property investment

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

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 5^th of the month if the collected rents will only be available in your account on the 10^th. Also, beware any manager who holds onto the rents longer than is truly necessary. Typically rents should be paid to you before the 10^th business day of the month.

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.

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.

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:

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.
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.
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.
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.
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.
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.
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.

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.

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

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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Why Renters Should Consider Renter’s Insurance

By: Eveline Brownstein (c)

Tenants should know what a landlord is not responsible for, and should act accordingly.

Local regulations differ widely nationwide, but there are some basic requirements of a landlord and there are some areas that leave a tenant vulnerable. Tenants should plan for, and cover themselves, for those things a landlord will not be responsible for, or they risk having losses that they will have to pay for out of their own funds.

1. Theft of a vehicle. A recent article on Heraldnet.com covers one such instance. A landlord is not responsible for a car stolen from the property. As a driver, you are required to carry insurance to cover accidents. In most states it is not necessary to carry vehicle loss insurance. However, if you do not cover your vehicle for theft and it is stolen from the property, you are personally responsible for that loss. Such a theft loss is not the responsibility of the landlord.

2. Theft of personal property inside the home. A landlord is not responsible for a tenant’s personal property, stolen from the home. Renters are wisely advised to purchase a renter’s policy to cover a theft of personal property. These policies are, generally speaking, affordable and they will give a tenant peace of mind. One of my properties has an alarm system that I installed when I was living there. I have had a number of subsequent tenants in that property, all of whom have elected not to activate the alarm system. While this is clearly a choice my tenants make voluntarily, since I have provided access to an alarm and it has not been activated by a tenant, my responsibility for any thefts at the home is greatly diminished. Tenants should especially consider purchasing renter’s insurance that includes valuables, if the renter intends to keep jewelry or collectibles on the premises. A landlord will only be responsible for a theft loss if the landlord is directly responsible for the theft, for example: When giving workers access to the property for repairs and failure to lock the door when leaving the property.

3. Flood damage of personal contents. A landlord is not responsible for damage caused by a flood to the personal contents of a tenant. This means that even if the landlord carries content coverage on a flood policy, that coverage will not cover a tenant’s possessions, should those be lost in a flood. Renters who purchase renter’s insurance will also be able to purchase flood damage coverage to cover their personal belongings, should there be a flood in the home.

4. A guest who experiences a personal injury. While most landlords carry personal liability coverage that covers losses in the case of the personal injury of a tenant or a guest at the property, this does not eliminate the liability of a tenant from being also named in a lawsuit or a claim for personal injury, especially if it can be shown that the tenant negligently contributed to the injury. For example, if the tenant personally places a large rock in a pathway where it can be tripped over. Renters should exercise caution when inviting guests to the home, but should also cover themselves in the event that a guest is injured on the property as a result of an act of theirs and not the landlord’s. Sadly, we currently live in a litigious society and forethought and protection from money judgments and lawsuits must be a part of what we consider when we make decisions about what we need.

These are just four reasons why a renter should consider purchasing renter’s insurance when renting a property. A landlord’s policy will simply not cover areas that a landlord is not responsible for and a renter must decide what losses he or she can comfortably afford and what losses to protect against.

Four Tips For Making Your Rental Stand Out From Others In The Neighborhood

Why you should not neglect the exterior of your rental

By: Eveline Brownstein (c)

Everyone wants a desirable rental property that has tenant longevity. Here are my four tips for making your rental the most desirable one in the neighborhood.

1. Landscaping. Most rental referrals are from yard signs and people who drive past the property to view the neighborhood and the property itself. Don’t underestimate the power of a pretty yard. Frequently mowed grassy areas, clean flower beds and property trimming of trees and shrubs can go a long way to make a strong and positive initial impression of your property, making potential renters more interested in seeing the interior of the property.

2. Exterior condition. If the paint on the exterior of your house is peeling and faded, the initial drive-past could make a potential renter drive away permanently. Maintaining the exterior of the home by touching up the trim paint and painting the exterior when necessary will make your rental home a place renters want to call home.

3. House numbers. There’s no point in advertising a property if your rental home cannot be found or can easily be mistaken for the property next door. In addition, emergency personnel need to be able to easily identify your property (this is a good tip for owners and renters). Make sure that the property numbers are clearly displayed and easily readable, from the street. This can be achieved by regularly painting your curb numbers and by erecting onto the house some large house numbers that can be seen from the street. Make sure your rental can be found and identified by potential renters and the people they may invite as guests and the emergency personnel, who may need to find the home.

4. Don’t neglect the mailbox. A leaning, missing or broken mail box can send a message to a potential renter that you do not care enough to make minor repairs to the property. After all, new mail boxes are not expensive investments and repairing the posts for them are generally simple and easily done. A sad mailbox could signal to a potential renter that the interior of the house is as sad and that a landlord will be difficult to deal with when it comes to making home repairs.

Don’t neglect the exterior of your rental home. It is the first impression a renter will have of the type of landlord or property manager you are and what they can expect in the future. Sadly, you will never know if a potential renter was disappointed with the exterior of the home as most will not bother contacting the leasing agent if they were put off by the home’s exterior. A renter may even overlook minor imperfections in the interior of the home, if the exterior makes them interested enough to enter the home for a viewing.

What makes a good rental property?

Why what you buy is as important as where you buy.

So you’ve decided to buy a rental property and you are working with an agent to find that “right” property to purchase as a rental for others to live in. What makes a good rental? A lot of real estate agents appear to believe that distressed properties that they are not having much luck selling to others make good rental properties. Even when I worked as a licensed realtor in California, I would never have encouraged an investor to invest in distressed property for a rental, unless that investor was willing to restore the property to pristine condition after a thorough home inspection that identified all of the issues with the property and a commitment to restore and repair those as new.

Any work not done on a distressed property, has the potential to create a habitability problem for a renter which will cause a landlord numerous headaches. Habitability includes heat, ability to cook, hot water for showers and a leak-free, safe shelter, though most local municipalities add substantially to this list and a rental owner must know what the local regulations are before proceeding to list a home for rent. It has been my experience that one of the first major items that is neglected in a distressed home is the roof. Roofs run in the tens of thousands to replace and most owners of distressed homes find that they are unable to pay for the basic repairs and maintenance to a home, let alone a several thousand dollar roof. If a roof is leaking at all, a home is uninhabitable and the roof must be water tight in order for it to meet the habitability requirements of a rental.

Another neglected area of a distressed home is the electrical wiring. As homes age, the electrical wiring often needs updating and repair. Many distressed homeowners neglect the wiring in their homes or can be unaware that there is even an issue with wiring. I purchased a three-floor, Victorian home where the third floor had not been used or lived in for decades. In fact, it had been sealed off to preserve the heat on the bottom two floors. When I opened it up to reveal the most beautiful rooms with authentic, Victorian wood details, I had to remove the old knob and tube wiring in order to make the third floor safe for habitability. The wiring problems were only apparent when we removed the old lathe and plaster (which was falling off the walls in chunks). The rest of the house had been rewired, but since the previous owners had no intention of using the third floor, they had not bothered to remove the old wiring and rewire that floor. Had I not engaged in the renovation of the third floor and left it sealed up, I may never have become aware of the old wiring issues on that floor of the home. Even though it may have been attractive to have tenants on that floor, without engaging in a proper restoration and removal of potentially dangerous conditions, it would have been irresponsible to have anyone residing in that portion of the house, even a family member.

These are just two examples of why purchasing a distressed home for a rental may actually be inadvisable. I sympathize with real estate agents who struggle to sell distressed homes, but they do not make suitable rentals unless the investor is willing to invest all of the money necessary to make the home completely habitable. It should also be a concern for an investor that even if a home is brought to code for habitability according to local regulations, parts of the home may become uninhabitable within a very short period of time after the tenant is permitted to move into the home, simply because of the age of the home and the lower urgency of those particular repairs. While the local government has regulations describing what constitutes a habitable home and those do protect tenants, rental income real estate investors should make sure that they always have the financial ability to maintain and repair a home within those regulations. That financial ability can become more challenging when a home is purchased with existing repair needs.

So, here is my list of what to do to make it easier for you to purchase a great rental property:

Enlist the services of a real estate agent who understands what your financial ability to pay for repairs now and in the near future truly is.
Be very clear about what repairs you are willing to make and what repairs you are not willing to make. While a distressed home may seem like a great deal, the longer it takes to repair the longer it will be before you can generate income and, even after the home is generating income, it is more likely that a larger percentage of that income will have to be set aside each month in order for an owner to anticipate and pay for repairs that will need to be made.
If you cannot afford a home in your “preferred” neighborhood, try the neighborhood next door (assuming it also meets the “best places to invest” criteria, of course). A great real estate agent will never allow you to be narrow-mindedly specific about a neighborhood in which you should purchase a rental property, but will go over the pros and cons of investing in a general geographic area. This will help you find the best rental home your money can buy for the best rental return you can expect to achieve and without the headaches associated with major repair costs.
If you are not a contractor, a lack of contractor knowledge can make a distressed home a money pit, rather than an income-generating investment. So, if you are still determined to purchase a distressed property, engage the services of a trusted contractor who can give you realistic and practical estimates for the necessary repair work to the property. Don’t allow the contractor to suggest cutting corners. Most reputable contractors will not allow you to do this, but investors are sometimes so concerned with the cost of repairs that they will ask a contractor if there are short-cuts to the repair issues. Don’t ask. In fact, someone without a construction background of any kind is well-advised to avoid a “fixer-upper,” in the first place.
Buy the most house you can for the dollars you have and be willing to make minor repairs to bring the home up to code and fully habitable. Your tenants will appreciate a clean and safe home. One of the biggest errors a landlord can make is assuming that if the rent is low, a tenant will be willing to live in less-than-favorable conditions. This is not only short-sighted, it is illegal and can lead to a landlord being cited by the local authorities. If a home is cited by local authorities, the tenant may be asked to vacate the property, engage in repairs to the property at the cost of the rental income, or be due monies from the landlord. None of these situations is consistent with rental income property investment goals and should be avoided at all costs.
Always keep in mind that your rental property is your tenant’s home. Yes, it is true that some tenants abuse rental homes and damage them without concern for the cost to the landlord, but if a landlord or property manager has done his or her due diligence with regard to tenant screening, then it is safe to assume that most tenants want a comfortable, clean and safe home for themselves and their families. We tend to have an emotional attachment to that place we call home and we deserve that place to be safe and secure. Great landlords can achieve long-term, tenant retention and timely rent payments by providing a home for a tenant, rather than simply a roof overhead (especially if that roof is leaky!)