6 Renovation Tips for New Landlords

Brooklyn apartment

If you’re new to investing in real estate, you’ll probably be really excited when you close escrow on your first purchase. That’s great because real estate investing can be a very good way to improve your long-term wealth picture. However, if you are an average real estate investor — as 99 percent of us are — that excitement will turn quickly to the realization that a lot of hard work is coming to your plate, especially when it comes to renovating your new investment property.

Here are some items you should be aware of so you can better prepare for your future as a real estate mogul.

Budget money and time wisely

As your closing come close, you are probably putting together a starry-eyed list of all the improvements you’re going to make on a shoestring of a budget. Of course the repairs will also be completed in 30 days so you can rent the property out and start earning some income. Not going to happen! Once you get going and realize improvements cost much more than you thought and take longer to complete, you’ll be doing some major revisions to your estimates. Be cautious when estimating a low-priced and quick-turnaround renovation, as that rarely ends up being the case.

Expect to invest your sweat equity

To better educate yourself and minimize budget overruns, plan on spending a lot of time at the property from the day you close escrow until about one month after it is occupied by renters. Why? Because it’s a lot of hard work — getting bids, waiting for deliveries, reviewing work, doing work, shopping for supplies (and more supplies), advertising your property, reviewing rental applications. You’ll be doing it all at your new property. It may start out fun but will not end that way; however, you are in this for long-term wealth building, and that’s why you are willing to invest your time and energy in hopes of a better retirement.

Don’t take the first bid

You must get several bids to ensure that you’re getting a fair price for any contracting work. The more expensive the job, the more bids you should get. This is going to be exhausting and time consuming. However, doing your legwork can lead to better and/or less expensive bids in the long run.

Focus on paint and flooring

If the paint and flooring in your property don’t look nice — and they usually don’t  — fix them! It’s going to cost some money, but hopefully you’ll get a little more rent when you make these improvements.

  • Paint: Use a bright and neutral color, and paint all the walls the same color and sheen. When you have to do touch-ups down the road, it’s nice to just have one color in the property, and you can always have a can of that color on hand.
  • Flooring: Your flooring options include carpet, tile, wood laminate and vinyl. Tile is best for kitchens and bathrooms due to water and moisture issues. Wood laminate is best for elsewhere due to its durability and easy cleaning. Carpet is not good for rentals as it stains easily, and every new tenant wants new carpet. Shop around: You can find some good laminate deals, and it’s relatively easy and inexpensive to install.

Check for plumbing and electrical issues

Properties that are more than 20 years old usually should have the water valves and electrical outlets replaced. So round up a few plumbers and electricians and get some bids. Do this while the property is empty. Water valves, supply line hoses, washing machine and dishwasher hoses and drains pose the biggest leak and flood risk. Change them all out. Electrical outlets and covers are not as big a risk, but usually look really bad with many coats of different color paint on them. An electrician can change out a whole house of outlets and on/off switches in half a day or less.

Don’t go for the lowest-priced supplies

When you get bids and are reviewing costs at a home improvement store, don’t just pick the least expensive supplies. Those items will never stick when you are actually making the decisions on what to contract for and purchase for your rental. You’ll end up buying the more expensive stuff, creating a budget headache that could have been avoided.

These basic tips should be supplemented with your investigation and seeking guidance from experienced real estate investors in your area. They’ll have other good advice, too. Just don’t think being a real estate investor is an easy walk in the park. It’s more like a marathon in the hot sun with a lot of hard work. But this hard work and determination will make your eventual success even more rewarding!

Source: http://www.zillow.com/blog/6-renovation-tips-for-new-landlords-151019/

One Thing Renters and Landlords Should Agree On: Renters Insurance

Given the high potential for disputes about rent and repairs, landlords and tenants often find themselves at odds during their relationships. Both sides should agree about one thing: renters insurance.

Renters insuranceRenters insurance protects both the interests of the tenant (by protecting their belongings from covered perils) and the landlord (by keeping tenants safe, satisfied and paying rent for the full term of the lease).

However, only about 35 percent of renters purchase insurance protection; that compares poorly with the percentage of homeowners who purchase coverage — around 96 percent, according to the Insurance Information Institute.

A big reason for the disparity: Virtually all lenders require mortgage holders to buy and maintainhomeowners insurance. But that doesn’t explain why more renters don’t protect their valuables. Likely reasons include mistaken assumptions about tenant/landlord responsibilities.

  • Property owner: Your policies don’t cover everything. Landlord insurance protects only the structure of your rental property from named perils such as wind and fire. If your tenants lose possessions in a natural disaster and can’t afford to pay rent, you’re out income. Encouraging — or even requiring — your tenants to buy insurance can help make sure that doesn’t happen.
  • Renter: Your landlord is not responsible for your possessions; you are.

Here are three scenarios in which renters insurance can benefit both renters and landlords:

Scenario No. 1: Theft

Renter: If thieves break into your apartment and steal your valuables, your renters insurance policy will pay for the items’ replacement or repair. If you don’t purchase renters insurance, you’ll have to replace the items on your own dime.

Landlord: If burglars rob one of your rental properties, your tenants’ insurance policies can be helpful in a couple of ways. Renters who don’t have coverage might not be able to replace everything stolen — particularly gaming systems, computers and televisions — and still pay rent. They could break their leases, leaving you with vacant properties. If you didn’t deliver the security measures specified in the lease, they could even blame you for the break-in and cause disruption to your business and rental income.

Scenario No. 2: Storm and fire damage

Renter: If your apartment or rental home becomes damaged in a fire or other named peril, your renters policy can help to repair or replace your possessions. Standard policies also typically come with loss of use coverage, which can help pay your expenses if you have to relocate for repairs.

Landlord: Your landlord insurance policy will pay for lost income while your rental property undergoes repair. During the repairs, the tenants must make other arrangements. Those with insurance can be reimbursed for expenses, which means they’re much more likely to make temporary arrangements and move back in once the property is habitable again.

Scenario No. 3: Liability

Renter: The injured person decides to sue. If you have renters insurance, the personal liability portion of your policy can help you with legal expenses, including any damages awarded in the case. Without renters insurance, you could find yourself in the middle of a pricey legal battle.

Landlord: Most insurance carriers and some landlords put restrictions on the kinds of dogs allowed on the premises, but even dogs of docile breeds can lash out. If they do, one tenant could become embroiled in a legal battle with another. You could even become involved in the dispute. Even if you aren’t, your professional reputation and profit could suffer.

Summary

Considering that the cost of renters insurance ranges between $15 and $30 per month, according to the National Association of Insurance Commissioners, the pros of purchasing protection typically outweighs the cons. Renters also could qualify for discounts for common apartment features such as smoke detectors and deadbolt locks. Those with good credit also could qualify for price breaks on premiums.

Source: http://www.zillow.com/blog/why-renters-insurance-matters-149412/

7 Things Every Lease Agreement Should Include

Congratulations on buying your first investment property. Smart investors know the best way to safeguard their investment from potential tenant trouble is to craft a solid lease agreement that includes these key things:

1. The basic clauses. Every lease agreement must list the parties to the agreement, which would be you and the tenant, along with the property’s address. You also want to state the term of the lease, which could be month-to-month starting on the first with a particular end date or an automatically-continuing lease that remains in full force and effect.

2. Security deposit clause. Your lease should require the tenant to put up a security deposit that matches one month’s rent or more, depending on the value of furnishings and repair costs if something goes wrong. Some states require you to place the tenant’s security deposit in a separate interest-bearing account and, at the end of the lease, you must give the deposit plus interest to the tenant, less any damages. Make sure to check with your state and judicial regulations and, to save time and money over the long term, check with your real estate attorney to make sure your lease follows the law. Security deposits can be a problem if not handled correctly.

3. Maintaining the premises. The lease should tell the tenant that he is required to maintain the premises, abide by noise control rules and not change the locks without your written approval. You will want to itemize the appliances and furniture that are part of the lease, and note their condition and any other special considerations. Don’t expect a tenant to follow oral requests, such as not parking in the driveway. All requirements must be spelled out in the lease. Also note whether the tenant or landlord will be responsible for utilities. Take the time to clearly write out the details of your agreement.

4. Warning of concealed defect. In some jurisdictions you have a duty to warn of a concealed defect known to you, or a defect that it is reasonable for you to know about. If you know the deck is crumbling and you fail to warn your tenant, then you may find yourself explaining the situation to a judge. Better to disclose the known defect in the lease and, best of all, fix it before the tenant moves in.

5. Subleasing clause. At some point, most landlords have a tenant who wants to sublet the apartment to a friend or stranger. To avoid trouble make sure your lease includes a subletting clause that requires the tenant to obtain your written permission before turning the property over to someone else. When the tenant asks to sublet the property, you will be in a position to decline or accept their offer. But heed this caveat: If you want to agree to having the new tenant move in, then it’s best to end the original tenant’s lease and start the process from scratch with the new tenant. You should go through the entire background check with the new tenant, including a new security deposit and lease. Do not get stuck trying to enforce your original lease against a new tenant who was not a party to the original lease. That situation is a risk you cannot afford.

6. Termination. The best practice is to know your jurisdiction’s rules on terminating a lease and include those details in your lease so your tenant will not be surprised. Terminations occur at the end of a non-continuing lease and also when there is an eviction. Evictions are one of the most dangerous areas for the self-advised investor. You may think you know the rules, but if you improperly notify your tenant of a coming eviction and lock out, you may find yourself on the wrong end of a lawsuit. You can find free eviction paperwork online, but if you are planning to evict a tenant, you would be wise to consult with an attorney.

7. After the tenant leaves. Would you ever hold a tenant’s personal property for unpaid rent? In some states it’s against the law for a landlord to confiscate a tenant’s property and demand rent money in return. Other jurisdictions consider the property abandoned and allow the landlord to dispose of the items. Most states require a landlord to hold the tenant’s property for a short period of time and give notice to the tenant, and some allow the landlord to claim a storage fee for the hassle. The key is to check your local laws and spell out in the lease what you plan to do with personal property left behind by the tenant.

Include these important clauses in your residential lease agreement and you will be well on your way toward building a successful real estate investment empire.

Related:

Southern California-based Kelly Zinser is a real estate broker, attorney and legal analyst for Avvo.com.

Source: http://www.zillow.com/blog/key-clauses-in-lease-agreement-146965/

5 Tips for Finding a Rental with a Large Dog

Finding an affordable and comfortable apartment can be an incredibly time-consuming process. Add a large dog to the mix, and it’s next to impossible.

That’s what Jan Even, owner of a 90-pound Rottweiler mix, experienced during her Bay Area apartment search. She was planning to rent in San Francisco or the East Bay and began her search by looking at pet-friendly apartments.renting with large dogs

“I couldn’t find a single place that would accept my dog. She’s perfectly well-behaved, but a lot of the places that bill themselves as pet-friendly have restrictions about types of dogs they will accept,” she said. “Eventually we concluded we weren’t going to be able to find a rental because of our dog. Now we’re looking at real estate to buy.”

It’s not uncommon for apartment communities — even those that are dog-friendly — to have weight and breed restrictions. So, what’s the owner of a large dog to do?

Look into single-family rentals

Large apartment complexes are mostly likely to have size and breed restrictions in their pet policies. Landlords of individually-owned properties are more likely to be flexible and accept large dog breeds on a case-by-case basis. Use keywords like “pet friendly” or “dog friendly” in your search filter to narrow down rental listings.

Use advocacy groups as a resource

There are plenty of other dog owners who have been in your shoes. The Humane Society of the United States has a webpage listing pet-friendly rental properties in each state. Your local animal shelter, breed rescue or advocacy group likely has a list of apartment communities that will accept your specific breed. For example, the website My Pit Bull is Family has a list of pit bull-friendly rental housing providers in each state.

Have all your documents prepared

In addition to preparing documents like obedience training and vaccination records, ask your landlord or veterinarian to write a reference for your pet, vouching for your dog’s behavior.

“A reference from a previous landlord can be huge in changing the mind of the landlord,” said KC Theisen, director of pet care issues at the Humane Society of the United States. “One other thing I recommend, in addition to pet resumes and references is a pet interview. If your dog is a great dog, offer to bring them by the rental office for a meet and greet. It’s very hard for a landlord to look at a sweet, well-mannered dog in the eye and say no.”

Plan extra time for the search

Understand that finding a rental with a large dog may not be easy. Allot additional time to find the right home for you and your dog. If you’d normally give yourself one month to find an apartment, double that to two since a good majority of rentals won’t be pet-friendly. If you really need extra time, consider getting a short-term rental and boarding your dog while you continue your search.

Be flexible

Finding a rental with a large dog may require flexibility on your end. Understand that you may be required to pay an additional pet deposit, pay extra for insurance that covers your dog’s breed or even rent on a month-to-month basis until your pooch earns the landlord’s approval. Follow the pet guidelines to show that you and your dog are model tenants and willing to work with the landlord.

As you look for a place to rent, above all, sell yourself as a responsible pet owner. “The thing about big dogs is that they’re not that different from a small dog in terms of the amount of space they need or damage they’re going to do,” explained Theisen. “Each dog is an individual.”

Source: http://www.zillow.com/blog/finding-rental-with-large-dog-tips-145740/

Do You Understand Income Taxes for Rental Properties?

A rental property can generate “taxable losses” that can be used to reduce your normal salary income, hence the federal income taxes you pay. It’s difficult for most people to understand how taxes work, and even more confusing once we get into the realm of rental properties and taxes. Note that understanding how taxes impact personal residences are a completely different topic, as those are governed by totally separate tax codes and go elsewhere on your 1040 form.

Below are some of the basics to understanding rental properties and federal income taxes.

Often I hear people saying that they want to buy some real estate to save money on income taxes. However, depending on your tax situation, owning real estate might not save you a dime on taxes. It wholly depends on your specific tax picture and the IRS rules about Passive Activity Loss Limitations.

First and foremost you should never make real estate investment decisions based solely on tax considerations. The first order of business is do your due diligence and determine if an investment makes sense based on cash flows, cash on cash returns, renovation costs, rental income, financing, and the risk of any particular property. Once you believe it makes sense in every other sense, then you can contemplate the tax effects.

Important note: Always have a CPA, attorney or licensed tax professional guide you through your individual tax picture — this article is an illustration of one scenario but your scenario can be very different based on your financial picture.

To better understand, let’s first quickly discuss the IRS 1040 form.

The 1040 form you fill out each year does two things:

  1. Calculates the amount of federal income taxes you owe for the year based on how much you earned in salary, income, wages, profits and distributions — LESS all the deductions (tax “shields”/subtractions) to those totals in the form of losses, deductions and exemptions to get to your Taxable income on Line 43. Then, look at the IRS Tax Tables and determine how much you owe in taxes based on your tax filing status (Single, Married Filing Jointly, etc.) and your Taxable Income.
  2. Second, it reconciles the amount you owe from #1 above against the amount you have already paid during the year. This is commonly called “withholdings” from your salary, or if you are self-employed, you probably paid quarterly estimated income tax amounts to the IRS during the year.
  • If you paid more in #2 than you owe in #1, you get a tax refund!
  • If you paid less in #2 than you owe in #1, you write the IRS an additional check!

Tax Considerations of Rental Properties

Rental properties generally show taxable losses for the first many years. That taxable loss is essentially another “deduction” that lowers your taxable income — noted in #1 above — and hence lowers your income taxes.

This chart below shows an example of how a loss would be calculated. For example, this property might show a ($7,500) loss. That loss would filter through your IRS 1040 form, reducing your taxable income, and hence reducing your taxes.

This is how you might save money on taxes by owning rental properties — using losses on your rental real estate to reduce your taxable income, which allows you to pay less in federal income taxes.

How much it reduces your taxes depends on your income and filing status. It is a little complicated and can get very complicated depending on your situation.

There are also limits on how much of a loss on rental property any particular taxpayer can use to “shield” their income. These limits are called Passive Activity Loss Limitations. If your losses are over $25,000 and/or your Adjusted Gross Income is over $100,000, you may not be able to use all of the losses. You may have losses, but you are not allowed to reduce your income with them based on the IRS rules. Consult a professional.

More information on this topic is available here.

Leonard Baron, MBA, is America’s Real Estate Professor®. His unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions. He is a past lecturer at San Diego State University and teaches continuing education to California real estate agents at The Career Compass.

Source: http://www.zillow.com/blog/income-taxes-for-rental-properties-144134/

Income Tax Tips for ‘Accidental Landlords’

So you’ve just joined the world of being an “accidental landlord.” Maybe you had to relocate, or perhaps you had to downsize. Now you’re renting out your personal residence or second home instead of selling it.

Tax time clockThis makes you a landlord in the eyes of the IRS, which means you’ll have to report the rental property on your federal income taxes.

So what’s a landlord to do?

Fortunately, most rental property ownership will initially generate taxable losses for you, whichmay save you some money on your taxes. These savings come from shielding, or deducting, losses against part of your regular taxable income. But keep in mind, taxable losses are different from positive or negative cash flows (and that’s a story for another day).

For our purposes, we’re just going to discuss what you need to do as a newbie landlord to get your taxes heading in the right direction.

Income and expenses

Next April you’ll add an IRS 1040 Form Schedule E (Supplemental Income and Loss From Real Estate) when you file your taxes.

On the Schedule E, you’ll record all the rental income you received for the prior year. Then you will record all the cash expenses related to the property: mortgage interest, property taxes, HOA fees — which are now deductible because it is a rental property instead of a personal residence — maintenance and repairs, gardening costs and any other expenses, such as depreciation (described below) that are related to the operation of  your “business.”

The net rental income, less all those expenses, will provide an income or loss figure that will be calculated on Schedule E and flow to your IRS 1040 Form, Line 17. So if rental income is $15,000 and expenses are $17,000, you have a $2,000 loss for tax purposes.

Depreciation

One favorable expense deduction that you can take against rental income is called depreciation. It is usually a large amount and can help you greatly decrease the taxes you pay. To figure out this amount, first you need to determine the tax basis and depreciable basis of your rental property. The tax basis will generally be what you originally paid for the property, plus any capital improvements you’ve made over the years. So if you paid $200,000 and put in a $25,000 addition, your taxable basis is $225,000.

You’ll then split that basis into land value and building value, which is your depreciable basis. Divide that building value by 27.5 years to get your depreciation deduction, which goes on your Schedule E just like any other expense. Make sure to have a tax preparer help you with this calculation.

Adding it up

Now let’s look at how the Schedule E income or loss flows to your main 1040 form. You would take your net income or loss on the Schedule E form and transfer it to your 1040. If it’s a loss, you save money on taxes. If it’s positive income, you pay additional taxes.

Note: On losses there are some “Passive Activity Loss” limitations on using losses to shield income. The net maximum loss you can use to shield income is $25,000, and the ability to use any losses phases out starting at $100,000 adjusted gross income. Real estate professionals, however, may be able to use unlimited losses. Talk to a tax professional on all these issues.

Even though your new landlording career may be an accident, being smart about the relevant income tax deductions shouldn’t be. Do some Internet research, talk to your tax professional, look at the Schedule E form, save all those receipts and make sure you maximize your deductions, especially depreciation, so you get the largest possible tax savings the IRS code allows.

Leonard Baron, MBA, is America’s Real Estate Professor®. His unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions. He is a past lecturer at San Diego State University and teaches continuing education to California real estate agents at The Career Compass.

Source: http://www.zillow.com/blog/tax-tips-accidental-landlords-144127/

How to Sell a House with Tennants

After 2008, many would-be home sellers couldn’t get the price they needed to sell. Or worse, their homes were underwater. And so, some homeowners were forced to become “accidental landlords.”

This year, as the real estate market continues to rebound in many parts of the country, millions of homeowners will consider getting back in the market. But this time, they’re trying to sell a tenant-occupied home.

A tenant can make or break your sale. You have to plan well in advance and communicate openly with your tenant to have a successful sale. In some cases, you may even have to postpone it. If you’re the owner of a tenant-occupied property that you want to sell, you’ve essentially got two options. Here’s what you need to know about each.

Option 1: Wait for the lease to expire

Most real estate agents would argue that a seller should wait for the rental agreement to expire. Tenants can sometimes be a bit of a wild card in the high-stakes real estate game, so some agents feel it’s best to proceed after the tenant leaves. After that, make some cosmetic fixes to clean up the home and sell it vacant.

This may be especially important if you have a difficult tenant or one who is unhappy that their home is “being sold out from under them.” The last thing you want, is to make showing the home more difficult — and a disgruntled tenant could easily do that by mucking up paint or leaving his place a mess. The result is that your property looks less appealing to potential buyers, which can have a dramatic effect on your bottom line.

On the other hand, selling a vacant rental unit isn’t always ideal for the seller’s finances. It can take months from the time the home goes on the market until it’s sold; that’s time during which the landlord receives no rent. This can be especially trying for sellers whose homes have been a long-term financial burden.

Option 2: Sell while the tenant is still there

It can be beneficial to keep your tenants in your home during the marketing and sales process, provided you have a good relationship with them. Homes show better with furniture, giving buyers a better feeling for what it would be like to live there.

Ready to sell but have a tenant in place? Do your best to work with them. Most tenants, upon hearing that the landlord would like to sell, immediately start looking for a new place to live. They’d rather just move on and not have to deal with keeping their home clean all the time, showings and phone calls from agents.

If your home is in a desirable neighborhood, you plan to price it right, and you believe it could sell quickly, use your tenant to your advantage. Lower their rent for a month or two leading up to the showing and/or selling. If you can get them to stay and cooperate through open houses and showings, tell them that you’ll guarantee them enough time to find another place and move. Also, if they’re helping you to get the home sold quickly, offer to help pay their moving costs.

Give thought to the message, delivery

Most tenants really don’t want to hold up your sale. Others will protest, and those are the ones who make the headlines or get talked about in real estate war stories.

If you have difficult tenants and suspect they won’t be cooperative, simply let the lease run out. Or find a way to legally take the home back and sell it vacant. But if you have a good relationship with your tenant, try to work with them. No tenant wants to be surprised with little (or no) notice that they must vacate.

Ultimately, the success of dealing with a tenant during a sale is less about the message itself, but in how the message is delivered.

Source: http://www.zillow.com/blog/sell-a-house-with-tenants-145436/