Top 9 Things Every New Landlord Should Know

While a great deal of attention is given to the rights of renters and tenants, landlords also enjoy protections under the law. If you are new to the residential real estate field, understanding your rights and responsibilities can go a long way toward ensuring you have a smooth path to profitability. Here are nine things every landlord should consider before signing their first lease agreement.

#1. Do Your Due Diligence

Checking references and performing a basic credit check before signing a lease will provide you with added information on potential renters. This can help you avoid unpleasant confrontations later and can better make certain you are leasing to quality tenants in your properties. Be sure to check on employment and residence histories; these can often offer greater insights into a renter’s stability and reliability.

#2. Maintain a Safe Distance

In nearly all cases, your renters should pay their own utility bills. This can protect you from unexpected costs during cold winters and hot summers. Additionally, if your tenants decide to move out unexpectedly, this will prevent you from being on the hook for unpaid gas and electric bills.

#3. Insist Tenants Have Renters’ Insurance

Tenants should be insured. This will help protect you from potential liability in case of damage to your tenants’ property should there be a disaster such as fire or flood. In the event a tragedy occurs, you want to be sheltered from lawsuits should your tenant claim you were negligent in taking adequate care of the property. Require proof of renters insurance before handing over the keys.

#4. Pay Attention to Details

Your lease agreement should include detailed stipulations about acceptable activities, prohibited practice and financial matters. Consulting with an attorney who specializes in real estate law in your state can often provide you with added assurance that all contingencies have been considered in your rental or lease agreement. These legal professionals have the experience and knowledge needed to protect your interests effectively in the real estate market.

#5. Don’t Be Afraid to Evict

Unpaid rent represents a drain on your financial resources and revenue streams. If your tenant fails to live up to his or her obligations to you, begin eviction proceedings immediately. Rather than discussing the matter at length, it is generally best to involve your attorney during the initial stages. Financial discussions can easily become heated; by allowing your lawyer to speak for you, you can ensure the most positive outcome without the risk of a nasty or confrontational encounter.
#6. Maintain a Financial Buffer

Even the best tenants can suffer monetary setbacks. By planning for the worst, you can be ready when rent payments are late or don’t turn up at all. Most experts recommend that you keep at least six months of reserve cash on hand to weather unexpected financial difficulties due to tenant evictions, repair costs or other emergency expenditures. By saving up for a rainy day, you can protect your ongoing profitability from your rental ventures. To keep things organized you should also setup a separate bank account for your rental income and expenses.

#7. Stay on the Right Side of the Law

Familiarizing yourself with the legalities of renting or leasing a property in your city and state can help you avoid some of the most common and costly mistakes new landlords tend to make. Many municipalities offer a helpful guide for tenants that outlines their rights under the law. This document or brochure can also provide you with valuable information on your own responsibilities and restrictions when renting or leasing a property. You can also google “landlord laws in Phoenix” or “landlord laws in Arizona” for information on your city or state.

#8. Make Your Expectations Clear

Even if the allowable activities of your tenants are spelled out in the lease, it’s a good idea to discuss key issues with potential renters during the first interview. Some of the most common points of contention include the following:

  • Can tenants repaint, change the carpet or otherwise remodel the property?
  • What type of damage/repair costs may be taken out of a security deposit?
  • Who is responsible for minor and major repairs? First $100 is tenants responsibility?
  • What activities constitute a breach of the lease agreement?
  • In the event of a late rent payment, when would a late fee apply and how much would it be?

#9. Do a Walkthrough at the Beginning and End of a Lease

And get it signed by all parties. Typically, you would be there for the initial walk through, and both parties would sign. This would be a place that a tenant can note any existing damage to the property, essentially clearing them of any sense of responsibility later on or upon vacating the residence. Most often, they would have an additional set time—48 – 72 hours is usually reasonable, but you should check with your attorney—to add any further issues they find upon moving in and getting settled. Be sure to keep this document in a file to compare upon move-out.
By discussing these matters upfront, you can often achieve an amicable relationship that can lead to increased profits and reduced tenant turn over. These nine guidelines can help you achieve a higher degree of success and better financial reward as a landlord. Be sure to take advantage of all the tools and resources that are available to you before making your move into this often lucrative, yet sometimes high-stakes endeavor.

Why it’s Smart to Invest in College Towns

College towns should be the first place you should look for investment properties when starting out or as a seasoned investor. They will continue to be busy markets with a consistent demand for housing from students looking to rent since most schools do not have enough on-campus housing. With students are only looking for temporary housing, it gives you the opportunity to add value to the house in-between tenants. Meaning you can increase your rental income.

We searched Revestor.com and found these 11 cash flowing housing markets based around college towns.

University of South Carolina

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University of Southern California // University of California, Los Angeles

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Chico State

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University of Michigan

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Yale

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Duke

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New York University

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University of Florida

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Arizona State University

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Georgetown University

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Ohio State University

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As you can see prices vary from town to town but overall there are a lot of profitable opportunities for investment. Search your favorite college town and let us know what you find! Share your screen shots with us for a chance to be featured on our Facebook page.

The Top 5 Key Benefits of Purchasing and Owning Investment Real Estate

So… You may ask yourself, why should you buy or invest in real estate in the First Place? Because it’s the IDEAL investment! Let’s take a moment to address the reasons why people should have investment real estate in the first place. The easiest answer is a well-known acronym that addresses the key benefits for all investment real estate. Put simply, Investment Real Estate is an IDEAL investment. The IDEAL stands for:

    • I – Income
    • D – Depreciation
    • E – Expenses
    • A – Appreciation
    • L – Leverage

Real estate is the IDEAL investment compared to all others. I’ll explain each benefit in depth.

The “I” in IDEAL stands for Income. (a.k.a. positive cash flow) Does it even generate income? Your investment property should be generating income from rents received each month. Of course, there will be months where you may experience a vacancy, but for the most part your investment will be producing an income. Be careful because many times beginning investors exaggerate their assumptions and don’t take into account all potential costs. The investor should know going into the purchase that the property will COST money each month (otherwise known as negative cash flow). This scenario, although not ideal, may be OK, only in specific instances that we will discuss later. It boils down to the risk tolerance and ability for the owner to fund and pay for a negative producing asset. In the boom years of real estate, prices were sky high and the rents didn’t increase proportionately with many residential real estate investment properties. Many naïve investors purchased properties with the assumption that the appreciation in prices would more than compensate for the fact that the high balance mortgage would be a significant negative impact on the funds each month. Be aware of this and do your best to forecast a positive cash flow scenario, so that you can actually realize the INCOME part of the IDEAL equation.

Often times, it may require a higher down payment (therefore lesser amount being mortgaged) so that your cash flow is acceptable each month. Ideally, you eventually pay off the mortgage so there is no question that cash flow will be coming in each month, and substantially so. This ought to be a vital component to one’s retirement plan. Do this a few times and you won’t have to worry about money later on down the road, which is the main goal as well as the reward for taking the risk in purchasing investment property in the first place.

The “D” in IDEAL Stands for Depreciation. With investment real estate, you are able to utilize its depreciation for your own tax benefit. What is depreciation anyway? It’s a non-cost accounting method to take into account the overall financial burden incurred through real estate investment. Look at this another way, when you buy a brand new car, the minute you drive off the lot, that car has depreciated in value. When it comes to your investment real estate property, the IRS allows you to deduct this amount yearly against your taxes. Please note: I am not a tax professional, so this is not meant to be a lesson in taxation policy or to be construed as tax advice.

With that said, the depreciation of a real estate investment property is determined by the overall value of the structure of the property and the length of time (recovery period based on the property type-either residential or commercial). If you have ever gotten a property tax bill, they usually break your property’s assessed value into two categories: one for the value of the land, and the other for the value of the structure. Both of these values added up equals your total “basis” for property taxation. When it comes to depreciation, you can deduct against your taxes on the original base value of the structure only; the IRS doesn’t allow you to depreciate land value (because land is typically only APPRECIATING). Just like your new car driving off the lot, it’s the structure on the property that is getting less and less valuable every year as its effective age gets older and older. And you can use this to your tax advantage.

The best example of the benefit regarding this concept is through depreciation, you can actually turn a property that creates a positive cash flow into one that shows a loss (on paper) when dealing with taxes and the IRS. And by doing so, that (paper) loss is deductible against your income for tax purposes. Therefore, it’s a great benefit for people that are specifically looking for a “tax-shelter” of sorts for their real estate investments.

For example, and without getting too technical, assume that you are able to depreciate $15,000 a year from a $500,000 residential investment property that you own. Let’s say that you are cash-flowing $1,000 a month (meaning that after all expenses, you are net-positive $1000 each month), so you have $12,000 total annual income for the year from this property’s rental income. Although you took in $12,000, you can show through your accountancy with the depreciation of the investment real estate that you actually lost $3,000 on paper, which is used against any income taxes that you may owe. From the standpoint of IRS, this property realized a loss of $3,000 after the “expense” of the $15,000 depreciation amount was taken into account. Not only are there no taxes due on that rental income, you can utilize the paper loss of $3,000 against your other regular taxable income from your day-job. Investment property at higher price points will have proportionally higher tax-shelter qualities. Investors use this to their benefit in being able to deduct as much against their taxable amount owed each year through the benefit of depreciation with their underlying real estate investment.

Although this is a vastly important benefit to owning investment real estate, the subject is not well understood. Because depreciation is a somewhat complicated tax subject, the above explanation was meant to be cursory in nature. When it comes to issues involving taxes and depreciation, make sure you have a tax professional that can advise you appropriately so you know where you stand.

The “E” in IDEAL is for Expenses – Generally, all expenses incurred relating to the property are deductible when it comes to your investment property. The cost for utilities, the cost for insurance, the mortgage, and the interest and property taxes you pay. If you use a property manager or if you’re repairing or improving the property itself, all of this is deductible. Real estate investment comes with a lot of expenses, duties, and responsibilities to ensure the investment property itself performs to its highest capability. Because of this, contemporary tax law generally allows that all of these related expenses are deductible to the benefit of the investment real estate landowner. If you were to ever take a loss, or purposefully took a loss on a business investment or investment property, that loss (expense) can carry over for multiple years against your income taxes. For some people, this is an aggressive and technical strategy. Yet it’s another potential benefit of investment real estate.

The “A” in IDEAL is for Appreciation – Appreciation means the growth of value of the underlying investment. It’s one of the main reasons that we invest in the first place, and it’s a powerful way to grow your net worth. Many homes in the city of San Francisco are several million dollars in today’s market, but back in the 1960s, the same property was worth about the cost of the car you are currently driving (probably even less!). Throughout the years, the area became more popular and the demand that ensued caused the real estate prices in the city to grow exponentially compared to where they were a few decades ago. People that were lucky enough to recognize this, or who were just in the right place at the right time and continued to live in their home have realized an investment return in the 1000’s of percent. Now that’s what appreciation is all about. What other investment can make you this kind of return without drastically increased risk? The best part about investment real estate is that someone is paying you to live in your property, paying off your mortgage, and creating an income (positive cash flow) to you each month along the way throughout your course of ownership.

The “L” in IDEAL stands for Leverage – A lot of people refer to this as “OPM” (other people’s money). This is when you are using a small amount of your money to control a much more expensive asset. You are essentially leveraging your down payment and gaining control of an asset that you would normally not be able to purchase without the loan itself. Leverage is much more acceptable in the real estate world and inherently less risky than leverage in the stock world (where this is done through means of options or buying “on Margin”). Leverage is common in real estate. Otherwise, people would only buy property when they had 100% of the cash to do so. Over a third of all purchase transactions are all-cash transactions as our recovery continues. Still, about 2/3 of all purchases are done with some level of financing, so the majority of buyers in the market enjoy the power that leverage can offer when it comes to investment real estate.

For example, if a real estate investor was to buy a house that costs $100,000 with 10% down payment, they are leveraging the remaining 90% through the use of the associated mortgage. Let’s say the local market improves by 20% over the next year, and therefore the actual property is now worth $120,000. When it comes to leverage, from the standpoint of this property, its value increased by 20%. But compared to the investor’s actual down payment (the “skin in the game”) of $10,000- this increase in property value of 20% really means the investor doubled their return on the investment actually made-also known as the “cash on cash” return. In this case, that is 200%-because the $10,000 is now responsible and entitled to a $20,000 increase in overall value and the overall potential profit.

Although leverage is considered a benefit, like everything else, there can always be too much of a good thing. In 2007, when the real estate market took a turn for the worst, many investors were over-leveraged and fared the worst. They could not weather the storm of a correcting economy. Exercising caution with every investment made will help to ensure that you can purchase, retain, pay-off debt, and grow your wealth from the investment decisions made as opposed to being at the mercy and whim of the overall market fluctuations. Surely there will be future booms and busts as the past would dictate as we continue to move forward. More planning and preparing while building net worth will help prevent getting bruised and battered by the side effects of whatever market we find ourselves in.

Many people think that investment real estate is only about cash flow and appreciation, but it’s so much more than that. As mentioned above, you can realize several benefits through each real estate investment property you purchase. The challenge is to maximize the benefits through every investment.

Furthermore, the IDEAL acronym is not just a reminder of the benefits of investment real estate; it’s also here to serve as a guide for every investment property you will consider purchasing in the future. Any property you purchase should conform to all of the letters that represent the IDEAL acronym. The underlying property should have a good reason for not fitting all the guidelines. And in almost every case, if there is an investment you are considering that doesn’t hit all the guidelines, by most accounts you should probably PASS on it!

Take for example a story of my own, regarding a property that I purchased early on in my real estate career. To this day, it’s the biggest investment mistake that I’ve made, and it’s precisely because I didn’t follow the IDEAL guidelines that you are reading and learning about now. I was naïve and my experience was not yet fully developed. The property I purchased was a vacant lot in a gated community development. The property already had an HOA (a monthly maintenance fee) because of the nice amenity facilities that were built for it, and in anticipation of would-be-built homes. There were high expectations for the future appreciation potential-but then the market turned for the worse as we headed into the great recession that lasted from 2007-2012. Can you see what parts of the IDEAL guidelines I missed on completely?

Let’s start with “I”. The vacant lot made no income! Sometimes this can be acceptable, if the deal is something that cannot be missed. But for the most part this deal was nothing special. In all honesty, I’ve considered selling the trees that are currently on the vacant lot to the local wood mill for some actual income, or putting up a camping spot ad on the local Craigslist; but unfortunately the lumber isn’t worth enough and there are better spots to camp! My expectations and desire for price appreciation blocked the rational and logical questions that needed to be asked. So, when it came to the income aspect of the IDEAL guidelines for a real estate investment, I paid no attention to it. And I paid the price for my hubris. Furthermore, this investment failed to realize the benefit of depreciation as you cannot depreciate land! So, we are zero for two so far, with the IDEAL guideline to real estate investing. All I can do is hope the land appreciates to a point where it can be sold one day. Let’s call it an expensive learning lesson. You too will have these “learning lessons”; just try to have as few of them as possible and you will be better off.

When it comes to making the most of your real estate investments, ALWAYS keep the IDEAL guideline in mind to make certain you are making a good decision and a solid investment.

 

 

MichaelBook2014SmallcolorGuest Blogger:
Michael Wolf, GRI & Author

858-722-6847

www.mikeandjessica.net