New Tax Laws Benefit Landlords

Through a late provision added to the tax legislation, the new GOP tax plan signed into law on December 22, 2017, gives landlords and real estate investors the potential for a large tax break. The Tax Cuts and Jobs Act (TCJA) permits landlords to take advantage of a “pass-through” provision intended to benefit limited liability companies, partnerships, and other “pass-through” businesses.

What is a Pass-Through Business?

A pass-through business is a business entity that “passes” business income through the business to the owner or owners instead of paying corporate taxes on the income. Therefore, the income is taxed as personal income at a lower tax rate instead of being taxed at a higher corporate tax rate. Many sole proprietors operate their businesses as pass-through businesses, including landlords and property managers.

How Can Landlords Take Advantage of the Pass-Through Deduction?

Under the TCJA provisions, a person who owns rental property can qualify for the same tax break as a pass-through company. In other words, if a landlord operates his rental properties as a sole proprietorship, S corporation, a limited liability corporation, or a partner in a partnership, he can qualify for the tax break.

Landlords who operate their business as a pass-through entity can deduct up to twenty percent (20%) of the net rental income. In other words, a landlord pays taxes on 80 percent of the net rental income. This deduction is a personal deduction; therefore, a landlord can also take advantage of all other business deductions.

Furthermore, because the individual tax rates are lower for 2018 under the TCJA, landlords and real estate investors can also benefit from the lower tax rate. Depending on the tax bracket, a landlord could see a six percent (6%) decrease in his tax rate. The deduction and lower tax rate are huge incentives for landlords to organize their businesses to qualify for the pass-through deduction.

Two Important Notes for Landlords Who Want to Use the Pass-Through Tax Deduction

One very important note, you are only entitled to the full twenty percent (20%) discount if your taxable income from all sources is less than $315,000 after deductions if you are married filing a joint tax return with your spouse. If you are single, your taxable income from all sources must be less than $157,500 after deductions. If your taxable income exceeds the maximum amount, your pass-through discount may be limited.

Another note to keep in mind if you want to set up your rental properties as a pass-through entity. The details of the new pass-through tax deduction have not been worked out by the Internal Revenue Service. An important question is whether property management will be considered a personal service business. If so, the pass-through deduction could be phased out completely for some taxpayers.

Taking Advantage of the New Deductions to Prepare for Retirement

Individuals searching for ways to create passive income, especially retirement income, could benefit substantially from the pass-through provisions in the TCJA. When compared to the volatile nature of investing in the stock market, investing in rental properties could be a safer way of earning passive income if the long-term expenses of owning real estate make sense to do it.

Because the tax law is new, and the IRS is still working out certain details, consulting a tax professional and investment adviser is a wise first step if you want to invest in rental property as a means of earning passive income.

Looking for a Property Manager ? 16 Questions to Ask, Final Installment13-16

  1. When do you typically pay landlords the rents collected?

Why is this important?  Remember that the property manager has a fiduciary duty to manage your money.  Knowing how long the manager waits between collecting rents and giving them over to you helps with your own business budgeting (because owning rental income properties is a business).  Don’t schedule to pay a bill on the 5th of the month if the collected rents will only be available in your account on the 10th.  Also, beware any manager who holds onto the rents longer than is truly necessary.  Typically rents should be paid to you before the 10th business day of the month.

  1. How do you pay rents collected?

Why is this important?  It is infinitely more efficient and faster to have rents direct deposited into your bank account, than it is to have to wait for a check.  However, the answer to this question will let you know if the method you wish to conduct your business is even available to you.  Some managers may not send out checks, doing everything electronically and you may prefer a check.  In addition, some methods of payment may incur a “service fee” which you will need to budget for and which you will definitely want to know, up front when you are still comparing your property manager options.

  1. How do you handle tenant emergencies?

Why is this important?  Income property owners need the dependability of long-term tenants in their properties.  Each time a property is vacant, that represents lost income for the duration of the vacancy.  Property managers who handle tenant emergencies well and who have access to repair people who can make emergency repairs as well as normally occurring ones timely and pleasantly are more likely to attract and keep the types of tenants an income property owner needs.  It is important that any property manager you hire knows that there is a correlation between how responsive the manager is to the tenant when there are issues at the property and how likely the tenant is to renew a lease.

  1. What is the eviction process in this state for tenants who don’t pay their rent and how long does it take to evict a non-paying tenant?

Why is this important.  No matter how great your property manager is, or even how great you are as an income property owner, evictions will happen.  They are greatly minimized with an excellent property manager, but even the best of managers cannot predict life events that sadly may put a tenant into a situation where rental payments are not made.  It is good for your business planning to know  the eviction process occurs and how long it might take from the date eviction proceedings are started, till the property is returned to you so it can be rented out again.  Unfortunately, in some states, the eviction process is very lengthy and a tenant can stay in a property for up to a year, without making a single rent payment.  Knowing this, lets you plan for perhaps  needing to make mortgage payments and property tax payments from your own funds, instead of rental income funds, for the duration of the eviction process.

Knowing the eviction process and in particular how your property manager handles that process also lets you know if the property manager is willing to both file an unlawful detainer action on your behalf and appear in court on the matter, or if you need to do that.  This is particularly important to know if you have an out-of-state income property that is being managed, because if your property manager will not file the matter for you, or appear in court on your behalf, you will need to travel to that state for each hearing.  There are often several hearings on an unlawful detainer action after it has been filed.

 

Photo Credit: Copyright,  Michaeljung

Five Signs Your Locks Need To Be Replaced

By: Ralph Goodman, Guest Author

Home maintenance is a huge responsibility that tenants and landlords have to worry about at some point in time. There are very few things on this earth that are meant to stay in pristine condition forever, and as such, maintenance plays a huge role in determining the longevity of any product, including locks. Some landlords install new locks on apartment doors and do not ever worry about replacing them until the lock is damaged to the point that a tenant is locked out of their home. The act of replacing door locks is one that should be undertaken every few years, but sometimes landlords and tenants are not sure what they need to look out for when it comes to replacing their locks. This is not a big problem at all, we are always here to help. Let’s take a look at some of the signs that it might be time for you to replace your locks.

1.Recent Break-In

If you and your apartment unit have been recent victims of break-ins and burglaries, then it might be a good time to replace the locks that you have on the doors around your home. In some cases, burglars end up damaging the locks to your home as they attempt to force their way in. In other cases, they simply show you that the locking mechanism you had in place is barely keeping you safe. This is one of the clearest signs for tenants and landlords that it might be time to replace your door locks.

Door locks play a huge role in your home security and decisions about them should never be taken lightly. Burglars tend to inflict a lot of blunt force trauma on locks, and this prevents them from being as effective as they once were. That is why it is imperative for tenants to talk to their landlords about damaged lock repair or replacement if they have been recent victims of a break-in or burglary. Landlords can also improve the locks to make them more resistant to burglars. This can be done by adding security pins to the lock, using longer screws to install the lock hardware, and also by utilizing deadbolts with a longer throw.

2.  Wear and Tear

Locks undergo a lot of stress over time, especially locks that are subject to heavy traffic day in and day out. Their constant use in conjunction with the effect that natural elements have on them leads deterioration over time. Old and worn locks tend to become rusty, and they start to stick, which makes the process of unlocking and opening a door a rather complicated one. Aside from the fact that it is a hassle to open doors, there is also the issue of your home security being put at risk. Locks that are old are much easier to pick and break, so it is advised that you replace your locks as soon as you notice this is happening to them.

In some cases, this natural aging process can be slowed by regular maintenance. This might involve lubricating the locks and handling them with more care. Properly maintaining your locks over time will decrease the chance of breaking a key in a lock.

3.  Changes In Your Neighborhood

In some cases, the indication that you need to replace your door locks does not come from the lock itself, or from within your home. There are times where the state of security in your neighborhood might change. Perhaps your community used to be one of the safest in the country, but if you or your neighbors are falling victim to a string of recent break-ins and other related crimes, it is a good indication that you should probably replace your locks. The locks on your door are meant to restrict the amount of access that people have to your home. If your neighborhood is becoming unruly, it is important to make sure that your locks are up to the task of keeping your tenants and your property safe, and if they are not, then you should replace them.

4.  Lost/Stolen Keys

In the event that your keys are lost or stolen, it is crucial that you replace the locks on your door. Misplaced or stolen keys automatically decrease the effectiveness of your home security, because your key control over your apartment unit or property has been reduced. There are some landlords who will make the assumption that no one will come back and attempt to use the key to gain access to your property, but it is always better to be safe than to be sorry.

Replacing the lock on the door will negate the possibility of anyone gaining easy access to your home or property, and it will help you boost your home security in the process. When you lose your keys, or if you suspect they are stolen, you should never dismiss it as a minor issue, because it is not. It is advised that you contact a trusted locksmith and have them replace your locks as soon as possible.

5.  Your Locks Are Old

This might seem like a really obvious point to most, but it will surprise you that there are landlords and property managers who do not change their locks for years. In some situations, it is easy to understand why. The lock has not failed you all this time and it continues to work fine, so why would you waste your time and money trying to replace a lock that has not let you down? I admire this way of thinking, but it is impractical. Technology moves fast, and there are always changes looming on the horizon. If you have not changed your locks in a very long time, it is a clear sign that you need to replace them, no matter how good it might seem to you. Make sure that your locks are able to withstand every modern method that a burglar can throw at them, so that they are keeping your property and your tenants safe.

Conclusion

There is never any downside to replacing the locks on your door, unless you replace them with locks that are worse (but why would you do that?). The locks on your doors are an integral part of your home security, and better security helps your property stand out from others. There are many other reasons that might prompt you to change your locks, however, these are the 5 most prominent ones that most homeowners deal with on a regular basis. Hopefully, this list will help homeowners make the right choices when it comes to their locks and also helps you stay vigilant when it comes to the state of your home security.

 

You can find more informative and lock and security related  blogs written by Ralph Goodman at:  http://united-locksmith.net/blog/author/ralph

Looking for a Property Manager ? 16 Questions to Ask, Cont. 10-12

10.  Do you charge a leasing fee?

Why is this important?  Many managers simply charge the percentage of rents as their fee regardless of whether or not they have to secure new tenants during the term of their management agreement.  Many other managers are willing to charge a lower percentage of collected rents but will add a leasing fee to their agreements.  Leasing fees can add up to a substantial amount of money, effectively more than the difference between 8% with a leasing fee and 10% without a leasing fee, so it must be considered in any financially-based decision to hire a manager.  Some leasing fees are charged with every new lease written while others are charged once in the same calendar year for the same property.  Don’t assume you are getting a great deal because a property manager has agreed to manage your properties for a lower percentage than others you have spoken to.  Ask about the leasing fee.

11.  Do you require that I give you a deposit to hold for property repairs?

Why is this important?  Some property managers require that you allow them to hold additional monies for “future” repairs as they may arise.  This repair deposit is generally between $200 and $500 dollars (often more for a high-end property) and will be used by the manager to pay repair people who perform general wear and tear repairs on the property during the tenancy of the tenant.  This provides some funds for the property manager to pay repair bills on your behalf if the collected rents will not cover them completely, or if there is a delay between when the rents are collected and repair invoices are due to be paid.  If you have more than a single rental property, or if that single property has a high income rental rate, then it is generally unnecessary for you to provide a repair deposit to the property manager.

Remember, also that it is generally considered fair and reasonable to ask that a tenant pay a deposit that is equivalent to a month’s rent.  Often a smaller additional deposit is required if the tenant has a pet, in the event that the pet causes additional damage to the property.  Your property manager will generally hold these deposits in trust for you and will act according to local law and regulation to deduct repair and damage costs from it upon the tenant vacating the property.  Carefully consider the reasons why a property manager says that a repair deposit from you is necessary because that will be income that will be unavailable to you for the duration of the property management contract.

12.  Will you please send me a copy of your typical property management agreement?

Why is this important?  Even my list of tips is not exhaustive.  There may be clauses in the property management agreement that you don’t like.  Never hire a manager without first looking at the type of agreement you will be required to sign.  Also, and people forget this constantly, if the property manager (or the property manager’s legal advisor) wrote the agreement, it is definitely going to be written in a way that fully protects the property manager, not you.  You can ask that clauses be added to protect your interests as well.  So secure a copy of the contract and get some legal input on where your risks are and how to guard against them by adding additional language to the contract.  Getting a copy of the property management agreement in the interview stage allows you to compare the contracts of the managers on your short list and can help you make your decision.

Stay tuned for Questions 13 through 16, up next…!

An Important Holiday Safety Conversation You Should Have With Your Tenants

Holiday time is a wonderful time of year, but it does not come without risks for homeowners and tenants who decorate their homes. rentUSAnow.com recommends that property managers and landlords develop policies regarding safe holiday decorating and that these policies are effectively communicated to tenants. Some basic recommendations are:

  1. Smoke and carbon monoxide alarm batteries should have been changed when the clocks were turned back for Daylight Savings Time. It is important to remind tenants that if they did not comply with your request at that time, now is the time to change the batteries and check the working status of these alarms.
  2. When unpacking string lights, carefully inspect the cords for signs of wear or damage. Damaged string lights should never be used. Always turn off string lights when leaving the room. Never leave string lights on overnight.
  3. Candles are not recommended. There are a variety of flameless choices and these are preferable. If traditional flame candles are used, they should never be left unattended, should be placed on fireproof dishes and should be extinguished when leaving the room.
  4. Never overload extension cords or power strips. Follow the manufacturer’s recommendations diligently and carefully inspect the cords for signs of wear or damage before using.
  5. Live trees are not recommended. If they are used they must be watered daily. Property managers and landlords may wish to write a policy prohibiting live trees.
  6. Use fireplaces with care. Do not mount wreaths above fireplaces or place any flammable items within five feet of a fireplace that will be lit. Stockings should never be hung on a fireplace that will be lit.
  7. Fire extinguishers should already be installed in kitchen areas, but tenants can be encouraged to purchase additional extinguishers that can be temporarily located near Christmas trees, fireplaces and in heavily decorated areas, as an added measure.

Happy decorating!

Looking for a Property Manager ? 16 Questions to Ask, Cont. 7-9

sas-goodnight-quote-pic  7.  Have you or any of your staff been charged with a crime or felony related to the management of other people’s money or any money-related crime? Has any property management company you have owned or work for ever filed for bankruptcy?

Why is this important? The property manager collects your tenant’s rent payments, deducts the management and repair or maintenance fees and must give you the rest. Misappropriation of your money will be devastating. This is an important question to ask and too often it is never asked. If a property manager feels this question is too intrusive, just move on. There are many reputable property managers and in states where licensing is required the licensing process requires fingerprinting and background checking. However, the lag time between licensing and renewals and between the filing of charges and a conviction could mean a person is licensed but has not yet addressed an issue like this with the licensing board. If a property management company has filed for bankruptcy it likely experienced severe business mismanagement and should raise questions for a landlord and should be discussed.

It is also a good idea to ask if and how the property manager vets vendors who do repairs and maintenance on properties. Also ask if the property manager requires them to have a bond and insurance. This is particularly important if repair personnel will be given access to tenant occupied properties, especially when the tenant is not home.

  1. When choosing someone to undertake a repair or maintenance at a property, how many quotes do you obtain for the job?

Why is this important? Some property managers have a contractual (sometimes just a verbal one) or a mutual service agreement with their friends or family in the business. They will only steer the work their way and not open it to competitive bid. You want your work to be competitively bid on to make sure that you are getting the best price for the job. It is, of course, fine for the property manager to secure bids from friends and family, so long as they are properly qualified to undertake the work, have all applicable state and local licenses to do the type of work contracted for, are not overcharging to “kick back” a portion to the property manager for the referral and will guarantee the quality of the repair. This also goes back to the vetting process mentioned above, but competitive bids help you to know the work is being done at a market reasonable cost.

  1. What percentage of the collected rental income do you retain for your management fee?

Why is this important? It is what you are paying for the property manager’s services. In residential management, this number is usually between 8% and 10%. In commercial, it is more often a negotiated percentage based on the total collected rents and the size of the property and it can be as little as 5% and as high as 15%, or more depending on what is negotiated and the extent of the work involved. Whether residential or commercial, you can negotiate this number. It is not a given. Remember to take into account the amount of work involved for the manager and the amount of rents that will be collected. This is a cost of having someone else manage your properties, but it will also decrease your annual income by that amount, so consider it carefully.

Stay tuned for Questions 10-12, up next…

 

Looking for a Property Manager ? 16 Questions to Ask, Cont. 4-6

Interview Credit Alan Cleaver
(Photo Credit: Alan Cleaver)

Introduction Recap:

 Always “Interview” Your Property Manager

The first step to securing a property manager for your property is for the property owner to be clear about the purpose of renting the property. Is the purpose to secure passive income; or to rent until the market improves so it can be sold; or is it being rented till the owner can move back in after a time away? If the purpose is to secure passive income, this is generally a long-term plan to keep the property as an investment and selling it is usually not a consideration. Renting till the market improves to sell and renting till the owner can move back into the property are generally shorter-term rental plans. Keeping the purpose in mind, a property owner can create a list of property owners using rentUSAnow’s search tool and then can interview potential property managers using these guidelines:

  1. How many properties are in your portfolio?

Why is this important? Depending on the size of the company (a question we will get to), this tells you two things: How many people trust the manager with their real estate; and, how busy the manager and his/her team are. Trust in a property manager must be well-earned. The manager handles both your income and the value of your property (equity) based on how well the home is maintained and looked after by the manager and the tenant. Good property managers are busy property managers. Good property managers ensure there are enough members of their team to handle the numbers of properties they manage. The important follow-up to this question is:

  1. How many staff members do you have and what qualifications do they have?

Why is this important? For the reasons stated above. There need to be sufficient team members to handle the number of properties in the manager’s portfolio. It is also important to know that qualified people with experience are dealing with your tenant(s) so that you don’t run into legal issues with the way the property is being managed. Some recent case law has suggested that a landlord is not entirely immune from liability for the actions of the landlord’s property manager. Same will go for the actions and behaviors of the manager’s staff. It is always excellent if the property manager has credentials and association membership for continuing education. It is even more excellent if the manager hires staff who also have experience, credentials and association memberships and who also participate in continuing education on topics important to the industry.

  1. What is the longest property management agreement you have ever had?

Why is this important? Trust. I reiterate how important trust is in this relationship. A long-standing property management agreement lets you know if the property manager has been able to establish ongoing relationships of trust. I personally have a property management agreement with a property manager for four out of state properties that is almost ten years long. That’s trust!

Next blog, Questions 7 through 9…

Looking for a Property Manager? 16 Questions to Ask

Interview
Always “Interview” Your Property Manager
The first step to securing a property manager for your property is for the property owner to be clear about the purpose of renting the property. Is the purpose to secure passive income; or to rent until the market improves so it can be sold; or is it being rented till the owner can move back in after a time away? If the purpose is to secure passive income, this is generally a long-term plan to keep the property as an investment and selling it is usually not a consideration. Renting till the market improves to sell and renting till the owner can move back into the property are generally shorter-term rental plans. Keeping the purpose in mind, a property owner can create a list of property owners using rentUSAnow’s search tool and then can interview potential property managers using these guidelines:

1. Are you a realtor, licensed real estate professional, or a member of a property manager association like National Association of Residential Property Managers, American Apartment Owners Association, etc.?

Why is this important? In some states, a property manager is required to hold a realtor license and be licensed by the state. It is important to find out from your state’s real estate commission if this is required and to check the licensing status of the property manager to ensure that the manager is in good standing with the commission and that there have not been any adverse actions taken against the manager for poor professional practices.

In a similar vein, the NARPM and the AAOA have standards of conduct that they require members to comply with. These associations also conduct educational sessions to ensure the ongoing education of their members of the newest trends and changes in local and federal laws regarding the industry. You want your property manager to be up to date on local ordinance and federal law and to be interested in participating in ongoing education related to the property management profession. You can also check whether the prospective manager is a member of these associations by contacting the association directly.

A follow up question to this is to ask if additional staff at the company are also licensed and/or members of the industry associations. This will be addressed below.

2. Do you have a resume? Please send me a resume.

Why is this important? Remember that the property manager is asking you to employ him/her and you will be paying for any services rendered. You are entitled to know what education and experience the manager has and knowing this information is critical to being able to properly evaluate the manager’s ability to manage your property. I would not hire a manager who was not willing to send me a resume for the job, and any manager should be willing to supply a resume, even if it means sitting down and writing one because nobody has asked for it in years. The resume may even answer the next two questions, but in case it does not, here are two other questions you should always ask:

3. How long have you managed properties belonging to others?

Why is this important? Some property managers only have experience managing their own properties. Others “fell into” the job because they were doing something else and were asked to take on the management of a property as well. This is how I got started. I was working for an attorney who asked me to help manage his properties as part of my job. He supervised me, but in that early stage of my experience I was definitely not qualified to step into the profession as I had a lot to learn. A number of realtors also contemplate adding property management to their portfolios. They have some advantages, such as knowledge of the market and what is market rent, but a property manager holds a fiduciary duty to the property that goes beyond what is taught in real estate school, because the property manager holds the owner’s rent money when it is paid by the tenant and that requires knowing the laws in a different way than is taught to realtors who are taught to represent the buyers and sellers of real estate. You want an experienced property manager, not a realtor who also manages properties. You may also want an experienced property manager who is also a realtor who can assist you to market and sell the property if that is your purpose at a later time. You want someone who is a property manager first. One with demonstrated experience as a property manager.

Next:  Questions 4 through 6, found here

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Should I Use A Realtor To List My Vacancy?

Yard Sign Snapshot Proof - BLACK By: Eveline Brownstein

Recently, I had a property listed for sale which after a short (3 month) listing did not sell. The home suffered extensive damage during Hurricane Sandy and I rebuilt it. The property market in that area is still a little skittish and the majority of buyers are looking for the incredible deals on damaged homes that they can fix up themselves. The advantage for most investors in rental income property is that even when they decide it might be time to sell, they never dismiss the idea that if selling is no longer an option, renting is a viable alternative.

The dilemma for investors seeking to rent their homes is that the best known website for listing homes, realtor.com is also exclusively fed its data by the Multiple Listing Service which only realtors (real estate agents who are members of the National Association of Realtors) have access to. So it is not possible for regular folks who are not realtors to place their listings on that website.

The other, and perhaps most important issue, landlords and non-realtor property managers face is that if they hire a realtor to find them a tenant, the fee typically charged by that realtor for the listing is one month’s rent. One-twelfth of the property owner’s yearly income on that property. Some rental listing contracts also require that this fee is paid upon each and every lease renewal by the original tenant secured by the realtor. Everything contractual is negotiable, but given that there are fees charged to realtors for their use of the MLS, annual NAR dues and local chapter dues, most will not negotiate a whole lot on the “one month’s rent” listing fee.

How can you evaluate whether or not hiring a realtor to list your rental is cost-effective? Put another way, what are your alternatives? One alternative is to use a national rental listing website, like rentUSAnow.com which allows you to list your rentals, with pictures, for free. Similar websites charge a listing fee, which is likely to be less than the realtor fee. When evaluating these options, also consider if you have the time to field the phone calls and emails and for showing the property. If you do, then there is no reason not to use a rental listing site, especially a free one.

When is it cost-effective to give up 1/12th of your annual rental income? When you do not have the time to manage the process, including the background checks and showings. It is also a good option when you are an out-of-state landlord who may not be entirely familiar with the market in which the property is located. In this case, a realtor can provide valuable information about what the market rate is for the property and can conduct tenant screening and property showings. One other thing that realtors have that you may not is a network of other realtors who are also motivated to bring prospective tenants to your property in exchange for a percentage (typically ½) of the listing fee.

In the case of my rebuilt Hurricane Sandy home, it was more cost-effective to hire a realtor, since I was working on an assignment at the time and would have lost valuable hours to the task of finding a tenant. In addition, the realtor was highly motivated. He sought me out, noticed that I had the home listed for rent and was already familiar with it after bringing prospective buyers by during the sale listing period. He also assured me that he could get a higher rental for the property than I was asking to which I replied, “If you can do that, the rental listing is yours.” And he did.