Gimme Shelter! Five Tax Deductions for Property Owners

GimmeShelter

Happy Tax Day! Are you looking for deductions, tax shelters, tax havens, any kind of tax relief? I certainly am….

Guess what? Rental properties are ripe with tax deductions to help relieve you of your annual tax burden. I am not an accountant but I do have my favorite deductions which provide low-hanging fruit-rationale for considering a rental property investment. My top five tax deductions are:

Depreciation

Your rental home, condo, or apartment building cannot be written off all in the year you purchased it; the IRS considers it to be long-term property. Technically, any item that lasts more than one year is considered to be a capital asset and therefore, long-term property. Examples of this are everywhere in a property: the building itself, the roof, the carpet, refrigerator, and on and on. Because these capital assets last more than one year, they are subject to depreciation, which is a process of writing off the asset every year over the general useful life of that particular asset. It is not complicated, but honestly, this can get pretty in-depth depending on how far you or your account might be willing to take it.

Depreciation starts with the property’s basis (what it’s worth today) and an IRS-mandated recovery period for the capital asset. For a building or home, the recovery period is 27.5 years and for capital assets, such as refrigerators, carpet, or roofs, the recovery period can vary from 5-27.5 years. So, in its simplest form, if the value of the building (not the land value) is $100,000 then every year, for the next 27 years, you can depreciate $3,636.36 ($100,000/27.5 years). Let’s say your rental home needs a new refrigerator. Generally (using the general method in accounting parlance), you can depreciate that refrigerator over 5 years. So your $500 refrigerator can be depreciated annually for $100 over the next five years ($500/5 years). Therefore, you are now depreciating $3,736.36 because of the building’s plus the refrigerator’s depreciation.

The rub to depreciation is called recapture. What you depreciate today needs to be recaptured by the IRS when you sell. So, using the example above, if you own the rental home for ten years and have depreciated $3,636.36 every year (let’s forget about the refrigerator or any other capital assets), then you have depreciated a total of $36,3636.00. If you purchased the rental home in 2005 for $150,000 and you sell it in 2015 for $250,000, you think you have $100,000 of profit that should be taxable. Not so fast……because of the depreciation you applied during those ten years, your taxable amount is now $136,363 because you sold for a $100,000 profit and you must recapture the $36,363. Recapture only exists for capital assets that have been following a depreciation schedule.

As you can see above, this can get quite hairy. It’s probably best you hire a solid accountant to help you manage and keep track of the complicated depreciation schedules that accrue. Regardless of the perceived complexity, it all adds up and provides a nice tax benefit for property ownership.

Interest

This is a big one – probably your biggest deduction. Basically, you can deduct any interest paid that you or your business accrues from 1) the purchase of a property through a personal loan or mortgage, 2) property improvements made from a personal loan or mortgage, or even 3) any general business services or products pertaining to your rental business, even if paid for with a credit card.

This is easier to calculate than depreciation but may require more documentation to back it up. Mortgage companies will provide you with a Form 1098 which will show how much interest was paid during a particular year. It is important to note that the principal payments do not qualify to be deducted – only the interest portion can be deducted. Instead, the principal amount typically gets added to the property’s basis. For example, if you were getting a $20,000 second loan to pay for a kitchen renovation, then the $20,000 would add to the property’s basis and follow it’s respective deprecation schedule, but any interest payments made during the life of the $20,000 loan can be deducted.

Again, it all adds up and interest is usually the largest deduction for most property owners.

General Repairs

Your home or building will require repairs and maintenance, all of which is deductible. This can be anything from a plumbing bill for a leaky sink to weekly lawn maintenance. The only place this gets tricky is when you add a capital asset to the repair, assuming you replace the faucet to repair the leak. The faucet can be put on a depreciation schedule while the general repair can be deducted.

Travel

Any travel activity pertaining to your rental business can be deducted – normally trips to your property or to the hardware store, etc. The deduction for this kind of local travel falls into one of two methods (not both!):

  • Depreciating your vehicle and expensing gas, repairs, etc. This generally works well for “company cars” that are used primarily for the purposes of supporting your rental business. Depreciation schedules vary based on the type of car, SUV, or truck you buy, so it’s worth looking into it for your particular vehicle.
  • Deducting mileage based on today’s standard mileage rate. This works well when you use your personal vehicle for the purposes of supporting your rental business. The mileage from any trips to your property, the hardware store, etc get added up and applied to the current mileage rate for reimbursement to you from the company; then, that reimbursement gets applied as a deductible expense.

Long distance travel that applies to your rental business also applies, including airfare, meals, hotels, car rentals, etc. It is very important that you document every receipt and every mile during your travel for your records. I highly recommend a simple application called Expensify to help manage all receipts digitally – I never deal with paper receipts…..ever.

Home Office

If you have an office at your home and meet certain IRS requirements, you can deduct a certain portion of your home’s expenses for your home office. In my honest opinion, this one gets complicated and it further complicates things if you also own your personal home and are looking to take advantage of your capital gain benefits from your personal home. If you deduct your home office, you erode your cost basis on your personal home and may get you outside of your capital gain tax-free benefit. Again, talk with your accountant about this one.

Tax benefits are a great reason to invest in real estate and hopefully these five deductions can help you consider an investment property as you consider you next tax day.

Happy renting!

You MUST pay rent online!

I-Want-You-Pay-Rent-OnlineObviously, the RenterUp team is passionate about paying rent online. To us, it simplifies everything for both the tenant and the property manager. For the tenants, no more digging for checks, envelopes, and stamps. The value for property managers is even greater: there are no more checks, cash, or money orders to be lost or stolen; there are no more costly trips to the bank; and, honestly, manually reconciling rent payments is a tremendous time killer.

We believe everyone should pay rent online; we do not believe everyone must pay rent online.

I recently stumbled upon a story from July 2014, by Lindsay Bramsom at KXAN, an Austin-based NBC affiliate station, describing how an apartment complex in Austin was forcing their tenants to pay rent online. Forcing them. (View or read Lindsay’s piece here: http://snip.ly/aGKc)

Forcing tenants to pay rent online is bad business. I manage seven units and have personally seen the challenges many of my tenants have with online payments: some don’t have email accounts, some don’t have checking accounts, and many don’t do well with online accounts (“I can’t remember my password” and “I don’t have internet” are the two reasons we often hear).

At RenterUp, we believe that providing rental payment options to tenants is good business. Next week we will officially announce our newest product to support the needs of cash-paying tenants, like many of those in Lindsay’s story. Our product, called Paper-or-Plastic, will allow tenants to pay rent directly in the registers of normal check-out lanes at any of tens-of-thousands of nationally recognized big-box retailers. More details will be available next week.

The point is that property managers and apartment complexes would do well to provide more payment options rather than imposing payment types. Providing more payment options illustrates goodwill and understanding that everyone’s needs are different.

We believe everyone should pay rent online, but we don’t believe that should be so limiting – we believe online can mean rental payments via cash, money order, check, or credit card.

 

5 Simple Steps to migrating from SparkRent to RenterUp

 

renterup_sparkrent_closingChange is never fun. It’s especially not fun when it involves changing your ability to receive rent payments. Since SparkRent’s recent announcement, we have received hundreds of calls and emails about our features, capabilities, and the work involved to migrating to RenterUp. I thought it best to distill it down to 5 easy steps, which take about 120 seconds for your first property and about 60 seconds for each additional unit. To migrate from SparkRent to RenterUp, you must:

  • Sign up for RenterUp. Start off by adding property information for all of your rental units.
  • Add rent rules and late fees. You want to collect rent, right?
  • Add tenants to each rental property. If you’d like, you can customize a personal email to each tenant to guide them through their account setup. If you rather send a pre-canned email, we have that ready for you as well.
  • Add your bank account information. We do need to know where your rent should be delivered! For security purposes, we will need to verify your identity.
  • Relax! RenterUp has all reminders and notifications covered.

Your tenants will receive your email about RenterUp and click through a link in that email to quickly set up their account. They will add their bank account information and verify ownership of that account to be ready for all future payments. When rent is due, they simply click “Pay Rent” in RenterUp and it’s done.

You can learn a little more HERE, or if you have questions or concerns about migrating from SparkRent to RenterUp, please don’t hesitate to call or email us. We can talk you through it!

Late Fees. Better Late than Never.

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Late fees. I wish I could tell you that all of my tenants pay their rent on time and, therefore, I don’t have to deal with late fees. Sadly, it’s just not the case for me.

I love hearing from different property managers about how they handle their late fees. I hear everything from “I have good tenants, therefore, I never have to use late fees;” to “My tenants pay on time because they certainly don’t want to be stuck with a $150 late fee.” (yes, that’s one-hundred-fifty American dollars!)

When considering late fees, there are a few important points to keep in mind:

  • You cannot enforce a late fee unless it is documented within the lease agreement
  • Many states set limits on the amount that can be charged for late fees
  • Most late fees tend to be about 5% of the rent amount

So, RenterUp is very excited to announce that we have officially launched Late Fees into our product. When you set up your rent rules, you can simply define your grace period and late fee amount for that unit. If rent goes beyond your grace period, the late fees are applied and tenants are notified. Simple for everyone.

“But I live in New York and my property is in Los Angeles; when is the late fee applied?” I’m so glad you asked. Each property’s zip code identifies the timezone it’s in, so when midnight hits for that property, the fees are added.

We would love to hear about are your late fees. How do you handle them? Do you really need them? Do they help you? Do you enforce them? How much are they? When do you apply them? Let’s hear about them! Our team is listening and will work to adjust this feature to better accommodate your needs.

Feel free to sign up for a RenterUp account and give it a try for 30 days, free.

Property managers are a creative lot.

bob-ross

My job entails discussing rent with property managers – lots and lots of property managers. Every conversation I have seems to uncover some tactic about rent payments I have not yet considered. I must admit, I seriously underestimated the creativity of property managers as it pertains to rent payment solutions. (Yes, I just called property managers creative.)

For example, one property manager I recently met has his bank send an ATM deposit card (tied to his checking account) to each of his paying tenants. The tenant then takes rent money directly to that bank’s ATM machine for deposit. How does this property manager know which deposit to apply to which home? He changes the rent, subtly, to match the property’s address, so 123 Main Street’s rent might be $1,001.23. I wonder how that month-end deposit matching process goes with 20, 50, or 100 units to reconcile. It seems like a lot of work to me…..but it is creative.

Another creative solution I often hear about are fees, which I blogged about in October 2014 here. Last night, I was talking with a 40+ year property management veteran and he swears by “on-time discounts.” For example, his tenants’ rent might be $800. If tenants pay on or before the first of the month, they get a $75 discount on their rent – no excuses on the second of the month; they pay the full $800 rent.

This creativity in rent payment solutions begs the question: How is there such low adoption for online rent payments when it truly simplifies these processes?

At RenterUp, we realize that changes in behavior are challenging, yet we hear from hundreds of property managers who have creatively deployed hundreds of different solutions. Responsible tenants yearn for a simple way to pay rent and property managers would do well to look for a simple solution. It helps with tenant acquisition and tenant retention. Make rent easy!

No vacancy means no polar vortex. This rental market is hot.

No Vacancy

 

Don’t take my word for it. A simple Google search will provide you with a bevy of data to support the claim there will be no polar vortex for the US rental market this winter…..it is hot, hot, hot. (The question is…..for how long?)

Let’s start with Zillow’s January press release. According to their findings, the US rental market increased 4.9% from 2013 to 2014, for a total 2014 market of $441B in rent. It’s a BIG number.

So, rent dollars are up – what about vacancies? They are down. US census data reports Q4 2014 national vacancies were 7.0%, down 1.2% from Q4 2013 and fairly consistently down in every region. Digging deeper, we are hearing about rental gaps in markets like Asheville, North Carolina, where they are reporting a 1.0% vacancy rate (reported by the Citizen-Times HERE). They claim that 5% vacancy rate makes for a healthy rental market.

Don’t be shocked to see ‘no vacancy’ signs across the US.

What about your region? Is it hot or not?

Vacancy Rates Q42014

 

Vacancies hurt. Wrong tenants hurt more.

VacanciesHurt

Vacancies hurt! I’m convinced that a property manager’s biggest fear is a vacancy. You have a nice tenant that pays on time and then the dreaded, “we will not be renewing our lease.” I personally have a vacancy approaching for one of my rental homes and I’m certainly not looking forward to paying that mortgage on my own. Getting the home ready for its next tenant will be expensive, time consuming, and stressful. Do I rent it to the first applicant with a job and pulse? Probably not…..

Different property managers have different approaches for their properties. Let’s look at a handful of data points that are available for landlords to collect, review, and consider when evaluating prospective new tenants:

  • Rental application – Typically a document used to capture general information about the prospective applicant, which might include details about the prospect’s income (indicating their ability to pay rent), other applicants, other tenants (kids, dogs, etc.), rental history, and referrals.
  • Credit check – Credit checks produce a number, a FICO score, which should never be taken at face value. The full credit report offers much more data and should be fully reviewed before jumping to any conclusions. There are a variety of factors to consider. The Fair Isaac Corporation is the analytic software company that publishes FICO scores and has published a nicely written brochure titled, “Understanding Your FICO Score.” Feel free to download and read that brochure HERE.
  • Background check – As you probably know, the internet can provide a wealth of publicly available background information about people. Beyond your internet searches, there are a number of different types of background checks that can be purchased from third parties. Background checks can include: identification verification, court and/or criminal records, property records, financial information, academic verification, employment verification, and more.
  • Rental history – These reports are newer, but are now available. Rental history reports can shed light on your prospect’s past rental payment history, assuming they have paid rent to a company that would have been submitting rental payment data into the credit bureaus.
  • Prospective renters’ rights  to Equal Housing –  The details of the US Fair Housing Laws can be found HERE, but basically, your prospective tenants have the right to expect that housing will be available without discrimination or other limitations based on race, color, religion, sex, handicap, familial status, or national origin. This includes the right to expect equal professional service, the opportunity to consider a broad range of housing choices, no discriminatory limitations on communities or locations of housing, no discrimination in the pricing of housing, reasonable accommodations in rules, practices and procedures for persons with disabilities, and to be free from harassment or intimidation for exercising your fair housing rights.

It can be a lot to consider but it’s all important. What else is there? How do you get to know your tenants?

 

 

Assigning late rent fees? Check state laws first.

DemandforPayment

We talk a lot about late rent fees and incentives at RenterUp and sometimes I forget that people live in different states with different laws pertaining to late rental payments, fees, and discounts….

In California, Equity Residential, a property owner with about 25,000 units is currently undergoing a class action lawsuit for excessive fees, which alleges the landlord generates profit from the tenants’ fees. The tenants also complain they have no way of knowing their late-fee balances and that the late-fee policies are not clearly documented. According to a Chicago Business Journal  article by Lauren Hepler, the late fees in this case can “pencil out to more than 1,000 percent interest.”

This opens up a can of worms, right? Why should anyone pay rent on time if the state is going to protect them from paying any late fees? However, should property owners be able to realize 1,000 percent interest on late rent fees?

Let’s look at an alternative way to consider the problem, through discounts. Many property owners choose to offer a refund or discount for early pay or even payment on time. For example, your rent might be $1,000 when the landlord only needs $950, so they might say “pre-pay your rent before the 1st and get $50 off your rent.” This takes fees out of the discussion and certainly should look good to a judge, right? Wait! In many states, including Connecticut, “No penalty or discount of any kind can be assessed or offered as long as the landlord is paid by the 10th of the month.” Ouch.

Conclusion? I’m glad I live in Georgia and…..you might do well to look at your state’s laws before getting creative with your fees and discounts. Take a good look at your leases to make sure all fees are clearly documented and consider using a software application, like RenterUp, to help automate communication of any unpaid rent and/or fees which might be accruing.

What about your state? Any good stories of discounts or fees?

Cash is dead.

heres-how-much-the-giant-pile-of-money-on-breaking-bad-is-worth

OK, Cash is not really dead, but undoubtedly, the usage of cash is diminishing. In our quest to simplify rental management, we talk with a lot of landlords and property managers and they love to talk about the challenges of dealing with cash. Yes, cash for rental payments.

The numbers are interesting. Approximately 10% of the US population is unbanked, with no checking or savings account. When asked why they don’t have an account, 49% say they either “don’t have enough money” or “don’t need or want an account.” (source: Federal Reserve Board’s Consumer and Mobile Financial Services 2014 report). Honestly, at an average cost of $268/year, it is easy to understand why many people choose not to have a checking account.

For rental payments, cash has its pros and cons. Let’s explore a few:

Pros:

  • A bird in the hand is worth two in the bush. Cash can’t bounce like a check or be charged-back like a credit card.
  • It is immediate. No need to wait for it to clear.

Cons:

  • Shrinkage! A friend of mine insures a property management firm that has recently discovered they had lost thousands of dollars of cash rental payments and now they want to file a claim to their insurance company to cover the losses. Sticky fingers in the property manager’s office! Uh, oh……it’s completely untraceable….so, did it really happen?
  • From a property manager’s perspective, it is seriously time consuming. Collect the cash, manually record all the transactions, find a deposit slip, count the cash, drive to the bank, and avoid being mugged! I’m exhausted thinking about it.

Without a doubt, cash is here for a little while longer. I imagine that most independent landlords don’t have a problem handling cash payments, but what about property managers with 10 units or more? How do you handle it? What are your thoughts on cash as a form of rental payments? Is it more of pain than it’s worth?

Is Cash Flow King?

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Last week I was talking with a fellow-landlord, Kevin Sandlin, and we began discussing his rental property. His tenants are moving out and he is considering whether it was good time to sell his rental property or just hold on to it. His preference is to sell now but he is concerned about trying to sell it this late in the year – typically the slowest real estate sales months. So now he is considering to continue renting his home. Such a dilemma! Now that the market has heated up for both real estate sales and rentals, I hear about this dilemma more often than ever. In fact, even I may be changing my tune since my August post, To Rent or Not to Rent.

You may recall from that post that my tenants told me they will be moving out and they felt as though they had done me a favor by queuing up another tenant for me. This is indeed nice because the only thing I hate more than a water leak at midnight is a vacant unit in December! HOWEVER…..I am still a bit foggy-eyed from a 2009 real estate hangover and holding real estate is something I had sworn off forever. Yet now we have a real estate market is forcing me to reconsider.

I have had time to reflect on my rental home and I estimate I have an opportunity to increase rent by nearly 20% with a new tenant – a significant bump in my cash flow situation. Is cash flow king? I think yes, it is, and it is calming my urge to sell. Perhaps this once-sworn-off property will live to see another Favero lease. Perhaps.

To be sure, I am getting out the magnifying glass and taking a closer look. Over the years I have developed a relatively robust spreadsheet that conjures memories from my Real Estate Finance classes in college; this spreadsheet helps me evaluate any potential real estate investment. Stripping it down for simplicity, I evaluate cash flows as below:

  • Potential Income (rents)
  • less Vacancies
  • plus Other Rents (parking, fees, etc)
  • equals Effective Gross Income (EGI)
  • less Management Fees (in my case, I call it the “I hate being a landlord” fee)
  • less Operating Expenses (property taxes, dues, insurance, repairs, utilities, etc.)
  • less Replacement Reserves (I use 10% of rent for this value because I cringe at the thought of replacing a roof)
  • equals Net Operating Income
  • less Debt Service (mortgage)
  • equals Before Tax Cash Flow
  • less income taxes (somewhat complicated but basically estimated by taking EGI less Operating Expenses less Interest Expense from Debt less Depreciation equals Taxable Income multiplied by Tax Rate equals Tax)
  • equals After Tax Cash Flow

There are a number of other considerations beyond cash flows, but for now, this where I am focusing.

Am I missing any major expenses or considerations? Do you face these same questions? I know it is a good problem to be facing, but I struggle with it nevertheless.