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The Complete Guide to Your First Rental Property: A Step-by-Step Plan from the Experts Who Do It Every Day
You are ready to take the plunge and begin investing in your first rental property. Congratulations, but now what do you do? You do not have to go it alone with this new comprehensive book that will guide you step-by-step upon the road to the financial success you desire. Investing in rental properties is one of the safest and smartest investments you can make. Real estate appreciates at a rate far greater than the rate of inflation, builds equity, provides a steady return on investment, provides cash flow, and can offer substantial tax benefits. With the sound guidance in this book you will be able to add to your monthly income, build equity and if you wanted to, retire comfortably and EARLY. Rental property investing is a perfect part-time business because real estate is a business where the assets appreciate and cash flow is generated even when you are absent. The book contains over 25 forms that you will need in your business and an excellent section on the use of the Internet and computerizing your business. The book covers property selection, tenant selection, inspecting premises, marketing and advertising of property, showing the property, tenant application, credit verification, employment and income verification, reference verification, lease agreement, deposits, walkthrough with tenant, collection of rent, late notices and collecting fees, statements, owner's proceeds, tenant complaints and requests, repairs, use of contractors, compliance with state and local regulation, property inspection after tenant leaves, deposit refund, accounting and computer software, income and expense, depreciation, a special section on using computers and the Internet, landlord tenant laws for all 50 states, federal housing regulations and disclosure information, legal issues, real estate terminology, techniques, advice, real estate management tools and software. Includes over 25 forms for use in the business.
288 pages, Paperback
First published April 1, 2008
1 person is currently reading
13 people want to read
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June 16, 2017
Homes are seized when taxes are owed and have not been paid. The property is often sold off for the taxes, fines, and interest, or is sold at auction. Before purchasing a seized property, you need to find out:
1. Whether the property is worth more than the taxes owed
2. How the property is zoned
3. What the state and local laws are concerning the rights of the previous owner (p.24)
If you live in your primary residence for at least two years, capital gains will be eliminated (p.25)
As a landlord, at a minimum, you must ensure that the mains systems in the house, such as electrical and plumbing, are property maintained and maintain any common areas if you are renting a duplex, apartment unit, or other multi-tenant dwelling (p.31-32).
Small banks are more flexible and can offer choices that larger banks do not have the decision-making power to give. (p.34)
A rule of thumb is that you set aside at least one month's rent for each unit.You may also consider having a line of credit to cover large costs. (p.45)
The typical vacancy rate is 5%.(p.46)
Look for a house at or below the median price range of a neighborhood.
The median price range means that half the houses sold are more expensive and half are less expensive than the property you are considering. You can find the median home price by asking any real estate agent in your area. (p.49)
Ask to attend the walk-through with your inspector. Watching how he inspects and what he looks for will give you tips on how to do your own preliminary inspections in the future (p.50). Even if you are willing to make repairs, avoid homes that have a weak or bad foundation, moisture problems, old plumbing, and out-of-date electrical wiring. (p.51)
*Place your own advertisement in the paper: Ex: "Looking for a multifamily home in the $40,000-$100,000 range. Home not older than 50 years...." (p.57)
Most FSBO sellers turn to a realtor within 60-90 days of putting their home on the market. You may be able to get a good deal during this time period, as they are more likely to give you the discount rather than pay a realtor's fees. (p.63)
Joining at least two clubs will help you gain the type of network needed to be successful in REI.(p.63)
Comparative Market Analysis (CMA) - Bases a property value on surrounding properties that have recently sold. These properties are similar in size, amenities, and features. To be accurate, the comps must be based on properties that were not sold at low prices or using financing not available to the average buyer (p.68)
Using the figure $1,000 per year difference is a good way to adjust for age. If a comp home is 20 years old and your home is only 8 years old, you can add $12,000 to the value of your home (p.69)
Collect from the owner the monthly maintenance expenses like snow removal, yard work, trash removal, and minor repairs. If you have a figure for the year, divide it by 12 to get the monthly amount (p.70). Then get average life expectancy of the Roof, plumbing, appliances, vinyl siding, electrical system, HVAC unit, exterior paint. (p.71) Determine how many of these items you will need to replace over the next 5 years and add up the price of the replacement. Divide by 60 (five years in 50 months) to get the monthly amount you should have in reserve.
Seller financing offers tax breaks for sellers and alternative financing for buyers who cannot qualify for conventional loans. So, if the seller does not need the cash from the sale to buy another home, they might be willing to take the tax breaks and interest on the money instead. (p.88)
If you live in a cold area, have a plumber or electrician install heat tape on the water pipes in your investment home. When the temperature in the ares where the pipes are located drops below a specified temperature, the tape, plugged into the electricity, will turn on and heat the pipes until the area surrounding the pipes has heated sufficiently to keep them from freezing. (p.94)
Many utility companies offer a service to landlords allowing them to keep continual service, called "leave-on service". Leave-on service lets the utility company know that when a tenant calls to cancel the service, it should be taken out of their name and put back in your.
Your property is the product that your business is selling. (p.95)
List of cleaning items to have handy: Vacuum cleaner, broom, mop and bucket, cleaners and disinfectant, dustpan, rags and sponges, toilet bowl brush, rubber gloves, trash bags, light bulbs, touch up paint, smoke alarm batteries, sandpaper, patching compound for nail holes and hammer, screwdriver, pliers, and other typical tools. (p.96)
Have your unit ready before showing it to potential renters. Applicants will notice the dirty floors or walls and will not want to rent--even if you tell them what you plan to do before they move in. (p.97) Consider a cleaning agency to save time on the cleaning to start looking for a new tenant.
If you have more than one unit, you will want to eventually have the same carpet (if you have carpet) in each unit so if you need a piece from another and have a reference for what type to replace. (p.98)
Use the same color scheme and stick with it for the exterior and all the rooms. (p.99-100)
Safety checks:
-Make sure faulted outlets next to sinks are grounded
-Provide proper bathroom ventilation to prevent mold
-Keep all smoke detectors in good working condition. Be sure to check your local laws to determine the number of detectors needed and the proper placement of these detectors
-Make sure all doors have working handles
Make sure that windows can be opened have working locks.
-Provide a fire extinguisher for the kitchen and check it every time you enter the home to be it is fully charged
-Install a carbon monoxide detector if there is a fireplace or wood heater in the home
-Tack down loose carpeting
-Let your tenants know what you would expect them to do in case of a fire
-Replace door locks after each tenant leaves
Have the area around the home well lit at night
Abide by all local health and safety codes (p.100-101)
You can find out local laws by going to your local housing authority or fire department. Be sure you know the code so that you are not penalized for violations (p.104)
Ceiling fans in a room will make a good first impression on your tenants. They also add light and help reduce heating and cooling bills. Mini-blinds look good in a rental unit. They're inexpensive and having them in your unit sounds good when written in your classified ad. The best color for a rental unit is something neutral like cream or white. (p.105) Shutters will make the unit look more expensive, better kept, and larger (p.106).
Ask inherited tenants what drew them to the property in the first place. Amenities, Good service, rent prices? Understanding this will enable you to how to keep them and perhaps attract new tenants(p.110)
***Purchasing a property with no tenants: Use a Yard sign. Using a more professional sign will get you higher-end applicants. Consider purchasing a kind of sign that a realtor wold use, with a solid frame that will hold up in the wind and will not deteriorate in the rain.
Your sign should have the words "For Rent" and your phone number. *Yard signs are especially effective if you live in a college town and will be renting to college students (p.111)
** Consider your target audience. If your typical tenant is a college student, for instance, then you might want to considering posting your ad with the campus paper, but be aware of the Fair Housing Act. If you post on campus be sure to post in other locations as well because you may not post for limited group viewing only and in the add cannot indicate that you would rather have one type of tenant over another (p112-.113)
In the advertisement include: Location, Rent, Apartment features, utility cost, Lease requirements, Lead Paint Disclosure, Vacancy Date (Let the reader know when the unit will be available)
Beware of sob stories to try to waive certain things. On the phone or email make it clear that you will definitely be checking landlord and employment history for the last two consecutive years (p.118)
Consider an open house. It'll save time on showing different prospective tenants the unit. (p.120)
There are 3 general things you want when finding a new tenant
1. Ability to pay in a timely manner
2. Willingness to abide by the lease and all the provisions in the lease
3. No sense that illegal activity will be engaged in or on your property (p.123)
As a landlord, you are a business owner (p.123)
Look at their income vs their expenses. The rent should be 33% or less of their total income. To measure this ratio, multiply the applicant's gross monthly income (income before taxes) by 0.33. If the resulting number is more than your rent, they are above the ratio. (p.124) Check the applicant's credit history. You can order a credit report, for a small fee, from Equifax, Experian, or Transunion LLC. Many landlords charge a fee to the applicants to cover the cost of the credit check. If you choose not to do so, keep receipts of the credit checks you run because the fees are tax deductible. (p.125)
Questions to ask references and previous landlords listed-(p.126)
If you have more than one unit, you may want to keep the applicants on file for three to six months in case another opening occurs (p.131)
Take a security deposit equal to one month's rent. Be clear, in writing, that this is NOT the last month's rent, but insurance against damages. (p.133) "Rent is due on the first of each month and a late free of $25 is charged after the fifth of the month. The lease states that being late three times in their lease period constitutes breach of the sales agreement and the tenant will be asked to move." (p.134)
Go over the property condition checklist with the new tenant. List flaws and defects and have them sign a document regarding condition so you're in agreement as to the condition (p.134)
Do annual and bi-annual inspections. Inspect your properties and address the problems as they come up. Don't wait until the tenant is moving out to make them pay for damages. If they break something a month into the lease, they should pay for it then (p.135)
Tenant cannot move out under a lease unless you agree to the move. A rental agreement is similar to a lease but does not specify a time. If you use a month-to-month rental agreement, you can change the rent with proper notification and the tenant can move elsewhere with proper notification (p.137)
List of what to put in a Lease on p.138) You can ask, in the agreement, to refrain from acting in certain ways, such as making noise that disturbs the neighbors, keeping pets, and more (p.139,140)
Hire an attorney to look over the lease you construct (p.142)
State laws that deal with being a landlord can be obtained from your state's Consumer Protection Agency or Attorney General's Office. Also the library, or online.
See findlaw.com and www.law.cornell.edu/states/index.html (p.145)
**Record keeping system for tenants (p.151)
Evictions may be necessary as a result of: Nonpayment of rent, refusal to follow the lease its provision, engaging in illegal activity on your property, creating a nuisance problem, refusal to leave the lease has expired (p.158)
Software to help you with your bookkeeping- Intuit Quicken (p.164). Before you buy an accounting program, make sure the data you enter into the program is compatible with the software program your CPA uses at tax time .
Any money you receive due to rent is taxable in the year it was collected. (p.172)
Repair are things that keep your property in good condition. These things include painting, fixing an appliance, and replacing a light fixture. These are deductions. On the other hand, improvements to the property add value to the property and are considered income. You cannot deduct expenses, but you can recover your cost by taking depreciation. Improvements include such things as a new roof, new appliances, a deck addition, or the addition of swimming pool (p.173).
Deductions come about when you spend money on your business, reducing your gross income. Not everything you spend is tax deductible, though.If you spend $500 in postage for you business, that is 100% deductible. Spending the same $500 on business meals is only 50% deductible. Finally,spending the same amount of money contributing to a political fund that will help reduce property taxes is not deductible. Some deductions you will want to take include:
1. interest- from mortgage loans,improvement loans, and credit card interest for goods and services used in your rental business. To take the interest of a credit card off as a deduction, you will want to have a credit card used exclusively for goods and services of your properties. (p.174)
2. Depreciation
3. Repairs-includes re-painting, fixing floors, fixing gutters, fixing the roof (but not complete re-roofing), replacing broken windows, repairing appliances, fixing holes in the walls, or fixing leaks. (p.175)
4. Travel- As a landlord, you are entitled to a deduction when you travel for any business related purpose. This travel includes going to your rental unit to talk with a tenant, going to the hardware store to buy a can of paint, or going to the attorney's office to have him check a lease.
5. Home Office- You may deduct home office expenses from your income as long as you meet certain requirements. To qualify, you must regularly use a part of your home exclusively for your business and you must either us your home as a principal place of business, meet tenants at your home, or have a detached building you are using as an office on your property. By having a home office, you will be able to deduct a portion of your mortgage, utilities, taxes, and repairs on your home.
6. Employees and Independent Contractors
7. Casualty and Theft Losses (p.176)
8. Insurance
9. Legal and Professional Services- Any fees paid to your attorney or professionals such as propery management companies, real estate investment advisers, or accountants are deductible as long as the work they performed for you was related to your rental activity.
10. Advertising- The cost of advertisements to find tenants or to find professional help are deductible
11. Property Taxes- Landlords may deduct property taxes, and local taxes associated with street maintenance, sidewalks, sewer, or other community services
12. Local Services- You can deduct the price of running water and trash collection if you provide them for your tenants.
13. Rental items- if you rent furniture for the benefit of a tenant, you can deduct this cost.
14. Utilities- any utilities such as heat,gas, or electric provided to your tenants are deductible
15. Tax preparation-It is wise to deduct the Fees of your tax accountant. With all the laws and rules and exceptions associated with tax laws, having someone knowledgeable is worth the price. (p.177)
If you subtract your expenses from your gross income and end up with a positive number, you have made a profit, and that profit will be taxed by the IRS. But if you subtract your expenses from your gross income and you end up with a negative number, you are operating at a loss, or Net Operating Loss (NOL)
Capital Asset-Any property that has a useful life longer than one year. Ex: Computers, cars, tractors, and houses.
Depreciation is used as a way to deduct the asset a little at a time over a prescribed number of years (p.181)
Your personal residence does not qualify for a 1031 exchange (p.184)
There are 5 different types of 1031 exchange. (p.185)
If you document each item as it occurs, you will be less likely to forget the information or lose the receipts. For each expense you need to know: the amount of the expense, what the expense covers (categorized by IRS deductions, who received the payment, the date the expense was incurred, the date the expense was paid.
The biggest thing you can do to separate home and business is to have a separate checking account and credit card for your business. Having a separate account shows the IRS that you are serious about keeping your home and business separate. (p.188)
At tax time,every landlord should use an accountant (p.189)
The three main ways to set up a business for the purpose of real estate investing are the S corporation, the partnership, and the LLC.
The S corporation that has its income taxes directly on shareholder returns. This type of entity will give less your personal liability if someone were to get hurt on your property, but it does not help in terms of taxes
A partnership offers tax benefits but does not protect you from personal liability (p.189)
Limited Liability Corporation (LLC)- When you have an LLC, no matter what happens to the property held by the LLC, nothing can happen to your own personal assets. An LLC does not have to have more than one member. (p.190)The biggest advantage to an LLC is that the owner of an LLC can use the net loss of the LLC as a deduction on their personal return (p.191) You should get a separate LLC for each property (p.193)
Real Estate Professional- You must work at least 750 hours annually in the real estate business (about 15 hours a week) and you mus spend at least half you tie actively engage in the RE business. (p.192)
To find out how long it will take to your money to double, use the rule of 72.
Rule of 72- Divide 72 by the annual percentage rate yo are receiving on a sum of money.
The ideal situation for long term rental investing is to achieve a positive cash flow, but due to depreciate and deductions, have a net loss. This way, you can enjoy the profits without having to pay the taxes. (p.199)
Appendix with useful sample applications and letters p.209-247
1. Whether the property is worth more than the taxes owed
2. How the property is zoned
3. What the state and local laws are concerning the rights of the previous owner (p.24)
If you live in your primary residence for at least two years, capital gains will be eliminated (p.25)
As a landlord, at a minimum, you must ensure that the mains systems in the house, such as electrical and plumbing, are property maintained and maintain any common areas if you are renting a duplex, apartment unit, or other multi-tenant dwelling (p.31-32).
Small banks are more flexible and can offer choices that larger banks do not have the decision-making power to give. (p.34)
A rule of thumb is that you set aside at least one month's rent for each unit.You may also consider having a line of credit to cover large costs. (p.45)
The typical vacancy rate is 5%.(p.46)
Look for a house at or below the median price range of a neighborhood.
The median price range means that half the houses sold are more expensive and half are less expensive than the property you are considering. You can find the median home price by asking any real estate agent in your area. (p.49)
Ask to attend the walk-through with your inspector. Watching how he inspects and what he looks for will give you tips on how to do your own preliminary inspections in the future (p.50). Even if you are willing to make repairs, avoid homes that have a weak or bad foundation, moisture problems, old plumbing, and out-of-date electrical wiring. (p.51)
*Place your own advertisement in the paper: Ex: "Looking for a multifamily home in the $40,000-$100,000 range. Home not older than 50 years...." (p.57)
Most FSBO sellers turn to a realtor within 60-90 days of putting their home on the market. You may be able to get a good deal during this time period, as they are more likely to give you the discount rather than pay a realtor's fees. (p.63)
Joining at least two clubs will help you gain the type of network needed to be successful in REI.(p.63)
Comparative Market Analysis (CMA) - Bases a property value on surrounding properties that have recently sold. These properties are similar in size, amenities, and features. To be accurate, the comps must be based on properties that were not sold at low prices or using financing not available to the average buyer (p.68)
Using the figure $1,000 per year difference is a good way to adjust for age. If a comp home is 20 years old and your home is only 8 years old, you can add $12,000 to the value of your home (p.69)
Collect from the owner the monthly maintenance expenses like snow removal, yard work, trash removal, and minor repairs. If you have a figure for the year, divide it by 12 to get the monthly amount (p.70). Then get average life expectancy of the Roof, plumbing, appliances, vinyl siding, electrical system, HVAC unit, exterior paint. (p.71) Determine how many of these items you will need to replace over the next 5 years and add up the price of the replacement. Divide by 60 (five years in 50 months) to get the monthly amount you should have in reserve.
Seller financing offers tax breaks for sellers and alternative financing for buyers who cannot qualify for conventional loans. So, if the seller does not need the cash from the sale to buy another home, they might be willing to take the tax breaks and interest on the money instead. (p.88)
If you live in a cold area, have a plumber or electrician install heat tape on the water pipes in your investment home. When the temperature in the ares where the pipes are located drops below a specified temperature, the tape, plugged into the electricity, will turn on and heat the pipes until the area surrounding the pipes has heated sufficiently to keep them from freezing. (p.94)
Many utility companies offer a service to landlords allowing them to keep continual service, called "leave-on service". Leave-on service lets the utility company know that when a tenant calls to cancel the service, it should be taken out of their name and put back in your.
Your property is the product that your business is selling. (p.95)
List of cleaning items to have handy: Vacuum cleaner, broom, mop and bucket, cleaners and disinfectant, dustpan, rags and sponges, toilet bowl brush, rubber gloves, trash bags, light bulbs, touch up paint, smoke alarm batteries, sandpaper, patching compound for nail holes and hammer, screwdriver, pliers, and other typical tools. (p.96)
Have your unit ready before showing it to potential renters. Applicants will notice the dirty floors or walls and will not want to rent--even if you tell them what you plan to do before they move in. (p.97) Consider a cleaning agency to save time on the cleaning to start looking for a new tenant.
If you have more than one unit, you will want to eventually have the same carpet (if you have carpet) in each unit so if you need a piece from another and have a reference for what type to replace. (p.98)
Use the same color scheme and stick with it for the exterior and all the rooms. (p.99-100)
Safety checks:
-Make sure faulted outlets next to sinks are grounded
-Provide proper bathroom ventilation to prevent mold
-Keep all smoke detectors in good working condition. Be sure to check your local laws to determine the number of detectors needed and the proper placement of these detectors
-Make sure all doors have working handles
Make sure that windows can be opened have working locks.
-Provide a fire extinguisher for the kitchen and check it every time you enter the home to be it is fully charged
-Install a carbon monoxide detector if there is a fireplace or wood heater in the home
-Tack down loose carpeting
-Let your tenants know what you would expect them to do in case of a fire
-Replace door locks after each tenant leaves
Have the area around the home well lit at night
Abide by all local health and safety codes (p.100-101)
You can find out local laws by going to your local housing authority or fire department. Be sure you know the code so that you are not penalized for violations (p.104)
Ceiling fans in a room will make a good first impression on your tenants. They also add light and help reduce heating and cooling bills. Mini-blinds look good in a rental unit. They're inexpensive and having them in your unit sounds good when written in your classified ad. The best color for a rental unit is something neutral like cream or white. (p.105) Shutters will make the unit look more expensive, better kept, and larger (p.106).
Ask inherited tenants what drew them to the property in the first place. Amenities, Good service, rent prices? Understanding this will enable you to how to keep them and perhaps attract new tenants(p.110)
***Purchasing a property with no tenants: Use a Yard sign. Using a more professional sign will get you higher-end applicants. Consider purchasing a kind of sign that a realtor wold use, with a solid frame that will hold up in the wind and will not deteriorate in the rain.
Your sign should have the words "For Rent" and your phone number. *Yard signs are especially effective if you live in a college town and will be renting to college students (p.111)
** Consider your target audience. If your typical tenant is a college student, for instance, then you might want to considering posting your ad with the campus paper, but be aware of the Fair Housing Act. If you post on campus be sure to post in other locations as well because you may not post for limited group viewing only and in the add cannot indicate that you would rather have one type of tenant over another (p112-.113)
In the advertisement include: Location, Rent, Apartment features, utility cost, Lease requirements, Lead Paint Disclosure, Vacancy Date (Let the reader know when the unit will be available)
Beware of sob stories to try to waive certain things. On the phone or email make it clear that you will definitely be checking landlord and employment history for the last two consecutive years (p.118)
Consider an open house. It'll save time on showing different prospective tenants the unit. (p.120)
There are 3 general things you want when finding a new tenant
1. Ability to pay in a timely manner
2. Willingness to abide by the lease and all the provisions in the lease
3. No sense that illegal activity will be engaged in or on your property (p.123)
As a landlord, you are a business owner (p.123)
Look at their income vs their expenses. The rent should be 33% or less of their total income. To measure this ratio, multiply the applicant's gross monthly income (income before taxes) by 0.33. If the resulting number is more than your rent, they are above the ratio. (p.124) Check the applicant's credit history. You can order a credit report, for a small fee, from Equifax, Experian, or Transunion LLC. Many landlords charge a fee to the applicants to cover the cost of the credit check. If you choose not to do so, keep receipts of the credit checks you run because the fees are tax deductible. (p.125)
Questions to ask references and previous landlords listed-(p.126)
If you have more than one unit, you may want to keep the applicants on file for three to six months in case another opening occurs (p.131)
Take a security deposit equal to one month's rent. Be clear, in writing, that this is NOT the last month's rent, but insurance against damages. (p.133) "Rent is due on the first of each month and a late free of $25 is charged after the fifth of the month. The lease states that being late three times in their lease period constitutes breach of the sales agreement and the tenant will be asked to move." (p.134)
Go over the property condition checklist with the new tenant. List flaws and defects and have them sign a document regarding condition so you're in agreement as to the condition (p.134)
Do annual and bi-annual inspections. Inspect your properties and address the problems as they come up. Don't wait until the tenant is moving out to make them pay for damages. If they break something a month into the lease, they should pay for it then (p.135)
Tenant cannot move out under a lease unless you agree to the move. A rental agreement is similar to a lease but does not specify a time. If you use a month-to-month rental agreement, you can change the rent with proper notification and the tenant can move elsewhere with proper notification (p.137)
List of what to put in a Lease on p.138) You can ask, in the agreement, to refrain from acting in certain ways, such as making noise that disturbs the neighbors, keeping pets, and more (p.139,140)
Hire an attorney to look over the lease you construct (p.142)
State laws that deal with being a landlord can be obtained from your state's Consumer Protection Agency or Attorney General's Office. Also the library, or online.
See findlaw.com and www.law.cornell.edu/states/index.html (p.145)
**Record keeping system for tenants (p.151)
Evictions may be necessary as a result of: Nonpayment of rent, refusal to follow the lease its provision, engaging in illegal activity on your property, creating a nuisance problem, refusal to leave the lease has expired (p.158)
Software to help you with your bookkeeping- Intuit Quicken (p.164). Before you buy an accounting program, make sure the data you enter into the program is compatible with the software program your CPA uses at tax time .
Any money you receive due to rent is taxable in the year it was collected. (p.172)
Repair are things that keep your property in good condition. These things include painting, fixing an appliance, and replacing a light fixture. These are deductions. On the other hand, improvements to the property add value to the property and are considered income. You cannot deduct expenses, but you can recover your cost by taking depreciation. Improvements include such things as a new roof, new appliances, a deck addition, or the addition of swimming pool (p.173).
Deductions come about when you spend money on your business, reducing your gross income. Not everything you spend is tax deductible, though.If you spend $500 in postage for you business, that is 100% deductible. Spending the same $500 on business meals is only 50% deductible. Finally,spending the same amount of money contributing to a political fund that will help reduce property taxes is not deductible. Some deductions you will want to take include:
1. interest- from mortgage loans,improvement loans, and credit card interest for goods and services used in your rental business. To take the interest of a credit card off as a deduction, you will want to have a credit card used exclusively for goods and services of your properties. (p.174)
2. Depreciation
3. Repairs-includes re-painting, fixing floors, fixing gutters, fixing the roof (but not complete re-roofing), replacing broken windows, repairing appliances, fixing holes in the walls, or fixing leaks. (p.175)
4. Travel- As a landlord, you are entitled to a deduction when you travel for any business related purpose. This travel includes going to your rental unit to talk with a tenant, going to the hardware store to buy a can of paint, or going to the attorney's office to have him check a lease.
5. Home Office- You may deduct home office expenses from your income as long as you meet certain requirements. To qualify, you must regularly use a part of your home exclusively for your business and you must either us your home as a principal place of business, meet tenants at your home, or have a detached building you are using as an office on your property. By having a home office, you will be able to deduct a portion of your mortgage, utilities, taxes, and repairs on your home.
6. Employees and Independent Contractors
7. Casualty and Theft Losses (p.176)
8. Insurance
9. Legal and Professional Services- Any fees paid to your attorney or professionals such as propery management companies, real estate investment advisers, or accountants are deductible as long as the work they performed for you was related to your rental activity.
10. Advertising- The cost of advertisements to find tenants or to find professional help are deductible
11. Property Taxes- Landlords may deduct property taxes, and local taxes associated with street maintenance, sidewalks, sewer, or other community services
12. Local Services- You can deduct the price of running water and trash collection if you provide them for your tenants.
13. Rental items- if you rent furniture for the benefit of a tenant, you can deduct this cost.
14. Utilities- any utilities such as heat,gas, or electric provided to your tenants are deductible
15. Tax preparation-It is wise to deduct the Fees of your tax accountant. With all the laws and rules and exceptions associated with tax laws, having someone knowledgeable is worth the price. (p.177)
If you subtract your expenses from your gross income and end up with a positive number, you have made a profit, and that profit will be taxed by the IRS. But if you subtract your expenses from your gross income and you end up with a negative number, you are operating at a loss, or Net Operating Loss (NOL)
Capital Asset-Any property that has a useful life longer than one year. Ex: Computers, cars, tractors, and houses.
Depreciation is used as a way to deduct the asset a little at a time over a prescribed number of years (p.181)
Your personal residence does not qualify for a 1031 exchange (p.184)
There are 5 different types of 1031 exchange. (p.185)
If you document each item as it occurs, you will be less likely to forget the information or lose the receipts. For each expense you need to know: the amount of the expense, what the expense covers (categorized by IRS deductions, who received the payment, the date the expense was incurred, the date the expense was paid.
The biggest thing you can do to separate home and business is to have a separate checking account and credit card for your business. Having a separate account shows the IRS that you are serious about keeping your home and business separate. (p.188)
At tax time,every landlord should use an accountant (p.189)
The three main ways to set up a business for the purpose of real estate investing are the S corporation, the partnership, and the LLC.
The S corporation that has its income taxes directly on shareholder returns. This type of entity will give less your personal liability if someone were to get hurt on your property, but it does not help in terms of taxes
A partnership offers tax benefits but does not protect you from personal liability (p.189)
Limited Liability Corporation (LLC)- When you have an LLC, no matter what happens to the property held by the LLC, nothing can happen to your own personal assets. An LLC does not have to have more than one member. (p.190)The biggest advantage to an LLC is that the owner of an LLC can use the net loss of the LLC as a deduction on their personal return (p.191) You should get a separate LLC for each property (p.193)
Real Estate Professional- You must work at least 750 hours annually in the real estate business (about 15 hours a week) and you mus spend at least half you tie actively engage in the RE business. (p.192)
To find out how long it will take to your money to double, use the rule of 72.
Rule of 72- Divide 72 by the annual percentage rate yo are receiving on a sum of money.
The ideal situation for long term rental investing is to achieve a positive cash flow, but due to depreciate and deductions, have a net loss. This way, you can enjoy the profits without having to pay the taxes. (p.199)
Appendix with useful sample applications and letters p.209-247
December 14, 2015
Very insightful.
Made me aware of what I could do better, with my rentals, esp. Credit checks on the renters, and not feeling sorry to their misfortune, I had to evict the first family that I rented to. ( inherited the property) so now I am reading up on landlord and tenants relationships, and how to build a profitable business.
Made me aware of what I could do better, with my rentals, esp. Credit checks on the renters, and not feeling sorry to their misfortune, I had to evict the first family that I rented to. ( inherited the property) so now I am reading up on landlord and tenants relationships, and how to build a profitable business.
February 13, 2024
It covered the absolute basics for real estate investing. Definitely had a few misleading descriptions specifically around how income is generated but overall is a good starting book for new investors. I personally enjoyed the Tax section which made reading the book somewhat worth wild.
May 12, 2015
Covers the bases. Answers the questions I was curious about.
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