The INVESTMENT / RENTAL PROPERTY thread!!!!!!

tehlorax said:   rufruf44 said:   

Using the 50% rule, the expenses will be about $1300 (~$170 more than the listed expenses, reasonable enough). That leave $1300 for debt service. Minus mortgage, it'll be $320, translating to ~6% return on cash. It'll be up to you to decide whether that return is sufficient or not.

OK, whats the 50% rule?

And is there a listing for these "rules" somewhere in this thread? The only other one I know of is the 1% rule. I know these are only generalizations, but would love to see quick tips/rules to help me quickly filter properties in/out.

edit: Upon further review, is the rule that 50% of monthly rental income will be taken up with expenses, minus mortgage?

That's the one. 50% of rent will cover expenses, leaving the other 50% for debt services and profit.

sam81 said:   Hi guys,

I am a landlord and just had some extra maintenance, repair charges last year on my rental property. The expenses are running more than 30% of the rental income on top of interest, HOA, taxes etc deduction and I am afraid that it would be bring an audit. Wondering what would the comfortable range of maintenance, repair charges one could claim before raising a red flag on the rental property?

Thanks

As long as you have all the receipts, prove of payment to back you up and the claims are legit, it will not be an issue. Just make sure you understand there is a difference between repair vs improvement. But most people try to have a paper lost, so 30% is not bad.

corporateclaw said:   corporateclaw said:   corporateclaw said:   .... and now the tenant that apparently saw that a water pipe broke in the house and didn't tell anyone about it has retained a lawyer to sue us for 'injuries sustained while mold was in the house'.... For the love of god this landlording thing is a PITA.

So, to the extent that this is the wrong place for this I apologize, but any assistance/comments/whatever that can be offered would be appreciated regarded steps that you can think of that I should be doing now:

The rental house is owned in my name and my wife's name, and we have zero asset protection entities in place (i.e., this house is not in an llc and we don't have a trust or whatever for any of our other property/assets). My wife is actually the only person that signed the rental agreement and is listed as the only landlord, because I had thrown up my hands and decided I could not deal with the house anymore at that time. We have a decent sized policy on the house, but a huge umbrella policy because we are both professionals (yes I understand that we should have other asset protection in place, but don't fight the hypothetical). I figured that we were safe, for now, because of the policy. Turns out that we have an exclusion for mold in all of the policies -- including the umbrella policy -- such that at the very least it is going to be a huge fight to get the insurance to provide coverage.

I fully understand that legally, a tenant cannot cause a problem like this, hide it, and then claim he was harmed by it (I mean, this would be like him getting drunk and beating his wife and then suing me for putting his wife in danger, IMO) -- plus, I cannot imagine he has any REAL damages from this (at least as far as personal injury). However, I am generally pretty terrified about what is about to happen to me.

To the extent that anyone has been through something like this, anything you can offer by way of advice, please do so. To the extent that it is useful for you guys, I'm going to do everything possible to avoid the shit hitting the fan, but in case it does, I will try to detail what goes on as a cautionary tale of my own stupidity. Even if it doesn't hit the fan, chronicling how I navigated out of this will probably be helpful.

Received what I can only describe as a pretty insane "offer" in the e-mail last night. It requests money for time off work while they could not stay in the house (what?) but ultimately is an amount of money that I could afford and would be better for me than wasting time with otherwise filing a suit and trying to get them out. It sucks, because I know it's just extortion at this point, but I'd like to do it and be done. Problem is that they have a small child and I'm not settling this with these guys (at least not in a way that they get any money) without it being binding on the child and the only way to have a settlement be binding on a child is with court approval (which can only be obtained via a lawsuit, even if it is a "friendly suit").
For those interested in an update, there is not a lot so far. Between this and a couple other things (but mostly this) my life feels like it's been coming apart at the seems lately.

They agreed to do the friendly suit, but then would not move out. Over the course of about a month, they'd scoop out excuse after excuse about why they could not move out and could not afford a moving truck, etc., and I kept cutting them slack, since I don't really give a shit about renting this place out and just wanted the ordeal over. This caused a lot of tension with DW, since she wanted to get them out and start renting it again.

They eventually moved out about 5-6 weeks after they said they would, but the place was a mess. Cost to clean it was pretty nominal compared to the 15 or 20K we spent fixing the damage (plus lost rent from the bottom of the duplex). They stopped contacting me during this time and also refused to do the friendly suit at some point saying they could not afford a lawyer to go to court with them. I told them they would not get anything from me without the friendly suit and then I never heard from them again.

I discovered that they are being sued by a collection agency for an amount of money about the same as what I'd be seeking from them, so that at least made me feel a little better about why they changed their mind about the friendly suit: I presume that they don't understand how the Courts work and would have thought that the judge would be familiar with the other suit and not let them have the money I was agreeing to pay them.

My wife still wants to sue them for the damage, back rent, and rent we lost from the other tenant while the house was being repaired. We've tried a couple of things (mailing something return receipt requested; checking Lexis every 3-4 weeks; and talking to the attorney in the collections case) but the only address that ever comes up is my duplex. So that's where we are so far (if somebody has any ideas on finding them, that would be cool).

For what it's worth I think this is just a cautionary tale not to get into landlording unless you know what you are doing (i.e., setting up the homes as a separate entity) and having both the financial constitution to whether the house of cards nature of this as well as the mental constitution to deal with the fact that once things go south, it is extremely stressful. I have realized that I absolutely do not have the mental constitution to deal with this (this is not fat psychology forums, so I'll not bore you with the details, but since this is the Internet which is great for attention-whoring, I'll at least let "slip" that it's been really, really freaking bad emotionally, which has bled over into financially).

If your above board then dont worry about it. Dont forget you have supplies, repairs, and maintenance (Sched E). Break it up.

PM has a valid point, your potential market may drop off after school starts, depends on your home and the neighborhood demographics. Just this month I did a 6 mo extension. The charge $125 per month, to existing tenant. Im sure your PM knows, but you should be aware of any potential bed tax in short term leases. FL has a bed tax for short term rentals (up to 6 months).

Been on FW for 10 years but JUST found this post! We have been blessed and are about to acquire our 4th home (3 rentals) and so far so good! Can someone give us some advice here?

We created an LLC last year containing 2 members (me and wife). One of our properties the past tennant moved out and bailed on us and left the house in a terrible state (long story short it was the wifes ex's mother in law and this whole deal was disaster to begin with, but its over now AMEN! HALLELUAH!). ANYWAYS!

We had several thousand of repairs and several months of lost rentals to get the place back in pristine condition. We have maxed out a single line item deduction on our taxes. So the question is how can we split deductions between BOTH of our LLC members (me and the wife) to try and get our full deductions we are eligable for? I found the schedule E but is that the right form to BREAK up the deducations? THANK YOU SO MUCH!@

Thanks for the update corporateclaw ... hope things turn for the better in the near future. That leads me to my question for you and some of the folks on the board.

Is there a list of must-dos for first time landlords, eg. in corporateclaw's case, setting up a separate entity for the houses, etc. If anyone has any suggestions or tips, please share, I'm sure there are a lot of people that would benefit from it.

corporateclaw said:   corporateclaw said:   corporateclaw said:   corporateclaw said:   .... and now the tenant that apparently saw that a water pipe broke in the house and didn't tell anyone about it has retained a lawyer to sue us for 'injuries sustained while mold was in the house'.... For the love of god this landlording thing is a PITA.

So, to the extent that this is the wrong place for this I apologize, but any assistance/comments/whatever that can be offered would be appreciated regarded steps that you can think of that I should be doing now:

The rental house is owned in my name and my wife's name, and we have zero asset protection entities in place (i.e., this house is not in an llc and we don't have a trust or whatever for any of our other property/assets). My wife is actually the only person that signed the rental agreement and is listed as the only landlord, because I had thrown up my hands and decided I could not deal with the house anymore at that time. We have a decent sized policy on the house, but a huge umbrella policy because we are both professionals (yes I understand that we should have other asset protection in place, but don't fight the hypothetical). I figured that we were safe, for now, because of the policy. Turns out that we have an exclusion for mold in all of the policies -- including the umbrella policy -- such that at the very least it is going to be a huge fight to get the insurance to provide coverage.

I fully understand that legally, a tenant cannot cause a problem like this, hide it, and then claim he was harmed by it (I mean, this would be like him getting drunk and beating his wife and then suing me for putting his wife in danger, IMO) -- plus, I cannot imagine he has any REAL damages from this (at least as far as personal injury). However, I am generally pretty terrified about what is about to happen to me.

To the extent that anyone has been through something like this, anything you can offer by way of advice, please do so. To the extent that it is useful for you guys, I'm going to do everything possible to avoid the shit hitting the fan, but in case it does, I will try to detail what goes on as a cautionary tale of my own stupidity. Even if it doesn't hit the fan, chronicling how I navigated out of this will probably be helpful.

Received what I can only describe as a pretty insane "offer" in the e-mail last night. It requests money for time off work while they could not stay in the house (what?) but ultimately is an amount of money that I could afford and would be better for me than wasting time with otherwise filing a suit and trying to get them out. It sucks, because I know it's just extortion at this point, but I'd like to do it and be done. Problem is that they have a small child and I'm not settling this with these guys (at least not in a way that they get any money) without it being binding on the child and the only way to have a settlement be binding on a child is with court approval (which can only be obtained via a lawsuit, even if it is a "friendly suit").
For those interested in an update, there is not a lot so far. Between this and a couple other things (but mostly this) my life feels like it's been coming apart at the seems lately.

They agreed to do the friendly suit, but then would not move out. Over the course of about a month, they'd scoop out excuse after excuse about why they could not move out and could not afford a moving truck, etc., and I kept cutting them slack, since I don't really give a shit about renting this place out and just wanted the ordeal over. This caused a lot of tension with DW, since she wanted to get them out and start renting it again.

They eventually moved out about 5-6 weeks after they said they would, but the place was a mess. Cost to clean it was pretty nominal compared to the 15 or 20K we spent fixing the damage (plus lost rent from the bottom of the duplex). They stopped contacting me during this time and also refused to do the friendly suit at some point saying they could not afford a lawyer to go to court with them. I told them they would not get anything from me without the friendly suit and then I never heard from them again.

I discovered that they are being sued by a collection agency for an amount of money about the same as what I'd be seeking from them, so that at least made me feel a little better about why they changed their mind about the friendly suit: I presume that they don't understand how the Courts work and would have thought that the judge would be familiar with the other suit and not let them have the money I was agreeing to pay them.

My wife still wants to sue them for the damage, back rent, and rent we lost from the other tenant while the house was being repaired. We've tried a couple of things (mailing something return receipt requested; checking Lexis every 3-4 weeks; and talking to the attorney in the collections case) but the only address that ever comes up is my duplex. So that's where we are so far (if somebody has any ideas on finding them, that would be cool).

For what it's worth I think this is just a cautionary tale not to get into landlording unless you know what you are doing (i.e., setting up the homes as a separate entity) and having both the financial constitution to whether the house of cards nature of this as well as the mental constitution to deal with the fact that once things go south, it is extremely stressful. I have realized that I absolutely do not have the mental constitution to deal with this (this is not fat psychology forums, so I'll not bore you with the details, but since this is the Internet which is great for attention-whoring, I'll at least let "slip" that it's been really, really freaking bad emotionally, which has bled over into financially).

Thanks for the reply. 42 or 50% of the maintenance expenses on the rental property is on top of all the other expenses I mentioned? It seems awfully high just for maintenance and repairs, so please explain your thought behind it.

mulderlx said:   The average (based upon surveys) expenses on rental properties is around %42, but round up to %50 for good measure.

sam81 said:   Thanks for the reply. 42 or 50% of the maintenance expenses on the rental property is on top of all the other expenses I mentioned? It seems awfully high just for maintenance and repairs, so please explain your thought behind it.

 

mulderlx said:   The average (based upon surveys) expenses on rental properties is around %42, but round up to %50 for good measure.

From my understanding, itsnot just maintenance. Its maintenance, taxes, insurance, repairs, etc. It may not even be maintenance required in THAT year, but when you have to replace a roof - you'll be glad you budgeted for it.

I am asking this question for IRS purpose. If I claim it higher than usual in one of the years to make a cushion for the future years then what would happen if IRS audits me?

JaxFL said:   Ive never heard of nor use that... I simply learn what the rent is, calc a payment, and look at whats left over. Mortg co's use 25%, If whats left over covers that, im okay. Maybe not good but okay.

What % of downpayment do you usually take into account for the mortgage to be 25% of rent?

ExperiencedNewbie said:   Thanks for the update corporateclaw ... hope things turn for the better in the near future. That leads me to my question for you and some of the folks on the board.

Is there a list of must-dos for first time landlords, eg. in corporateclaw's case, setting up a separate entity for the houses, etc. If anyone has any suggestions or tips, please share, I'm sure there are a lot of people that would benefit from it.

I think that starting by reading a thread like this is probably a good idea. There are a lot of people doing well posting things that work, but it's probably important to pay attention to the people that are doing poorly too (it's easy to get StarStruck I'd think, by the people that do drive bys in this thread about how they are 22 years old and own 83 houses and are making a million dollars a month now and they bought all of their houses for 2 grand a piece and they are all worth over 100K now...etc.). Stuff can go really wrong and you need to be able to weather that storm.

For me, making sure I had my personal finances in order in various forms of asset protection first would have been very important. Next trying to insulate the property with an LLC or something would have been a good move. People have mentioned the warranties and I would have done that, plus I think the most important would have been to make sure my umbrella policy covered mold regardless of how much extra it cost.

Also, I think it's important to look at whether it makes sense for you time-wise as to how much money you'd be making vs. time spent making it vs. time spent focusing on other things. For me, I know that if I'd looked at that I might have been more vehement about selling the house when we moved out, rather than getting greedy eyes with the rental income -- for example, the best case outcome with my house for a year would be a profit of less than one of my paychecks. Spending the amount of time, energy, etc., that I have with this house is not worth that payoff. Obviously, if you get lucky with time spent, then it's probably worth it, but I also think a lot of people underestimate how much time they spend on their rentals.

rufruf44 said:   JaxFL said:   Ive never heard of nor use that... I simply learn what the rent is, calc a payment, and look at whats left over. Mortg co's use 25%, If whats left over covers that, im okay. Maybe not good but okay.

What % of downpayment do you usually take into account for the mortgage to be 25% of rent? I didnt state mortg would be 25% of rent. 25% is what mortg. co's use as the basis for vacancy, repairs etc... Anybody can purchase a property with a large DP and make the numbers work. % of DP is relative, as in a blue-blue collar property, which one would expect a higher rate of cash flow and lower price, vs a middle white collar property.... The former would possibly require a lower dp than the later. It also obv depends on your finances. That is why I dont think a predetermined % cost is a factor , other than the min 25% that is used. So many considerations with each property standing on its own merits. In a sense your buying quality, like a AAA vs A investment... different expectations with investment and rate of return, if im conveying it well.

sailwind said:   Noob question. Do you deduct the rental mortgage interest paid against the rental property income? Or just as a normal mortgage interest expense like your owner occupied property? Does it make a difference? Because in the end it seems like it's the same income deduction. Never done this before.

You deduct ALL your expenses from the rental income, to arrive at your NET rental income
These deductions include, but are not limited to: mortgage interest, taxes, utilities if you pay them, condo/homeowner fees, depreciation on the building and any furnishings or equipment, repair expenses, bank fees, mileage expense to check/fix/collect rent, Insurance.

Keep your reciepts, as the irs can ask you years later to prove something.

sam81 said:   Thanks for the replies. I own a rental property in a college town, which I bought for $125K. Rent is like $1000-1100/mo, but I spent close to $ 3000 on maintenance on top of mortgage interest, HOA, management fees, taxes and 2500 miles of vehicle use. How does $ 3000 sounds for maintenance here. I have the receipts/details, but does it look too much? Sadly, got bad tenants this year and second half of the year just got numerous maintenance calls.

Hey it happens, I had 2 years in a row of large expenses, new furnace and the next year new air conditioner, each was about 2.5K plus the normal little stuff, just remember to call the big improvements as improvements, you will be able to depreciate them over time, being super agressive trying to claim everything as a yearly expense will raise a flag (ex new fence or new roof as expense is not a good idea).
I know its not fair, when you shell out a couple of grand for something, and then don't even get to claim it that year, but thats the way the rules are.

OliverQuackenbush said:   hello my good friends, may I ask two questions? I have a rental property and rent checks are paid to a sole priproiter LLC. The LLC has a bank account that the rent checks and a little extra money is deposited into. The monthly mortgage payment is paid using these funds in the LLC bank account.
1) Since the rent is paid directly to the mortgage company from the LLC and I do not receive a dividend or income from the LLC, I just need to claim the rent on the schedule C and I do not need to claim the rent as income and do not need to pay tax on it, correct?
2) Am I entitled to claim the mortgage interest tax deduction the mortgage company sends me even though it is the separate entity LLC that is paying the mortgage and not me?
Thank you friends.

You might want to consider paying an accountant for the first year, so you see how things are done.
I'm not an accountant, and I'm sure there are lots of details you didn't mention, my answers would be:
1) LLC's will flow through the profit or loss to the owners.
2) no, the LLC is already off-setting the rental income with mortgage interest expense (that is how you benefit via flow-through)

This thing where you put in a little extra $$ to the LLC bank account, could easily land you in some issues. If its a loan, write it up and deposit the amount all at one time (thousands), right now it could look like you are renting out something else or some other business and not declaring the income from it.

Thank you guys very much for your time in helping me. I am from the website slickdeals. This website is much better so I plan on coming here often. Thanks!!

I wanted to update on what I decided to do with my question from last month.

I'm refi-ing the first on my old residence (now rental). It was on a 15 year fixed. Moving to a thirty year fixed. Payment will be about $700 month less and a much higher percentage of the payment will be interest, i.e., deductible.

Also opening a new HELOC of $115k on my new residence, and using $100k to pay down the HELOC on the rental (which I concluded was likely not deductible--the HELOC was taken out to buy new residence, which research revealed is not a business expense). The other $15k from the new line on new residence will be used to put in AC and do some other improvements, making the interest on that entire $115k line deductible.

Be careful with the mindset that PAYING interest to a bank to get a tax DEDUCTION is good. It is almost ALWAYS better to NOT pay interest versus paying interest and somehow thinking you "make" money by getting a decuction on that money you spent on interest.

tehlorax said:   (I thought) I remember reading a few years ago in this thread that creating an LLC wasn't worth the cost surrounding it and it made it hard to get financing. Instead a good umbrella policy was the suggested route. Since I've started checking this thread regularly again, I see constant mentions of LLCs.

Did I dream reading that?
I know that every situation is different, but do most people here use them?

I still do not advocate using a LLC. And from the multitude of questions about them here, it continues to appear that they are more trouble than they are worth. IMHO, insurance is the way to go.