during the coronavirus pandemic. In Michigan, STRs were banned from operating during the height of the lockdown, and even now that they’ve been allowed to reopen to guests, vacancy rates are still sky-high – hitting as much as 85% in some areas. 

Furthermore, the great “Airbnb debate” has been raging in many areas of Metro Detroit for years now, with local city councils seeking heightened regulation and a limit to the number of short term rentals permitted within a given area. 

The new proposed ordinance in the City of Detroit, for example, will supposedly eliminate 85% of the nearly 1,000 listings currently active there – something short term rental owners in the area are keen to prevent. This is because, in addition to a rule limiting the number of Airbnbs to roughly 1 per city block, the new regulations would make it so that only owner-occupied properties could be used as a short term rentals. 

Yet “private rooms” in a host’s house account for less than 50% of all the short-term rentals currently on Airbnb in the Metro Detroit area. The rest are whole-place stays, where guests have exclusive use of an entire house or apartment, and these types of properties are where most of the demand will lie as we enter the age of the new normal. 

This could be an opportunity for STR owners outside the City of Detroit to take advantage of the area’s growing tourism industry in the coming years. If the new ordinance is passed, guests may look further afield to Metro Detroit’s Ring Cities as an alternative to staying in hotels or shared STRs in the city center. 

So, if your property is located near to good transport links or local amenities, you should highlight these points in your listing. In places like Hazel Park, Dearborn, and Dearborn Heights, where there are several conference centers catering to private and corporate events, expect a healthy demand from business travelers and out-of-town visitors once we return to normalcy. Whereas, in the shorter term, cities like the Pointes and St Clair Shores might see demand rise as people search for an escape from the more densely-populated metropolitan areas. 

Whether you want to target tourists, businesspeople, or city-dwellers looking for a more remote getaway, the way you present your STR should be in line with what your ideal customer wants. For example: 

Budget Stays – These could be just a simple, private room in the owner’s house, with basic furnishings, or a no-frills apartment. The target market for these types of stays are budget travelers and businesspeople, looking for an alternative to a 2 or 3-star hotel. This means you won’t need to splash out on fancy interiors or extra amenities, but you will need to make sure the property is in a good location, since budget guests will value convenience and affordable travel costs above all else. 

Luxury Stays – These include high-end apartments and lofts or nicely-decorated houses, and should ideally be located in safer, trendier areas with a walkable downtown. Your target market will be the bigger spending guests, looking for an alternative to a 4 or 5-star hotel. This means that you’ll likely have fewer issues regarding the security of your rental, but will almost certainly have to work harder to accommodate guests’ high expectations. Expect to get detailed reviews listing any small thing that your visitors found unsatisfactory, like clutter, dust hiding in corners, or noise from outside the property. 

The short-term rental market in Metro Detroit is still not as developed as it is in other cities, like Chicago, but the industry was growing prior to the coronavirus outbreak, and will likely continue to do so once regular travel resumes. If you operate an STR, keep an eye out for new proposed ordinances in your area, voice your opinions to your local city council, and make sure you adjust your strategy accordingly if nearby cities impose their own Airbnb bans – this could be an opportunity for you to capture guests from those markets. 

Image Courtesy of Monica Silvestre

Categories
Shortterm Rentals

How Soon Until Short Term Rentals Bounce Back From Coronavirus

Lady wearing a face mask
What is the new normal?

Coronavirus has affected the travel and tourism industry at an unprecedented scale. With strict stay-at-home orders and lockdowns still in place globally, online travel traffic is down by 70%, potentially accounting for up to $20B in missed revenues. In the US, bookings for short-term rentals bookings saw a 94% year-on-year decrease due to the pandemic.

As borders slowly start to reopen in the near future, what will the new normal of the short-term rental industry look like in Metro Detroit and Oakland County, in particular?

Localized Effects Will Differ

Travel restrictions have crippled the industry severely, but data suggests that the short-term rental industry is doing better than the hotel industry, which reported continuous declines, with revenues per available hotel room dropping year-on-year by as much as 94%.

Urban markets will likely suffer more than holiday or leisure destinations. In New York (where the virus hit hardest), year-on-year data indicate that the demand for short-term rental properties have decreased by 50%, and consequently, revenues have gone down by 47%, too.

What we’re currently seeing is a shift in demand from urban to remote rental locations, where there is less exposure to the virus. As these patterns carry on into the foreseeable future, we recommend STR operators to keep a closer eye on market trends and industry news. More than ever, strategic and data-driven decisions will be crucial in bouncing back from this crisis.

Assessing the Impact of COVID-19

To predict demand and gain market insights, consider using a trend analysis tool, such as MarketMinder. They provide good breakdowns of market rates and offer valuable insights on trends that can help you work out the state of your particular market, and adjust your strategy accordingly. (Note: some of their features are only available for paid subscribers, but you can do 5 basic reports a month for free).

Here are some trends to look at to gauge the stage of your market’s recovery:

  • How far ahead reservations are being made?
  • How are other hosts pricing their properties now vs. their pre-pandemic rates?
  • What rate do guests actually book the property for?
  • How far are people travelling to reach your area?
  • How are they getting there – by air or car?
  • When will business-related travel resume? Are there any conferences planned for the future in your area?
  • Are people booking owner-occupied rentals, or only “have the whole place to yourself” ones?

Post-pandemic, it seems very likely that travelers may opt for vacations that could be reached via land travel to mitigate risks. This may lead to an increase in demand for nearby STRs, as travelers try to find budget-friendly holidays and accommodations within easy reach of the city. 

To see how these trends are developing in Metro Detroit, we used MarketMinder to conduct a comparison between Downtown Detroit and a suburban area closer to the lake, such as Saint Clair Shores.

Insights from the tool indicate a rental demand score for Saint Clair Shores of 72, in comparison to Detroit’s score of 69. Median occupancy rates (calculated over the last 12 months) in Downtown Detroit are also down, from 69% in June 2019 to 45% in April 2020. By comparison, Saint Clair Shores has a current occupancy rate of 50%, possibly showing early signs of the shift in demand from urban locations to less densely-populated areas.

Human beings have an inherent desire to travel and explore. So it’s almost certain that, once travel restrictions are lifted globally, the demand for STRs will slowly increase again. Although we don’t exactly know when this “new normal” will begin in earnest, for now, property owners and landlords can spend this time preparing for it, by implementing strict sanitation measures to reassure and attract future guests.

Image Courtesy of: Anan Shvets

Categories
DIY

How Much Should You Pay Yourself vs. Reinvest in Your Next Flip?

A common question flippers have is: “How much should I reinvest in my next flip out of what I make in profit?”

The usual answer? “However much it takes!”

Instead, let’s try reframing this question in a different way: “How much should you pay yourself from each flip?” Answering this might be a better way to gauge if you need to take out just enough to cover living expenses, or if you need to be giving yourself some kind of salary.

Here are some things to consider, if your goal is to maximize your profits and flip more houses:

For New Flippers:

Flippers usually aim to make about 20-30% ROI for every house flipped, although this figure is dependent on costs and how long it takes for each sale to go through. But here are some guidelines to follow when deciding how much profit you want to reinvest in your business vs. keep for personal use:

What are Your Revenue Streams?

Do you have a full-time job that can cover your daily living expenses? If so, then consider reinvesting all the profits back into your next flip – this is the way to achieve the fastest growth in your portfolio.

If you’re flipping full-time, you could choose to keep 10-30% of the profits for yourself, which is how some flippers choose to operate. Alternatively, you could work out what your living expenses are, just keep that amount back, and reinvest the rest, but keep in mind that this will slow down your growth rate.Imagine you paid yourself 30% of the $60k in profit from the example above – that would leave you with just $42,000 to reinvest. Is this enough to help you move up the property ladder with your next flip?

Consider a Live-In Flip

Alternatively, you could consider live-in house flips as another way to “pay yourself,” by negating your own housing costs and writing off expenses, such as tax deductions and double  mortgages.

Experienced Flippers:

If you have a partnership structure, there are more complex issues to think about, like how to divide profits and disperse them in a way that makes sense, tax-wise .

Work Out a Profit-Sharing Agreement

Some calculate profit sharing depending on the number of hours they put in, while others go for an even split (like 50-50, for two partners), regardless of the division of labor. There’s no “one size fits all” formula to this, so you should set clear targets ahead of time for  how much you’d be willing to pay someone else for the skills and/or resources they bring to the partnership.

Know the Tax Implications

Find a knowledgeable CPA to work with and discuss your partnership agreement with them, before you decide how to disburse profits. If you pay yourself a salary, any earned income could be subject to self-employment tax at a rate of 15.3%. That being the case, it might make more financial sense if the profits come to you as dividends, instead.

Know Your Value

The terms of your partnership agreement will determine how much you yourself get paid vs. your co-investors or flipping partners. So, when working out this arrangement (whether you go for a limited partnership or an LLC), make sure you’re being valued appropriately, relative to what you bring to the partnership. Again, it’s always best to seek out an attorney and a tax specialist for guidance here.

Ultimately, the decision is yours. But one good model is to flip 4 properties, then keep the 5th as a rental for steady income. This approach lets you diversify between long- and short-term revenue streams, giving you small amounts of income in steady increments (in the form of rents), as well as larger amounts of income in more irregular intervals (from the sale of flipped homes). Having a balance like this can help you to achieve financial stability in the long run – and this is the same way many traditional businesses structure their revenue streams, too.

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Categories
Wholesaling

Wholesalers: Should You Obtain Your RE License?

Should real estate wholesalers operate with or without a real estate license? There are a lot of mixed opinions about this, and legality varies by state, but as long as you make sure that you abide by the law, you may not need to have a real estate license to wholesale properties. Let’s look at some of the pros and cons of acquiring a real estate license, as opposed to operating as a real estate wholesaler without one.

Benefits of Wholesaling with a Real Estate License

  • May offer increased credibility with sellers, buyers and associates in the industry.
  • Gets you access to the Multiple Listing Service (MLS), although most wholesale deals are done on off-market properties, meaning you won’t find them listed on the MLS. 
  • You could use your RE license to earn additional income, if you want to earn commissions on selling properties, but this is a whole different beast to wholesaling, so ask yourself – do you want to be a real estate agent, or a wholesaler?
  • Being a licensed agent also serves as a good starting point when growing your network, by giving you the chance to connect with brokers and agents, who could potentially bring you future wholesale deals. This is also a great way for beginners to learn more about the ins and outs of the industry.
  • Not worrying about state requirements which the number of annual transactions you can do without a license.

Drawbacks of Wholesaling with a Real Estate License

  • Acquiring a real estate license requires ongoing time and money.
  • Bear in mind that if you’re a licensed agent, you can only work if you’re employed by a brokerage, which means that they are entitled to a commission from each sale you make. What’s more, being part of a brokerage means you’re limited by the policies set out by the firm, and therefore you might not be able to conduct business in the same way that you would independently.
  • By law, you are also required to disclose that you are a licensed agent, which could negatively impact your ability to source deals and put you at a disadvantage, when compared to an unlicensed wholesaler. This isn’t necessarily always the case, but it’s worth being aware of.
  • Potentially getting fined, or worse, for exceeding state limitations on the number of annual transactions one can do without a license.

Regardless of whether you decide to operate as a wholesaler with or without a real estate license, there are certain risks you should always be aware of. To safeguard your credibility, as best practice, it’s always important to carry out proper due diligence by staying informed about your state laws. We highly recommend consulting a real estate attorney for their legal opinion. Also, be extra mindful of the language you use when sourcing deals and marketing them, so that all parties involved understand what your participation in the transaction is. 

 

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Categories
Wholesaling

How Wholesalers Can Monetize Land and Increase Value

Land leasing is a good option for achieving long-term returns on your investment

Land is a form of real estate often neglected by wholesalers. Most wholesalers flip properties, but flipping undeveloped land has unique advantages of its own. It requires less upfront capital, and there is less competition.

The typical land wholesaling model is the same as property wholesaling: you enter into a contract with a motivated seller to purchase the land below current market value, and then either flip the land or sell the rights to the purchase contract to a third party for a profit. But one added benefit of land wholesaling is there are options to further increase the value of raw land while you have it under contract, by subdividing it into multiple parcels or applying for a change in zoning.

Rezoning to Add Value

Rezoning, or changing the use district of a particular parcel of land, is a common way to increase the value of non-residentially zoned land. By changing the use district of industrial or agricultural land to residential or commercial use, you can increase the value of your land by anywhere from 100-400% of its original value. You don’t have to own the land outright to apply for rezoning – just make sure that rezoning is permitted in your contract with the seller if you intend to change its use district before flipping it.

The process of applying for rezoning can take a few months or up to 2-3 years, and in addition to meeting all the requirements set by your local authority, it’s also important that you research and understand your city’s plans for development in the future. For example, changing from a residential to commercial use district could either increase or decrease the value of land, depending on whether or not the city has plans to prioritize commercial development in that area in the coming years.

Splitting Parcels

Subdividing land, or splitting a single plot of land into two or more parcels, can increase the value of land and the total amount of rental income you receive from it. Legally subdividing a property can be a lengthy process – it usually takes several weeks or months from start to finish, and will require that you submit an application to the local authority for approval. You also have to take into account the zoning restrictions and specific rules in your area (such as the minimum permitted plot size) when splitting your land into parcels, and will need to hire a surveyor to plat the land. Usually it costs between $1,000-$3,000 to subdivide a piece of land into two parcels, but the benefits of doing so can be considerable. Smaller parcels are more affordable, and thus appeal to a larger number of buyers and tenants, and it’s possible to increase profits on a single piece of land by as much as 100% when selling or renting it out as two smaller parcels.

As long as it’s permitted in your contract with the seller, you can subdivide land while still under contract, but you will need to close with the seller before selling the individual subdivided parcels outright. The major benefit of this wholesaling strategy is that you can subdivide a plot into 4 parcels, for example, and sell 2 of them outright, leaving you with 2 parcels that you own free and clear.

Don’t be scared off if you find a great piece of land to wholesale and you’re worried it will take too long to rezone or split. Instead, negotiate with the seller on a longer purchase contract as it doesn’t hurt to ask. If that doesn’t work, you can also try more of a partnership agreement with the seller, where you do all the work and then split the profits.

How to Monetize Undeveloped Land

Once you’ve sold some of your subdivided parcels and closed the contract on a land wholesale deal, you can sell the remainder of the parcels outright, or monetize them in other ways.

Developing raw land yourself can be a costly and time-consuming process which may not be feasible for wholesalers operating in different states. There are other ways you can generate income from land without having to develop it. These options do take more time and energy than simply selling your land immediately, but the result is higher profits on each plot you own in the long term.

Rent your land to a small business venture

Land leasing is a good option for achieving long-term returns on your investment. If you market your property to the right audience, you’ll find there are a whole range of unexpected business plans which only require raw land to get started. Archery ranges, escape rooms, and drone race tracks are just a few examples of businesses that will pay to rent land, even without any structures or facilities in place. These businesses generally require plots anywhere from .2 – 3 acres in size, so even if you don’t have a huge amount of land, this can still be a viable option for you.

Put up a parking lot (without paving paradise)

Having a parking lot can be an inexpensive way of monetizing your land. Even if your land isn’t near a very transited area, you shouldn’t necessarily discard this option.

Try to think of who may have parking needs and may want to pay lower fees than those charged in downtown areas. A perfect example would be truck, bus and coach companies, since these usually prefer inexpensive options to keep their vehicles overnight, as opposed to expensive central locations. For some of these clients, you won’t even need to pave the land, and they usually pay somewhere around $10 per vehicle for parking overnight.

Rent-to-own

Rent-to-own is a type of transaction in which the tenant is given the opportunity to buy the property outright after a maximum lease period of 5 years. The tenant usually pays you an initial deposit of 3-5% of the property’s value as a purchase option. A portion of the monthly rent then goes towards the purchase price of the land, and after the initial leasing period, the tenant can exercise the purchase option. If they choose not to proceed with the purchase, you can begin the process over again with a new tenant once the agreement ends. It’s also possible to monetize land using a lease-to-own agreement while you still have the land under contract. With a sandwich lease agreement, you can sign a lease-to-own contract with the seller, then sign a separate lease-to-own agreement with a tenant-buyer of your own, who pays a higher rental rate. Once the lease term concludes, you can complete the agreement with the seller and close the deal with your tenant-buyer.

Partner Up!

If you’ve got a free and clear piece of land, it’s an asset, that like cash, you can invest in a deal. In this case you can put up your land as your part of an investment in a new construction or development project. Look for active builders and developers in the area of the land and see what they’re interested in doing.

If you subdivide into parcels, wholesaling land could lead to you owning some plots essentially for free. Whether you decide to sell these outright or pursue a long-term monetization strategy for the land you own, any revenue you receive will be 100% profit, and that’s perhaps the biggest advantage of the land wholesale investment model.

Image Courtesy of Marek Mucha

Categories
Wholesaling

How To Market Wholesale Deals.

How to market deals without large adcertising budgets?

The two most important skills that real estate wholesalers can have are sourcing great deals on properties for sale and finding solid buyers for their purchase contracts. In order to maximize the number of potential buyers you reach, it’s therefore crucial to know how to advertise contracts for sale in an efficient way (without running into any legal issues).

Wholesaling itself is legal, but keep in mind when marketing your deals that selling someone else’s property without a license is not permitted in many states. You should always make it clear in all marketing materials that you are selling a purchase contract, not the home itself, otherwise you could run into legal issues. If you’re unsure, talk to a specialist real estate lawyer to make sure you are doing everything above-board.

With that in mind, here are some of the best ways to market wholesale deals to potential buyers without the need for a large advertizsing budget:

Networking Events

One of the best tools a wholesaler can have is a great network of potential sellers and buyers. When you have an extensive network, you open up greater possibilities for word-of-mouth advertizsing. Up to 50% of word-of-mouth referrals lead to a successful sale, which makes it the most powerful kind of marketing, and what’s more, it costs basically nothing.

Going to local networking events is a great way to meet people in your area who could one day become your customers, or help bring you potential leads. You can find networking events taking place in your city on Eventbrite.com or Meetup.com.

You could also consider joining industry-specific groups, like your local REIA, or a business club, such as Business Network International (BNI). Alternatively, there are also one-off real estate industry events which you could attend to find buyers and sellers in your area.

Linkedin

Linkedin has become an essential online marketing tool for sourcing leads and generating sales across a variety of industries. Its free version allows you to filter searches based on a person’s type of job, position, location, company size, and more, meaning you can target your marketing messages at potential buyers in your area.

Linkedin allows you to send a connection request with a message to those who fit your target customer profile. If you don’t have enough time to sift through hundreds of professional profiles and contact them individually, don’t worry – there are many tools, such as Scrab.in, which you can use to automate your marketing efforts through Linkedin.

Cold calls

You may think cold calling sounds fairly last century, but the truth is that cold calls are still an effective marketing technique – although less effective than referrals, cold calls still have a 2% successful closing rate.

If you’re nervous about the idea of calling up strangers, there are tools you can use to send potential customers a ringless voicemail instead, meaning you won’t have to speak to leads one-on-one until they call you back and express interest in the property. You can find contact details for your target market by using paid tools, like Skip Trace Lists.

Social Media

Social media is one of the best options for marketing wholesale deals, because it provides a huge potential reach and requires less time and effort than other forms of advertizsing. You can upload a description of the deal and pictures of the house to attract buyers, while also helping you build visibility for your company or personal brand. Having a dedicated Facebook, Instagram or other social media page to promote your wholesale deals will also make you easier to find for buyers searching for homes in your area.

In wholesale deals, communication is key when dealing with both the seller and the buyer, so always communicate clearly and honestly about the fact that you intend to market the property deal. When advertizsing deals, you should disclose the current state of the property, and provide an estimate on any necessary renovation costs, as well as the estimated property value after repairs.

Image Courtesy of Martine Savard

Categories
DIY

Landscaping Your Rental On A Budget

Image Courtesy of Felix Mittermeier

The kitchen and bath may entice your potential tenants, but offering a beautiful, inviting outdoor space can be the tipping point for a place they’ll want to call home. The cost of beautifying a property varies greatly depending on the scope of the job and materials used. Since your rental property is a source of income, any expense must justify itself with a return on its investment — resist the urge to over-decorate. If you’re working with a limited budget, there are inexpensive landscaping design concepts to make the area more attractive.

Declutter the yard

Costing you not much more than your time, this is one of the easiest and cheapest way to spruce up your yard. Merely pulling some weeds and removing any dead or overgrown vegetation can freshen up the yard’s look. This may be all you need, but if you decide some landscaping is in order, you’ll have a clean palette to work with.

Outdoor Lighting

On a warm, sunny summer’s day, the outdoor area may look fine, but after sunset, it may lose some its charm. To experience what your tenants will encounter while enjoying a starlit nightcap, stop by the property in the evening and see for yourself. Is it inviting and attractive or boring and unfriendly? Landscaping lighting fixtures not only bring a dramatic look to the yard, but they can also double as an added security measure. There are several options that can brighten a drab looking space. For the garden, spiked lights can illuminate boundaries and walking areas, while providing a pleasant accent. Depending on your budget, spiked lighting can be hard-wired, battery-operated or solar powered. Another inexpensive alternative is tiki lights or string lighting with a timer or photosensitive switch. Easy to install, they can be strung through trees, from eaves or over patios or decks to highlight the space while providing a warm glow.

Paving Stones

If the outdoor area is small and/or receives limited sunlight, trying to maintain a lush lawn will become an effort in futility. Installing stone pavers will eliminate any dry or muddy dirt patches, instead turning it into an appealing useable patio area. After properly leveling the pieces and filling in the cracks, you’ve got yourself a multi-season functional outdoor space.

Flower Boxes

Flowers brighten even the most boring spaces by adding color and vibrancy, but unless you want to spend your time gardening, they aren’t always the best choice for a DIY landlord. If you insist on flowers for the yard, but don’t want the maintenance headache, incorporate flower boxes into your design. They are cheaper and require much less work than traditional flower beds — virtually eliminating the need for weeding. You can use old care tires or recycled wood for rustic DIY feel. For a bit more pizzazz, paint the rubber or wood frames to add color to your outdoor space.

Ornamental Grasses and Evergreen Foliage

Perennial ornamental grasses are versatile and incredibly inexpensive as compared to other flowers, trees or shrubs. Ornamental grass is super low maintenance, while adding lots of color and texture. Evergreen vegetation, such as small trees, bushes or shrubs add a dynamic that most tenants will enjoy. They require very little maintenance while producing a warm, plush setting with just an occasional trimming. Though most grasses and evergreen plants will thrive from direct sunlight, most will do just fine in partial shade. Plant or pot them near the patio, along walkways or fence lines for privacy.

Disregarding the outdoors can cost you with fewer walk-throughs and potentially excellent renters. Even if your property is a drab, concrete jungle, there are inexpensive, low-maintenance landscaping ideas to add color and character to the yard. Potential tenants might love the kitchen, but if the outdoor space looks like an abandoned graveyard, many will consider alternative properties. Renters shop on emotion, so if the space makes them “feel good,” that might be all you need to snag yourself a long-term tenant.

Categories
Wholesaling

The Wholesalers Buyers List: How To Effectively Market Your Properties

Image courtesy of Lukas

Being a successful property wholesaler is contingent upon not only locating a viable property, but more importantly, being able to find an end buyer – and quickly.

Whether you’re assigning contracts or double-closing, you want to move the property as quickly as you can. There’s no point in getting into a property if the potential for getting rid of it quickly is low. Your buyers list can be an invaluable part of your business. It provides the ability to contact serious, interested parties, as opposed to blindly cold marketing wanna-be investors. Since your buyer’s list is your lifeline to steady profits, you need to know the essential details regarding your properties, as well as the needs of your potential buyers.

What Is a Buyers List? 

Your goal as a wholesaler is to contract properties below market value and then, as quickly as possible, pair that property with a buyer. Starting your search for an end buyer after you’ve got a property under contract will only eat into any profits by accumulating holding costs. Often, you may be forced into buying the property yourself. A buyers list is your inventory of real investors who you can contact to offer your wholesale properties. Building a useful buyers list can take some time, so networking is key. To help grow a list, start associating with real estate professionals, entrepreneurs, and investors. Many communities have an REI club, but you can make connections through other channels such as online real estate forums, Craiglist, Facebook, property auctions, networking events, or from the bandit signs you’ve placed. 

Organize Your Buyers List

For your list to be useful, it should be kept organized and updated, prioritizing the most serious buyers or the ones most likely buy based on a set of parameters. Keep contact info current, take notes about the neighborhoods or property types buyers contacts on your list are looking for, so you don’t waste time and energy contracting houses you won’t be able to assign. Nor will you be trying to sell them a property that doesn’t interest them. Using a customer relationship management system (CRM) is an effective way to compile pertinent information across several channels, including social media. By analyzing the information in a CRM, you’re able to present properties to the investors most likely to buy, before resorting to emailing your entire list. 

Educate Your Buyer

Understanding the wants and needs of the investors on your list will save you and your buyers time. Property investors are busy and don’t want to be bothered with every contract you’re trying to assign. When looking for properties to wholesale, you should have a buyer profile already in mind before closing the deal. If you think a property will suit a buyer from your list, present them with a concise package, don’t just bombard them with tons of information or data that they’ll have to crunch themselves. Provide vital information first, such as location, terms of the deal, property photos, a list of expected repairs, and estimated ARV. If, after a quick review, there is something that piques their interest, you can delve into more specific details. 

To be a successful wholesaler, you should have a reliable buyers list at your disposal to effectively market any property under contract. Not all buyers on your list will be interested in hearing a sales pitch for all houses you’ve got under contract. Keeping your buyers list loaded with dependable contacts and updating it as needed will help you move those properties quickly to keep the

Categories
DIY

Rental Property Tax Deductions You Should Be Taking Advantage Of

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We all know that paying taxes is an unavoidable expense of doing business, so protect the profit margins on your rental property by taking advantage of any and all tax deductions available to you. All of your expenses considered to be ordinary and necessary to run your business are deductible as per the tax code. As the tax laws are continuously changing, make sure you consult a tax professional before filing your return. 

Here is a list of some of the most impactful tax deductions:

Interest on Loans 

Your rental properties are likely some of the most expensive assets you own. So, unless you own them outright, you’re paying a significant amount of interest for your mortgage. In addition to your mortgage interest, you may also deduct other interest for loans to make improvements or other business-related activities. 

Depreciation 

You’re allowed to deduct ordinary business expenses for the tax year in which they occur on your annual return. However, the tax code does not permit large capital expenditures to be deducted all at once, those large purchases need to be depreciated over an extended period of time. The tax code allows for the purchase price of your rental property to be depreciated over 27.5 yrs.

Repairs and Maintenance 

Any repairs you make to your property are fully deductible for the tax year in which they occur. It’s worth pointing out that repairs are not the same as improvements. For clarification’s sake, a repair is an expense you incur to fix something you already own that is broken and/or is not operating correctly. For example, a burst pipe or a new thermostat for the HVAC system.

Capital Improvements

Any improvements, or other large purchases, you invest in for your property are not deductible for the year in which they occur. As mentioned above, repairs and improvements are distinctly different. The IRS mandates that capital improvements and restorations be depreciated per guidelines according to their natural, expected usable life. These types of expenditures would include a new roof, laundry equipment, and structural renovations. 

Meals & Entertainment 

If you meet someone for coffee or a meal to talk about your business, the cost may be tax-deductible. Just be sure your tax preparer knows about the new restrictions about expenses with clients versus staff.

Education 

Any business-related book or program you buy probably qualifies as a business tax deduction. 

Office Equipment, Services & Supplies 

Don’t forget about these! Any application you buy or subscribe to, paper, toner, etc. may qualify as a tax-deductible business expense. Part of your computer/printer and cell phone (both purchase price and monthly service) expenses may qualify. 

Travel Expenses

You can’t expense your drive into work every morning, but you can deduct work-related travel and maintenance. If you have a dedicated work vehicle, you can deduct the payments, gasoline, insurance, registration fees, and mileage. To make keeping a log easier, download an app, like Everlance, Stride, or TripLog to track your mileage and/or travel expenses, many offer a freemium option until you decide to spring for the full package. You have the option to deduct actual expenses incurred or use the IRS standard mileage rate. For 2019, the standard business mileage rate was $0.58 per mile. 

Pass-Through Deduction 

Congress enacted the pass-through deduction as part of the Tax Cut and Jobs Act in 2018. It is currently set to run through the end of 2025 unless re-enacted by Congress. This generous deduction allows you to deduct 20% of your income or 2.5% of your investment PLUS 25% of employee wages. Pass-through businesses are ones in which the business entity pays no tax, but instead the earnings “pass-through” to the owner(s) who pay the taxes on the personal tax returns. To meet the requirements of the pass-through deduction, you must operate your business through an approved legal entity such as a: sole proprietorship, S-corp, limited liability company (LLC), limited liability partnership (LLP), or partnership.

Home Office 

Small business owners and DIYers often devote space in their home for use as a home office. If you use the space primarily for conducting business, you can deduct associated expenses. The tax code permits you to write off prorated expenses for the mortgage interest, insurance, taxes, maintenance, and utilities.

Overall, be careful about proper documentation to keep your personal and business expenses separate. This can be as easy as using one of your personal credit cards ONLY for business expenses. Otherwise, you may be increasing your chances of an IRS audit.

Operating a DIY rental business is difficult enough without the IRS taking their chunk every year, you need all the breaks you can get. Luckily, by running your rental business, you are authorized to benefit from these and many other tax deductions, but it’s vital to keep accurate records for all business transactions. It’s worth reiterating, tax laws are updated frequently and often without much attention. Always review your deductions with a CPA or tax attorney to make sure you still qualify.

Categories
Wholesaling

The Down ‘n Dirty Of a Wholesaling via the Double-Close

To be a successful property wholesaler, you need to find a property, get control of it, and move it as quickly as possible. One of the biggest challenges a wholesaler faces is handling a buyer or seller that wants to cancel a deal when they find out what the wholesaler is making. That’s why it’s wise to be familiar with the double-close, where the seller and buyer close separate transactions and never meet.

What is a Double-Close?

Often a wholesaler puts a property under contract, as a buyer, but then assigns the contract to another buyer at a higher price. With a double close, the wholesaler actually purchases and takes legal possession of the property, then has a separate closing to sell the property to their buyer. Though the double-close does add an extra step and expense, it doesn’t necessarily delay the whole process; many closings are still completed almost simultaneously. Also, if you’re tired answering the question, “Is what you do even legal?” The double close removes any whisper of impropriety or illegality.

Benefits of Doing a Double Close

Financial Confidentiality: When assigning the purchase contract for a deal, your original seller and end buyer will eventually know your contract price, the final contract price, and can do the math to figure out what you’re making on the deal. Either one of them can feel jilted and try to force you to renegotiate, taking money out of your pocket. Theoretically, you could sue either or both for nonperformance of their contract, but that may take a while, and a judge may not look favorably on the transaction.

Using a double-close avoids all this. 

How To Perform a Double-Close

Since you, as the wholesaler, legally take ownership of the property, there are two closings, hence the name, to complete the deal. The first transaction is between you and the seller, where you are buying the property. In the second closing, you are the seller, so your buyer is purchasing the property from you. The two transactions can even occur in the same office on the same day.

Double-Close Challenges

Let’s be realistic, if it was easy, most wholesale transactions would use a double-close over a contract assignment. So, let’s look at why many wholesalers avoid using a double-close.

Purchase Funds: It’s much easier to get a property under a wholesale contract you plan to assign, then coming up with the funds to actually buy the property yourself. Lack of funds is why many investors are initially attracted to wholesaling to begin with. 

Solution: Use your network to look for sources willing to do Transaction Funding. Transaction Funding is what it says – it’s a very short-term loan to facilitate a transaction. Most of these types of loans are for less than a week. Because the lender can’t make much profit on interest for only a week, expect fees and high-interest rates. If you do the math though, you’ll find the actual cost is reasonable. 

Costs: Two closings result in two sets of closing costs – even if you’re closing on the same day. One for the transaction where you buy the property and one for when you sell it. 

Solution: There’s no way to get rid of costs like title insurance and recording fees, but if you establish a relationship with a closing company/agent, they may be willing to waive or reduce some of their specific fees.

Finding Closing Company: Years ago, the double-close got a bad reputation because wholesalers were doing closings where they used the end-buyer’s money, to fund their purchase from the seller. This is pretty much no longer allowed, hence the need for Transaction Funding. Still, many closing companies/agents won’t do a double-close (with Transaction Funding) or require a minimum amount of days between the two closings. 

Solution: Use your network to find a closing company/agent that understands the double-close and will work with you. 

Many wholesalers were trained to simply assign contracts and view the double-close as illegal, and too complicated, and so not worth the hassle. As we’ve outline though, the double-close may be something to consider. The extra steps and costs may help you close more deals, while also protecting the spread in those deals. 

Photo by Andrea Piacquadio