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DIY Landlords

Investing in Real Estate from a Property Manager’s Perspective

Executive Summary

Many real estate investors self-manage their properties and I did too learning from my experience as I went. However, professional property managers have a lot of experience to help both new and seasoned real estate investors make the best investment and property management decisions. I asked my property manager, Jill Powell, of 1st Choice Real Estate, PLLC to share some of her insights into what investors should be considering.

Property Management Considerations Before Purchasing

Interestingly, all of the suggestions from my property manager come before purchasing the property. Thus, education and preparation are key to success in real estate investing. However, from my own experience, there are things that you just cannot anticipate and only experience teaches you.

15 Things to Consider Before Making that Next Purchase (in no particular order)

  1. New property investors should not buy older homes that have been turned into multi-units with all utilities included. These properties are often efficiencies or one bedroom units with transient tenants. You will have sky high turnover and sky high utility bills. Plus, you can’t hold anyone responsible for leaving the junk sofa on the curb that you now have to pay to have disposed.
  1. If you buy in a college town, have the parents co-sign.
  1. Always run prospective tenants’ credit and have a good way to score the rest of the application findings. Make sure the application is complete and all steps followed—no cutting corners or exceptions.
  1. If you don’t have a lot of spare time or don’t enjoy tenant calls at 3 a.m., when their heat goes out in Michigan in the winter, think about hiring a property manager. After self managing at first, I now buy my properties with the intent of having a professional property manager help me run my rental business.
  1. Use a cashflow or deal analysis spreadsheet prior to writing your offer. My property manager has seen many out of area investors pay for inspections only to walk on the deal once they find out what the local taxes will be after buying, local cost of the rental licensing and the true cost of rehabbing the property. It pays to have a professional on your side. I always have my property manager weigh in and be involved prior to making any offers. They are a valuable part of my team.
  1. Use a local Realtor who specializes in rental properties. They can tell you not only what is happening with property values and market rents in the area but also things like is there a moratorium prohibiting rentals in that subdivision, a limit on the number of unrelated persons in a property or a limit on the number of pets a tenant/owner can have in a property in that area. 
  1. Get the details from your lender before making the offer so you have the exact downpayment number as this will affect your rate of return.
  1. Start slow and learn from each property.
  1. Investing in real estate is not a way to earn “passive income.” It is a very time consuming business unless you use a property manager.
  1. Be cautious purchasing rental properties with tenants in place. Ask for a tenant ledger. Ask for current photos or, better yet, inspect all units personally. Look up rental/tenant violations for the property historically. Drive by the property at multiple times of the day to see how the tenants maintain the property.
  1. Research rental rates for the area. Just because the listing says they can get a certain rent doesn’t mean they actually are—verify it against market rents.
  1. Know the local laws regarding “discrimination based on income source” for things like section 8 vouchers.
  1. Decide if student housing is right for you. You will have high turnover, higher costs to get the property ready to re-rent and potential issues locally if the tenants like to party.
  1. Have a good CPA. They can help save you a lot of money and understand the tax implications of the investment.
  1.  Make sure you understand the local rental laws where you purchase property.

Conclusion

A professional property manager is a valuable part of any real estate investor’s team. Even if you self-manage your properties, you can learn from their experience to make the best investment and property management decisions before you buy your next property.

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DIY

6 Fixes Novice Flippers Should Avoid DIY-ing

When it comes to DIY, “Why pay someone to do it when you can do it yourself?” is what most new flippers would say… at least until they realize how underprepared and underskilled they are for extensive repairs!

Some renovation projects are tough to do as well as a professional would, even with the best of YouTube tutorials. If you’re not qualified to replace roofs, repair electrical systems, fix the plumbing situation, or install new gutters, doing them yourself could lead to costly and dangerous consequences. 

Faulty work leads to spending more time and money trying to fix your mistakes, if you don’t know what you’re doing. Lots of seasoned flippers can do nearly any project themselves, but many more newcomers to the industry try their hand at things above their pay grade and end up regretting it later on.

So if you’re new to the world of DIY, here are six fixes that should be left to the professionals—even if you think you can do it yourself.

Roof Replacement

The fact that we refer to homes as a “roof over our heads” shows how important good roofing is for a home. Nobody wants to buy or live in a house with a damaged roof!

The roof is such a vital part of the infrastructure—you will want to make sure that it’s installed right to not cause any problems in the future. And while many people may think replacing a roof is easy, it really isn’t.

Here are just a few of the complexities you can encounter:

  • The height & pitch of the roof can require special safety equipment.
  • The underlayment is critical, but often done incorrectly.
  • Do you know what drip edge is for?
  • How do you prevent ice dams from causing roof leaks?
  • Unless installed by a licensed professional, most shingle warranties are voided.

Instead, you should hire a professional whose whole job is to replace roofing. Not only will they assess the roof before replacement, but they will also have all the suitable materials and tools for the job, as well as the much-needed experience in construction-related safety issues. A professional roofing company would also have warranties that can save you money in case something goes wrong.

Electrical Repairs

Repairing the electrical system of a home is another dangerous task to DIY.

In your house flipping journey, you might run into older homes with outdated or broken electrical systems. When that happens, you’ll want to spend extra on hiring a professional who has the training and experience to work with electrical currents—especially because they can be deadly when mishandled.

Feel free to install new light bulbs in the home, or to change light fixtures, plugs and switches if you’re a handy person, but anything more complicated than that should be handled by a licensed electrician. Here are the common issues often found in older homes that signal it’s time to call an electrician:

  • Replace electrical panels
  • Replace an exterior riser or the main feed from meter to panel
  • Messing with meters
  • Run underground electrical lines
  • Install a new circuit to an electrical panel

Plumbing Fixes

While improperly installed plumbing fixes aren’t as dangerous as electrical systems, they can seriously set your budget back and eat into your flipping profit. DIY-ing a simple leak might save you a couple of bucks, but if it escalates into a flood, that’s thousands of dollars instantly added to your expenditures. 

Beyond fixing a slightly clogged drain or replacing a new faucet, extensive plumbing repairs and maintenance are best left to the professionals. Here are some plumbing fixes that a professional plumber should do:

  • Replacing underground sewer or water lines
  • Replacing corroded stack or main supply lines
  • Replacing or repairing water heaters, sump pumps, and worn down or burst pipes
  • Running new drain lines, unless you know the exact pitch required by code

Drywall Mudding 

Drywall mudding is more artistic than people think, so it’s tough for non-professionals to do well. You can hang drywall yourself, because unless you totally butcher it it’s fairly uncomplicated to hang, but doing the taping and mudding takes an artistic touch.

Plus, even if you do manage to do your own mudding, it definitely will not be as seamless or aesthetically pleasing as work by a professional company. Ugly drywall is a serious eyesore which could turn buyers off from an otherwise beautiful house, so leave it to the pros.

Structural Repairs

We’ve all seen that part on the DIY home improvement show when the clueless flipper bashes through a load-bearing wall and almost caves the whole house in. 

Don’t be that guy. Structural repairs are one of those things which even pro flippers hire contractors for, because the cost of making a mistake is so high. Stay away from all structural work as a new flipper, including:

  • Bowing walls
  • Cracked floor joists
  • Bowed roof or ceiling
  • Removing walls for an open floor plan (are they load-bearing?)

Fixing or Replacing Heating Systems

Installing the wrong efficiency furnace or replacing with one that’s mismatched with the exhaust system could be fatal, literally.  For an 80% efficiency furnace, you use a particular exhaust, but if it’s 90%+, it’s a totally different exhaust system, which is not compatible with 80%-efficient systems. If someone gets poisoned with carbon monoxide in a home where you worked on the furnace, you’re liable.

The same applies with duct work. There are equations which experts use to calculate the type of ducting required, based on the size of the house, furnace type, distance from furnace, etc. Get it wrong and this could lead to a house that’s not heated well and puts more strain on the furnace, so it wears out faster.

Conclusion

Know your limitations, and you will save thousands of dollars – not to mention headaches! Even if you’re a crafty person who loves to learn new things, there are certain cost-cutting measures you want to avoid when it comes to flipping a home.

So, the next time you want to replace the roof, repair the electric system, fix the plumbing, or install new gutters in the home you’re flipping—grab your phone instead to protect your flipping profit as much as possible.

Image Courtesy of Suntorn Somtong

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How Long Does It Take To Fill Rental Vacancies in Metro Detroit?

The amount of time it usually takes to fill a rental vacancy varies from area to area

Rental vacancy rates are an important indicator for investors to judge the strength of individual real estate markets, because these shows whether or not there is an adequate demand for the number of rental properties available in a given area.

Rental vacancies are also one of the biggest impacts on landlords’ net operating income (NOI) each year, so, apart from retaining tenants, having a short turnover time is crucial for minimizing losses. According to SmartMove, vacant rentals cost landlords in the US $1,750 each month, on average, so investing in an area with lower vacancy rates and quick turnover times is essential for maximizing the return on your rental investment.

Vacancy rates in Metro Detroit

Vacancy rates across the country reached their peak in 2008 and have been steadily decreasing year-on-year ever since. According to FRED, the average vacancy rate in the US in Q1 2020 was 6.6%. Census data for 2019 shows that rental vacancy rates in Michigan were at 6.8%, and 6.2% in the Metro Detroit area, down from a peak of 12.8% in 2010.

According to the most recent data from HUD, Oakland County has an overall vacancy rate of 4.68%, although apartments are in even higher demand, meaning complexes have only a 2.4% vacancy rate. By comparison, Wayne County has an average rental vacancy rate of 6.7%, with apartment vacancy rates at 3.4%, Midtown Detroit has a vacancy rate of just 1.9%, and the highest rates in Metro Detroit are seen Detroit, sitting at 5.3%, on average.

However, in the Metro Detroit area, vacancy rates have been steadily declining, due to population growth and the corresponding increase in rental demand. There’s been an increase in the number of rental home developments in recent years, but it’s estimated that the current planned construction projects in Oakland and Wayne will only account for roughly 20% of the new rental homes that will be required to meet this demand, boosting competition for existing rentals on the market.

This is good news for landlords, as prices have been going up, while turnover times are getting shorter.

You can find vacancy rates for the 75 largest metropolitan areas in the country at cccensus.gov, but this data won’t tell you what the average rental turnover time is for each specific neighborhood. The best way to find out how long it takes to fill a rental vacancy for your property type in your area is by talking to local real estate agents, landlords, and property management companies. They will be able to give you an insider view into the current rental demand in your market, the amount of time a typical turnover process takes, and the kinds of issues which generally slow down or speed up the process in your neighborhood.

Rental turnover times in Metro Detroit

So how do vacancy rates translate into turnover times? Higher vacancy rates in an area means less demand for rental properties, which in turn creates longer turnover periods for landlords looking for new tenants. In Metro Detroit, rental homes on average remain vacant for 52 days, and turnover times can reach up to 90 days, depending on several conditions.

The amount of time it usually takes to fill a rental vacancy varies from area to area, with rural properties generally experiencing longer vacancy periods than urban rentals. The type of property also has an impact on vacancy rates – for example, student rentals have longer turnover times, owing both to the summer holidays and more intensive repairs requirements. Single and multi-family rental vacancies also experience seasonal swings, with turnover periods taking longer during the winter months than in the summer, when rental demands for family homes are 51% higher, on average.

In Metro Detroit the tenant turnover process is particularly fraught with difficulties: finding quality tenants can be a challenge, meaning there is a greater risk that landlords will have to deal with evictions or time-consuming and costly repairs between tenancies. All of this can drive up the number of days your rental sits empty throughout the year. The best way to combat these issues is to be highly selective when choosing tenants and to manage your rentals well to avoid unforeseen issues when the lease ends.

Pricing is also a key determinant of rental turnover times. Interestingly research indicates that, across all rental property price brackets, slightly lowering your asking rent correlates directly to a shorter turnover time. On the other hand, overpricing a rental and later reducing the asking rent leads to properties spending longer on the market and achieving lower rents. Ultimately, pricing your rental competitively will lead to a shorter turnover time and drive up competition for your property, letting you be more selective when it comes to choosing the best tenant.

Working with a good property management company, having a solid rental marketing strategy, and carrying out thorough tenant screening are the best ways to ensure that the turnover process goes as fast and smoothly as possible for your Metro Detroit property. Vacancy rates in the area have been steadily decreasing, so if you’re still experiencing longer-than-usual turnover times, it might be worth talking to your property manager, or revising your pricing, advertising, and tenant selection strategies.

Image Courtesy of Sarah Trummer

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Landlords: Tenant-Proofing your Rental Properties

Tenant-proofing your rental properties is kind of like baby-proofing your house–it saves both of you from unnecessary headaches. The key when tenant-proofing is to identify the things that get abused the most, and think about how you can minimize damage to these areas, or eliminate them altogether. This is especially true for properties in low demographic neighborhoods, whereas problems like these rarely occur in higher-demographic areas.

Here are some other things you should avoid if you want to minimize the risk of extra damage costs:

  1. Avoid Garbage Disposal – Have you ever watched a movie, and the characters threaten to drop something meaningful into the garbage disposal by the sink? Yes, it’s true, people love to put all types of things down that drain. It’s handy–but also very easily clogged. It’s a piece of high-failure, time-consuming equipment to fix.
  1. Avoid Air-Conditioning Units – This may seem necessary, especially during the sweltering summers in Michigan, but AC units are not a requirement. Repairs are pricey and window-mounted models often disappear in the hands of thieves. Leave it to your tenants to buy one for themselves!
  1. Forbid Wall-Mounting – People like putting up decorations on their walls, but strictly avoid any nails or screws that put ugly holes in the walls. There are plenty of adhesive hooks in stores that tenants can use as an alternative, and walls with adhesive residue are easier to repair than those with holes. If you do allow nails, plan on deducting repair costs from the security deposit, because most tenants won’t repair the holes themselves (even if it says so in the lease).

Instead, install features that can help keep your rental properties clean and easy to maintain:

  1. Install Durable Flooring – Vinyl flooring is your best bet here, as it’s affordable, durable, simple to install, and it’s easy to remove any stains that a renter would leave. Although having carpet is a preference for some, it gets old and stained easily, with some stains refusing to come out at all, and absorbs odors from pets and smoke. Similarly, hardware floors – while a great feature to have when selling a house – can easily get scratched or damaged, and cost thousands to replace. With vinyl floors, all you need is a mop and bucket of soapy water, and you’re pretty much good to go. 
  1. Install Door Stoppers – Doors swing open and close multiple times a day, and many people (especially kids) won’t care if the doorknob puts an indent in the wall. Installing door stoppers is a must-have in rental properties, as it will save both your walls and your doors from unnecessary damage.

There are a surprising variety of door stoppers on the market, from baseboard stoppers and ones affixed to the back of the door itself, to wall-mounted handle stoppers and magnetic stoppers. One of the best options is the hinge pin stopper, since it has less chance of getting overworn through constant use (or played with by children).

  1. Install Window Coverings – Blinds, drapes, or curtains might seem like an added expense (and another thing to replace if damaged by a tenant), but it’s a good idea to install some kind of window covering to avoid giving thieves or squatters a clear view inside the property. Cheap coverings will do the trick, and if they’re damaged when the tenant moves out, you can deduct the replacement cost from their deposit.
  1. Opt for Durable Fittings – Some things, like faucets, can be bought as cheap plastic pieces, costing in the region of $40. While this may seem like a good cost savings in a lower-demographic rental, these cheaper fittings usually break down quickly and will need to be replaced every 2 years, on average. Investing in a more expensive, more durable option, like a $120 metal faucet, will mean that fittings can last for up to a decade before wearing out, saving you more money in the long run.
  1. Keep Pests Out – When doing property turnovers, consider conducting routine checks for pests and take preventative action, if necessary. Pests and insects hide well, and pest control services can add up to a fortune if the problem is left to worsen. So better to discover any potential infestations early, and fight back with rodent traps, chemical-free solutions, and an exhaustive scrub-down between rentals.

Follow these tips, and you should have a property that’s as tenant-proof as it’s possible to be. Of course, there will always be repairs and maintenance that need to be carried out at the end of every lease, but by planning properly, you can minimize the chance of incurring additional expenses for damages that could have been easily avoided.

Image Courtesy of: Ksenia Chernaya

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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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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.

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Rental Property Tax Deductions You Should Be Taking Advantage Of

Image courtesy of Pexels

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.

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What You Need To Ask Your Contractor

How many jobs is you contractor juggling?

House flippers have a knack for seeing the hidden, potential beauty in a property that requires a lot of love. Hiring the right contractor to see that vision through to reality is a skill in and of itself. If you’re the kind of investor that has the ability to see the grand scheme of things but don’t have the time or qualifications to get the work done, you need to diligently screen your contractor.

How Much Experience Do You Have With Remodels?

Though there is some overlap, remodeling is a niche and is distinctly different from working on new construction. It’s hard to tell what setbacks you’re bound to run-up against, so if the crew has multiple skillsets, it will be cheaper for you. For instance, getting the same person to hang drywall, handle some minor electrical and later lay carpeting is less expensive than subcontracting specialists.

Are You Licensed AND Insured?

Any serious contractor will be licensed to work in the area and have proper insurance coverage. Don’t hesitate to ask to see copies of both. This will (hopefully) ensure that the work will be done to meet proper code requirements and that their insurance policy provides enough coverage should you need it. 

How Many People Are In Your Crew?

To be an efficient flipper, you want to get your property ready for sale as quickly as possible. Having the right-sized team, no matter the extent of your remodeling project brings confidence that the job can get done in a timely fashion.

How Many Other Jobs Are You Currently Juggling? 

You don’t want your remodel to take longer than needed — time is money. This will also give you a sense how large the company is and how your project will be managed. Many qualified contractors will be doing several jobs at once, that’s not necessarily a problem, as long as your rehab doesn’t experience unreasonable delays. If the other jobs are at different stages, then there shouldn’t be a crew shortage that would require hiring additional subcontractors that would throw you off your timeline.

Can You Ensure Completion By (insert date)?

If you’re satisfied with the answers to previous questions, get the contractor to commit to a guaranteed timeline for completion. People don’t like to pass on work and will tell “little white lies” to get the contract.Have your agreement drafted by a professional to make sure all of your requirements are correctly detailed. Rehabs rarely run as smoothly as the contractor would have you believe, there will always be unexpected snags which jeopardize your completion date. To help guarantee the agreed-upon timeline, consider including incentives for early completion and, likewise, penalties for any unreasonable delays.

Photo by Andrea Piacquadio

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DIY

Keeping It Legal for DIY Landlords

A legal hammer.

ALWAYS have everything in writing. Specific terms should spell out exactly what is expected and legal from all parties involved

Working through the web of renting your properties can be mind boggling when you realize the details involved with signing a tenant. Knowing federal laws and local regulations will help keep you in business and profitable. Working from a template and a detailed checklist is a good way to keep everything legal from Day 1. If properly thought out, it can save you from the high cost of defending yourself in court.

Proper Documentation

ALWAYS have everything in writing. Specific terms should spell out exactly what is expected from all parties involved. Have a lawyer draft your lease agreement to help avoid the pitfalls of cookie cutter online forms. Rental agreements are legally binding contracts, know the rights tenants have and familiarize yourself with the Federal Fair Housing Act.

Advertising, Showings & Applicant Screening

You must study, and pretty much memorize, the Fair Housing Act to avoid discrimination violations. Your advertising, how you handle inquiries, showings and applicant screenings must all conform. Make one mistake and you could wind up in court.

Don’t forget about the Fair Credit Reporting Act and what your required to do if you deny an application or an applicant disappears.

Once you figure out how to legally operate — be consistent! Avoid potential discrimination lawsuits by treating everyone the same and avoid shortcuts — even when you know what the outcome will be.

Deposits and Fees

Check your state and local requirements regarding application fees, pet fees, security deposits, etc. Decide what you’ll charge and again, be consistent to avoid discrimination claims.

Keep In mind a security deposit is just that, a deposit, so it technically still belongs to the tenant, you are just holding it. Don’t go out and spend it. You may want to keep it in a separate account to make it easier to keep track of and explain when needed. Remember, the security deposit is used as a guarantee against possible damages or unpaid bills, but even during an eviction proceeding, it still legally belongs to the tenant.

Required Disclosures

Federal law requires disclosure to a tenant about potential lead-based paint issues. Make sure this disclosure is included in your lease and that you also have the government required lead-based paint pamphlet to hand out.

Your tenants may also have the right to disclosures regarding building ownership, landlord, or management company that acts on behalf of the landlord. Provide them with proper contact information for rent collection, complaints, maintenance issues, etc.

There’s also required disclosures like the Move-In Checklist, specific tenant notifications required in a lease like; Truth-In-Renting Act, Security Deposit Rights, Domestic Violence and Senior Living clauses. All are another reason to engage an attorney to at least review your lease annually.

Property Maintenance

Check your local ordinances for landlord obligations regarding property maintenance. Many cities consider it illegal to collect rent if a property hasn’t passed a city inspection. In addition to issuing tickets, they may also arrest an owner who fails to comply.

Know Your Landlord Rights

When dealing with landlord-tenant issues, there is usually more focus on protecting the tenant. As we all know, there are two sides to every problem, and as a landlord, you have rights, as well. Though not a complete list, here a few biggies:

  • Eviction – Depending on your lease agreement and state & local laws, you have any number of valid reasons for choosing to evict a tenant.  Keep it legal here, abide by all local laws and ordinances to prevent making the situation any worse.
  • Home Entry – You certainly don’t have unlimited access to a tenant’s home, but with proper notification to complete repairs or an emergency the law allows entry as needed.
  • Rent Increases – Many states and cities are passing laws limiting rent increases. Be sure to check and conform as needed. If there are no laws, you can legally raise the rent as much as you want, as often as your lease allows.

Housing is a highly regulated industry and need to be clear on fair housing laws and other local ordinances that affect your business. Pleading ignorance will not keep you out of trouble. Of course, you want your real estate investments to be profitable, but ignoring the laws set in place to protect the landlord-tenant relationship, will only do more harm than good in the end.  Before making any legal missteps, consult your attorney for clarification for any landlord-tenant issue.

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DIY

Why Do I Keep Attracting Bad Tenants?

Cops outside a house.

In the landlord sewing circle, conversations have a way of moving toward bad tenants.

No matter where your properties are located or how high your rental rates are, you’re bound to come across some bad renters — it’s just part of the business. Bad tenants affect more than just your bottom-line, they can wear on your sanity as well. If you feel like you’re attracting more than your fair share of “slumtenants,” maybe you are. Before things get any worse, take an introspective look at your policies and evaluate your business model.

Where Are You Purchasing Properties?

If you own properties in rougher neighborhoods, expect more problems and repairs. Lower demographic areas have lower income levels, higher levels of illegal activity, and many residents have a criminal past. Many will not have the decency to respect you or your property.

How and Where Do You Advertise?

If you’re nailing hand-written flyers to telephone poles, you give the impression that you’re desperate and probably will take anyone just to fill the vacancy. But if you take the time to take hi-def photographs and/or professionally made virtual tour videos to post on your site, you will attract a different type of renter. By including the rental rates in your marketing material and your website, you will instantly narrow the number of potential applicants. By charging higher rates, you’ll weed out much of the riff-raff.

The Application Process Is Your First Impression

Was the potential tenant on time for appointments? If they showed up late without calling or just blew you off with no consideration for your time, they’re probably not going to have much respect to your property either. Were they courteous and neatly dressed? If their appearance is sloppy, imagine what the inside of your rental will look like. 

For starters, charge an appropriate application fee. If prospective renters can’t scrape together the fee, how are they going to come up with the rent? Also, it’s smart to present a lengthy application, people who aren’t serious won’t bother to take the time to fill it out. Was the application written legibly, fully completed, and signed? Texting is ruining people’s penmanship, so that’s not the perfect marker, but if vital information or sections are left blank, you have to ask yourself, “What are they hiding?” These are some early red flags, though it’s not foolproof, it does you give an idea of how they will act as tenants.  

Don’t Skimp On Lease Details 

Sure, you can go online and just print out a lease, but be careful with cookie-cutter contracts. You want to be confident that every one of your required terms is in the lease. You’re better off getting an attorney to draft one for you, the initial cost will more than pay for itself when problems arise, or you find yourself in court. Make sure all tenants are listed and sign the lease. Once presented with the contract, many tenants will try asking for amendments, resist the urge to negotiate the terms of YOUR LEASE. By doing so, potential tenants will feel like they found themselves a “pushover,” you’re setting yourself up for problems in the future. 

Get The Scoop From Past Landlords

Your application has a section for references for a reason, make sure you contact previous landlords. A little extra time now doing basic research will save you the trouble of having to deal with the aftermath of damages or missed rent payments. Be glad to get the bad news early and weed out any subpar tenants. Past behavior is a good indicator of how they will treat you and your property. 

Max Out The Deposit

For the same reason it’s smart to charge appropriate application fees and rents, get as much of a security deposit as the law allows. It will weed out bad tenants that may have trouble coming up with cash on the 1st of every month. 

Don’t Be Lenient With Your Policies

Bad tenants are like sharks, they can sense prey in the water. You have a business to run and bills to pay. It is vital to be firm and consistent with all of your policies. Being passive about tenant screening, rent collection, and other house rules only cause more problems throughout their tenancy.  

You can’t always spot a problem tenant. Someone is bound to sneak through eventually. But with due diligence and proper screening, you should be able to limit your liability. You want to stay on top of your rentals and arrange for periodic inspections so you won’t get surprised when they move out. Finally, don’t rush the process just to fill a vacancy, if there’s any doubt, then there’s no doubt. 

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