Investing in Real Estate – What is a “Good Deal?”

Let’s look at a tried and true way to measure rental property investment returns and what we as buyers should be looking for in our purchases. Total investment returns in real estate are really comprised of two pieces: operating positive cash flows and long-term appreciation. In today’s world, even though it probably will come, we cannot count upon and should not consider long term appreciation. That leaves positive operating cash flows as our primary source of investment return. Let’s call this: “earning money the old fashioned way.”

So how do we calculate our returns and how do they compare to other investments where we could place our hard earned cash equity dollars? It is quite straightforward to calculate our investment returns, unfortunately few people do this leaving many a buyer to make poor real estate choices.

Most Important – “Cash on Cash return” is the most important measurement. So while the price is important, one’s actual cash equity investment is the vital issue. So for every dollar invested what is our percentage yield return on our equity cash investment. CDs offer 1.5%, Bonds 4.5%, stocks 7.5% and real estate is generally high risk, so we want fairly high returns to compensate for the risk.

If one is buying a $200,000 investment property they probably put down 25% or $50,000 plus another 5% or $10,000 for closing costs, loan fees and rehab costs. So the mortgage is $150,000 and a buyer’s cash equity is $60,000 from the start. Again: The property price of $200,000 is important too, but how much cash equity one invests is much much more important.

investing-in-real-estateSee Chart – Using a conservative estimate, depending on the local market, that property might generate $1,800 per month in rent and have 33.3% operating expenses ($600) leaving net operating income of $1,200. Then subtracting the monthly mortgage payment of $900 leaves $300 of monthly cash flow or $3,600 per year.

Divide that $3,600 by the $60,000 of cash equity and this property has a first year cash on cash return of 6.0%. And it should increase a little each year as rental income increases, as do general expenses, but the mortgage stays constant.

That 6.0% is a pretty fair return for real estate and of course there hopefully will be some long term appreciation, tax benefits and a little more yield from the mortgage balance pay down via amortization of the loan.

Be Smarter – It is stunning how many real estate buyers fail to do this simple calculation and buy properties with minimal or negative cash on cash returns – to their own financial detriment. Let’s be a little bit smarter and make sure we take a good look and a conservative approach to real estate investing for our own long term benefit.

Go for the Cash Flow! – As a final note, buyers will find prize properties, like at the beach or fancy condos, generally have very low or negative returns. Skip those! It is the moderately priced units that have decent cash on cash returns. Hence… “prize” properties are NO prize…moderately priced cash flowing properties are the real prizes! Then you will have to figure out where to invest all that positive cashflow….

To help you do better analysis, you can download my simple and straightforward spreadsheet for free when you join my email list. Sign up below!

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5 Signs a Foreclosure is a Good Deal

If you want to take advantage of the market and try to pick up a great deal on a foreclosure, and yes, you have enough credit or cash, there are few things you should know before making a purchase.

5-signs-a-foreclosure-is-a-good-dealFirst of all, what is a foreclosure? It’s a bank-owned property, commonly called real estate owned (REO). For whatever reason, the original owner stopped paying their mortgage so the lender (e.g., Bank of America, Wells Fargo, Fannie Mae, etc.) legally repossessed the property and took ownership.

Next, it will be listed for sale by a local real estate sales professional in the Multiple Listing Service (MLS) along with listings of traditional sales and short sales. We are not talking about properties sold via a foreclosure auction at the county courthouse; those make up a very very small percentage of bona fide real estate sales to third-party buyers like you. Plus, they are extremely high risk, so let’s leave those to the pros who take huge risks.

When Foreclosure is Not a Good Deal

Let’s first talk about what foreclosure is not a great deal. A great deal is not necessarily the lowest-priced property on the block. Or, if it is the lowest priced, it’s because it needs lots of repairs. A great deal won’t be a property where there are several other properties for sale, or many vacant properties in the area. And a good deal on a foreclosure won’t be a home that is really run-down — unless you’re a professional — or a condo or house in a new subdivision that is only half sold out or one that can only be purchased by “cash” buyers because no bank will finance the purchase.

The fact is there are many things that can go wrong with a real estate purchase. You may think you are going to get some unbelievable deal, but the truth is there is usually a reason for a property to be really low priced. Most often, you won’t figure out that reason until after you close escrow, and at that point it’s too late.

What Makes a Foreclosure a Good Deal

When you are about to purchase a foreclosure, consider these 5 things:

1.    “I love the property” is what you say after you’ve viewed it, driven the neighborhood, and investigated the property fundamentals. You love it because it is very close to exactly what you were hoping for in becoming a homeowner, or rental property owner.
2.    “I plan to own it a long time” is what you say when asked. Regardless of how great a deal you think you are getting, the break-even point in ownership is really about five years. If you aren’t going to own it that long, you are most likely better off staying a renter. Remember the three most important words in real estate: long-term ownership
3.    “It’s in pretty good shape” is what you say when your friends ask about the physical condition of the property. The vast majority of buyers have wildly low expectations of how much it costs to renovate a property. Renovations usually cost a lot more and take a lot longer than one believes, so let the contractors buy the fixer-uppers.
4.    “The price is in line with comparable recent sales in the neighborhood” is what you find out when you do a comparable market analysis of nearby properties. Remember, if it sounds too good to be true, it probably is.
5.    “Most of the nearby houses are occupied” by owners, or at least renters in the area. Neighborhoods with many empty houses can go into downward spirals that can become very bad areas with very low home values. Avoid that type of risk.

Confirm Your Suspicions

To further help you ascertain and confirm that the foreclosure is a “great deal,”  you need to do the proper due diligence during your buying process. This is especially true since bank-owned properties generally do not come with the traditional seller disclosures of any material issues wrong with the property.

Before you sign, review comparable market sales, get contractor estimates, compare mortgage rates, and view at least 10 other properties so you know what the market has to offer. You should also review the HOA financial and legal condition and your title insurance policy for any issues as well as keep the proper amount and type of dwelling and liability insurance in place.

Taking those steps to reduce your risk is key to making sure what you bought was really a “good deal.”

Overall, when buying a foreclosure (or short sale, or even traditional sale for that matter), the first order of business is to buy a good quality property in a good area that you will own for a long time and will make you happy. It’s better to pay more for a better quality, lower risk property. This is the largest and riskiest purchase you will ever make, so make a smart purchase.

Finally, the prices these days on residential real estate are generally very fair, as is the financing, so it truly is a good time to buy – subject to the above due diligence tasks. But avoid the “I’m going to get the steal of a lifetime deal” mentality. Go for something that fits what you want, for all the right reasons, and for the long term, all of which are vastly more important issues than price.

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Demystifying HOA Fees and Special Assessments

If the property you’re looking to buy has home owners association (HOA) fees, it’s essential that you understand where those fees are coming from, as well as their risk of increasing every year before you buy.

Formulation of the Fees

HOA-fees-and-special-assessmentsEvery year, a home owners association (HOA) board of directors (BOD) prepares a community budget. That budget includes what the BOD will set as the current year total HOA fee per month, per unit. The composition of that fee is the first thing you’ll need to comprehend before you better understand fees increasing each year as well as the much loathed “special assessment.”

The monthly HOA fee has two parts to it, so for the sake of this exercise, let’s assume the total HOA fee is $300 per month per unit for a 100-unit community. Here are the calculations:

Current Year Operations Portion – $200 per month

The HOA collects fees from each of its units to pay for all the current year operations such as gardening, water, insurance, property management. The BOD forecasts forward that this year it will cost $240,000 to pay for all current year operating expenses. Since there are 100 units, we divide the $240,000 by 100 units to get $2,400 per year per unit or $200 per unit per month for operations.

Current Year Reserves Portion for Long Capital Items – $100 per month

The HOA also has to save money over time for long-term repairs and replacements, such as roofs, roads and parking lots. To understand how much they have to save, they have, or should have, an outside expert do a “reserve study.” The reserve study expert makes a 20-year +/- schedule of when HOA assets will need to be repaired and how much they will cost.

The reserve expert calculates an annual amount needed for those long-term repairs. Therefore, through the HOA fee, owners are putting money away each year to pay for those repairs. This money accumulates into “reserves” so that the HOA can pay cash for large-item repairs when they come due. This helps avoid special assessments because the HOA has the money on hand to pay for these capital items.

In our example, the reserve study specialist determined that owners should be putting away an additional $120,000 per year going forward or $1,200 per unit per year or $100 per month per unit owner.

Thus, $200 for current year operations and $100 to put away additional funds, totaling the $300 HOA fee per month, per unit.

As long as the HOA board makes perfect predictions, and the reserve study expert’s estimates are 100 percent accurate, the HOA will pay all the current year bills and be in great shape for paying for long term capital item repairs. However, this rarely happens.

Not an exact science

Calculating unfortunate budgeting expenses, long-term reserves, and unanticipated repairs is not an exact science. Usually, operating expenses are higher than budgeted, or some people do not pay their HOA fees, and the HOA gets drained of cash covering expense overruns. If the BOD spends extra on operations, they won’t be able to save the recommended cash for long-term repairs. Thus, the BOD increases HOA fees next year to catch up the amount they should have saved this year for their reserves.

If they don’t increase fees to make up for that balance, perhaps because owners protested higher HOA fees, when they need $240,000 to paint the building, the BOD uses a special assessment — an additional fee levied at homeowners— so the HOA can pay for the needed repairs.

The main takeaway…

At the end of the day, all the bills — current year, capital repairs and replacements — will have to be paid by you and the other owners in the community one way or another.

The BOD usually does their best to financially manage the community well, but due to a number of factors above, it is a challenging assignment. All the owners have to live within the HOA finances, but note, it’s better to increase fees as you go to avoid special assessments.

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Buying an Investment Property? Use This Checklist to Avoid Surprises

You are ready to make the largest financial decision of your life by buying a home or rental property. But, you are concerned because of all the issues that people who bought in recent years have encountered. Perhaps properties are underwater, or the rental income doesn’t cover all the expenses, or mortgage payments have become unaffordable.

Buying-an-Investment-PropertyYou are not alone if you have some of these reservations about buying a home. While those issues are just a few of the inherent risks that are present when buying real estate, there are many more. Although these issues have been around forever, only recently have typical buyers been getting better about doing their due diligence and taking the time, energy and effort to work hard to significantly lower their risk on real estate.

The process is not overly complicated, but, it is time-consuming. We’ve put together a list of categories that should be on your due diligence list. You should learn these items, tasks, procedures and how to analyze property so you can make great choices.

Here’s how to lessen the chances of something going wrong with your purchase:

1. Understand the Purchasing Process

Buyers should have a full understanding of the purchasing process from the start. Early on review the contract you will be signing, understand how to shop for the right property and know about making an offer, contingencies, appraisals, mortgage financing, and when your earnest money deposit becomes “at risk.”

2. Does This Make Financial Sense?

• Buying Investment Property – Start by penciling out the deal. You should determine the total cash you will invest and what “cash on cash” rate of return you project to earn. Bank CDs pay 1.0 percent, Bonds 5.0 percent, but real estate is riskier – so what should you earn? Five percent is suggested. Value appreciation may come down the road and certainly will help, but let’s count our cash first!

• Personal Residence Rent vs. Own – There are some simple guidelines to follow here. If you plan to own for less than five years, you should remain a renter. You are not throwing away money renting and you avoid a lot of stress. Buying for the long term is your best move. And, don’t buy just to buy something – buy the property you “love” and that will make you happy.

3. Shop Smart

Hoping to snag a once-in-a-lifetime deal on a foreclosure or short sale? If you’re trying to chase some “great” deal like at the courthouse auction, or through a distress sale, it only wastes your time and energy with little chance at success. Be prepared. These options are complex and can often fall through the cracks.  Skip the get-rich-quick schemes. A more conservative approach is to shop for a traditional sale on listing websites.

4. Real Estate and Income Taxes

Buying to save money on your taxes? Most couples buying residences under $300,000 get little in net tax savings. People with higher incomes and more expensive homes get the biggest tax benefit. Surprised? Meet with your CPA to determine what, if any, tax benefits you will earn.

5. Mortgage Financing – Getting a Fair Deal

If you can get financing, it has become easier to get a “fair deal” because of new federal regulations. Regardless, you should understand your Good Faith Estimate (GFE) and how to dissect it to make sure you get that fair deal. Mortgages are for the long term, so take some time to interview a couple of lenders and understand your mortgage so you can make a good decision.

6. Homeowners Association (HOA) Condition

This is one of those items that most buyers do not even know to review. The finances and operations of an HOA are becoming a huge risk issue nowadays. If you do not understand and review them, you may get a surprise in the form of sharply higher fees or special assessments in the years to come. Meet with a knowledgeable person to help you decipher them. The goal is to avoid a community where the association is in really bad shape.

7. Home Inspection/Fix Up Costs

Having a home inspection is one of the most important things you can do as a buyer. During the inspection you should be putting together a list of what needs to be repaired and replaced. Then you can take your list to a home improvement store to get a feel for the total costs to bring the property up to the standards you desire. This should help you negotiate any seller’s credits and/or terminate the deal if the costs are too much.

8. Property and Liability Insurance

Insurance policies cover certain risks and have a maximum payout on any loss related to those risks. It is up to you to determine the maximum policy amount you want based on construction quality, cost to rebuild and your risk tolerance. The top issue – failing to increase coverage amounts over time as the cost of rebuilding increases. It is not difficult to understand and have the right coverage – we suggest getting with your agent and have a once a year checkup!

9. Title Insurance, Title Issues, and Lot Lines

This is another purchasing task that few people review. And while the risk of an issue is very low, the potential losses are huge. Taking fifteen minutes to review your title abstract/history and the plat or a survey of the parcel, then walk the property. It could save you endless headaches and financial stress down the road.

10. Other Investments

Fixer uppers, flipping, vacation rentals, second homes, apartment buildings, condohotels, land or building a home also have significant risk issues that should be evaluated carefully, before you make the decision to take on one of these investments.

Buyer Beware!

By taking the time to learn the risk issues and do the proper due diligence before you buy, you can significantly reduce your risk of something going wrong. And while it’s hard work, it is much easier than straightening out a “predicament” after you close escrow.

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Are Home Warranties Worth It?

Home warranties have been around for decades but have just started to be widely purchased in the past ten years. They are often used in sales transactions as a kind of “insurance policy” that the seller can provide for the buyer. The theory is that if something goes wrong with a covered item — appliance, electrical, plumbing, etc. — the buyer will call upon the insurance policy instead of blaming the seller. While this sounds great in theory, the general policies have some significant limitations and issues.

are-home-warranties-worth-itFor example, home warranty companies could have customer service issues that should cause a buyer some concern. However, to be fair, much of this comes from a common misunderstanding about what is actually covered. This happens because few people who receive the policies actually read them to find out what is not covered – like pre-existing conditions, or certain appliances in the basic policy. Of course, some complaints result from companies refusing to cover certain items and hope that people will give up trying, but it should be noted that some of these claims are just plain dubious.

Which leads to the big question: Are home warranties worth the $350 – $500 per year?

The answer is, it depends.

There are plenty of people who make claims, get paid out, and are happy with their service. But, there seems to be a lot of people who are not very satisfied.

Because the most common way for someone to be introduced to a home warranty policy is typically at the purchase of a property, let’s address that first.

Seller’s Side – If you’re selling your home, you might believe that offering a warranty is a good marketing tool to get the property sold. This is the typical pitch from an insurance company. And if something breaks after the sale, the new owner can make a claim on the policy. It’s estimated that about 80% or more of residential sales come with a home warranty policy. And if the seller feels more comfortable with this “insurance,” then it’s a small price to pay for that piece of mind.

Buyer’s side – If you’re buying a home and the seller is throwing a home warranty policy in, you have nothing to lose. Just don’t count 100% on making a successful claim on the policy.

For one thing, many buyers forget they even have the policy! So keep a note on your refrigerator to remind you. Additionally, after an unsuccessful claim, some people find it easier to just call a local repairman. That’s unfortunate, but insurance companies do not make money by easily paying out claims. And each year they learn, and their policies further restrict against the expensive issues they’ve had to pay out upon in the prior years.

Buyers also need to realize that with older appliances, things are going to break and cost money to fix. It is best to try to get some money as a closing credit in the sales contract, to compensate for older items; or reflect this issue in the original offering price.

Seller Won’t Pay, or First-Year Policy Expires or Existing Homeowner – Before you decide to buy, make sure to fully understand what is covered and what is not covered by the policy. And if you’ve had good luck with a company in the past, go for it. If you have no experience, consider this: what are the chances that you will have a loss that is actually covered, and that it will be more expensive than the annual policy cost plus the service visit fee? On that note, it might just make sense to differentiate between newer and older homes.

New Homes – When you buy a new (or newer) home, many of the existing warranties may still be in place. These could cover several of the appliances, so review them! And since the appliances are new, they should have fewer issues. As to electrical or plumbing items, they are pretty rare in newer houses and there may be a developer warranty anyway, depending on the state. Overall, you might be better off saving your money and just paying claims, when/if they arise, rather than paying for a home warranty.

Older Homes – Older homes have a higher chance of something going wrong that is not under a warranty. But if there are new appliances or updated systems, you may not have issues after all. Even if they need replacement, many policies will only pay the depreciated value on older appliances. Read the full policy carefully if you plan to purchase a home warranty to make sure you know exactly what is covered.

Overall, it seems the restrictions on claims, exclusions, and customer service issues tilt somewhat against paying $350 – $500 per year for a policy that you may not actually use.

Now what would help the industry is if the companies were able to better convey upfront what is andisn’t covered – so there are less misunderstandings. Regardless, those are a few items to consider. Now you can make you own decision, based on your house and appliance ages, and your tolerance for the potential that you may have to cover an entire loss.

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When Your Home Won’t Sell: Accidental Landlord

So you’ve had your property up for sale and you just cannot get it sold. And while you prefer not to become a landlord, you are thinking that renting it out for a while may be the best option – at least you would have some money coming in. You have become an “accidental landlord.”

Let’s touch on a few issues herein to give you some guidance on how you might want to proceed if you are in this situation. You will need to think it through and make the decision that’s best for you….but let’s consider your options.

Re-Quadruple Your Efforts to Sell the Property

when-your-home-won't-sell-accidental-landlordFirst, give it one more “college try” to get your property sold. Maybe lower the price and/or do a short sale. Has your real estate agent offered a bonus to the buyer’s agent? Are you helping by keeping the house clean and available for viewing? Doing enough advertising? And make the property appealing to a buyer – maybe with a credit for new flooring or appliances? These all cost money, sure, but otherwise, you’ll end up being a landlord.

It’s especially important to step up your efforts if you’re moving out of town — you really don’t want a rental property so far away. So, re-quadruple your efforts to sell the property first, while you move forward with the options below.

The Landlord Option Seems Inevitable

Since you’ve had no luck selling it, let’s make some some smart choices that will help you in your first landlord assignment. You have two choices:

  • Having the Property Professionally Managed – Recommended!
  • Renting and Managing it Yourself – Not Recommended!

Professionally Managed

Since you do not have experience with this, hire someone to manage it for at least the first year(s). Typical cost should be 7-10 percent of rental income, plus re-rental fees for new tenants. When that happens, the management company can advertise it, show it, take rental applications and do credit checks, draft the lease, do the proper move-in and move-out procedures – so you don’t have to. Trust me, they work hard for their money. And if you work full time, you’re not handy, you’re moving out of the area, or have never been a landlord before – a professional property management firm is the way to go.

Make sure to interview several management firms, get references, call them, and review their insurance.  Don’t forget:  you get what you pay for!

One thing you can and should do to help, is place rental ads yourself for your property – just put the management company’s telephone number on them. Flood the Internet with ads and include nice pictures on Zillow, Craigslist, etc. – it certainly can’t hurt, and most sites charge very low prices, or are free!

Managing Yourself

Managing yourself can work well too, just make sure to educate yourself as much as possible. A few items to consider are the time it takes to show the property, draft a lease and get it signed, and evaluate potential tenants based on their credit, income, legal and rental history. Talk to experienced property owners to learn the ins and outs. Then monthly, you must collect rental checks, pay bills and handle issues about six times a year. It can be a lot of work – but you will learn over time what works for you.

Overall Rental Property Ownership

The key to making life easier and earning money is to get good tenants to stay. Landlords, and accidental landlords, do this by keeping properties in good shape, handling issues when they arise, and treating tenants with respect. It also helps to ask market rents or even a little less, to get a better selection of quality renters. All of the above are what most long-term, individual rental property owners have learned over the years.

Consider these options and educate yourself as much as possible to make the right choice for you – America’s newest accidental landlord.

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Rental Property Investing 101

For-rent-2The good news about real estate investing is that most people can earn a fairly substantial amount of wealth over their lifetime if they educate themselves and make better decisions when purchasing property. The bad news is that contrary to all the TV shows about flipping houses and people making money, or turn-key hassle-free rental properties, real estate is actually really hard work, it’s time-consuming and it can be a risky place to invest your money.

Click here to see what our videos and books can teach you about this.

Here are some tips that should help you earn real estate wealth. By the way — it’s a marathon, not a sprint.

Think long term (skip get-rich-quick schemes)

Long-term ownership is the key to real estate wealth. If you buy decent properties and hold them forever, that’s going to provide the highest likelihood that your real estate will have significant equity down the road. Also, if it sounds too good to be true, it always is — especially in real estate. Drop the idea that there is fast and easy money to be made in real estate. It’s just not true. Sometimes people get lucky, but you don’t have to worry because that “lucky” person will never end up being you.

Cash flow positive properties

A significant portion of investors buy properties that are cash-flow negative or have very low investment returns. That means the buyer puts in their equity cash capital when they purchased the property, and they are still investing additional funds each month, which could go on for decades depending on how bad of a deal they purchased. The better way to invest is to buy properties where the rents minus all the expenses, including the mortgage payment, provide positive cash flow that you can deposit in the bank. So if you collect $1,200 in monthly rent, then subtract expenses of ($400) and a mortgage of ($500) you will have $300 per month left over. Nice job!

Simple analysis tool: The 1 percent rule

A simple way to do a quick analysis is to take the conservatively estimated monthly rental income and divide it by the purchase price of the house. You still need to pencil out your deal with rents and actual conservatively estimated expenses, but this back-of-the-napkin test is a quick and easy test to see if it  makes sense.

  • Example of a good deal: If you can collect $1,600 per month in rent and you paid $200,000 for the property, you are collecting rent that is 0.8 percent of the purchase price (0.8 percent = 80 basis points in financial terms). And that’s probably a really fair deal.
  • Example of a bad deal: If you can collect $1,600 per month in rent and you paid $400,000 for the property, you are collecting rent that is 0.4 percent of the purchase price, or 40 basis points. And that’s not a really good deal.

Find good quality properties

Smarter investors work hard up front to find the good areas where the rents provide a nice positive cash flow and investment returns, low crime rates, better schools, and decent amenities nearby like parks or retail. Coupled with good tenants who have excellent credit, you also create low vacancy rates. Smart investors also buy properties that are in decent shape, although every property needs paint, carpeting and some plumbing and electrical work from time to time. Do that hard work upfront and spend the money to put your properties in very good shape, you’ll get a little more rent and probably have a bigger pool of interested tenants from whom you can then choose. Lastly, do your homework, talk to other investors, read guides and books, shop properties, pencil out deals and have a long term ownership plan. Hopefully it will translate into a nice cash flow retirement picture.

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Tax Savings: Rental Property Depreciation Explained

House-on-tax-forms-300x199One reason you might consider investing in rental properties is to save money on federal income taxes. While this may be true, you should fully understand how rental properties and taxes work in order to determine whether you will save money from your rental property ownership.

If you’re already an investment property owner or are thinking about becoming a landlord, here’s a refresher on how the depreciation expense could help you maximize your tax savings.

The basics

In doing your annual 1040 federal income tax return, you’ll record your rent and all expenses on a Schedule E form. The net amount of gain or (loss) is then recorded on your 1040 form and can shield your income from taxes if you had a loss. One of the bigger expenses on most rental property owners’ Schedule E is something called depreciation. Here’s how it works.

When you own property, each year you write off costs for money you expend where the cost is a one-year expense, such as gardening, general maintenance, repairs and HOA fees. But what if the cost is for an improvement such as a new kitchen or new sidewalks? Because those costs have a useful life beyond one year, you must “capitalize” and depreciate those costs. That means you divide the total cost by the useful life of the improvement, and write off 1/nth of the cost per year. For example, you do $15,000 worth of driveway and sidewalks, with a 15-year useful life, so you can write off $1,000 per year ($15,000 divided by 15 years).

The biggest capital asset of any property is the actual purchase of the house. When you buy a rental property and will own it for longer than one year, you can depreciate the structure. First you must divide the purchase price of the property between the land and the building. You can use your tax assessor’s estimate of the cost of each of those components, an appraisal or an insurance agent’s estimate of the cost of the building. Either way, you can only depreciate the building, as theoretically the land portion of your purchase price is not “used” up and cannot be depreciated.

Crunching the numbers

Here’s an example: Let’s say you buy a single-family home for $200,000. The tax assessor’s estimate of the land value is $75,000, and the building value estimate is $125,000. Your depreciation expense that you take each year against rental income would be $125,000 divided by the IRS allowed 27.5 years of useful life (residential real estate) for a depreciation expense each year of $4,545. So thanks to that depreciation expense, you are saving (assuming you can use passive activity losses) $4,545 multiplied by your marginal tax rate (which is a topic for another day). This could be tax savings from $1,000 to $2,000 per year, just for the depreciation amount.

The calculation and write-off are pretty straightforward, but the actual tax savings amount gets a little more complicated. Many people flub this calculation from the start, so it’s best to find a licensed tax professional and start saving some money going forward.

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Tips for Avoiding Rental Property Disasters

Leaky-bathroom-pipe-96664aIf you plan to be a landlord, you should know that owning and managing property is hard work and can be very stressful. All kinds of issues can occur, taking up your time, energy and effort, and possibly making you wish you had never become a landlord. Here are a few things rental property owners can do to ease headaches and help reduce the risk of having issues. They don’t always work, but hopefully they will be worth your while to implement and follow.

Put properties in good shape

Properties that are in good shape usually are treated better by your tenants. Everyone wants to live in a nice, clean place, and renters will probably take better care of your properties if you’ve provided them a nice place to live. Try to do the work when you first purchase the unit and it’s still vacant — upgrades when you have a tenant inside will be a major pain for all parties. Items such as newer flooring, paint, appliances, window coverings and landscaping are good bets. They’re expensive, but hopefully you’ll thank yourself for needing to make fewer repairs down the road.

Have plumbing fixtures and valves changed out

Water issues are prevalent in all properties, and they can cause the most damage and be the most time-consuming issues to resolve. If the plumbing valves, supply lines, faucets, toilets or washer/dryer hoses haven’t been changed in years, it’s probably time to do that. Make sure the main water shut-off valve works — and that your tenants know where it is — just in case. Again, these measures are costly, but you’re trading an upfront investment for lowering your risk of problems from a leak.

Be attentive and fix broken items

If something breaks, work hard to resolve it quickly. Obviously water, gas or electric items need immediate attention. Broken appliances might take a few days or a week, but the quicker the response the better the landlord-tenant relationship. Sometimes it’s hard to get to non-emergency items in an expedient manner, but do the best you can to fix the issue. Ultimately your tenants will be much happier and better tenants.

Treat your tenants with respect

All properties have “property” issues like the three above, but they also have “tenant” issues, which are a much bigger hassle and can take a lot longer to resolve. Treating your tenants with respect — and trying to resolve issues in an amicable manner instead of starting a fight — will hopefully have them return the favor toward you. As the landlord, it’s in your best interest to step up to the plate and make sure relations with your tenants stay on a good track. Your life will be a lot easier when a real issue occurs, such as a pipe breaking and flooding the unit.

These tips aren’t easy or quick, and you’re never going to succeed at all of them all the time. If you work hard to keep on top of the issues it should make your landlord life easier, more profitable and with a much higher likelihood of success.

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How to Choose a Good Real Estate Sales Professional

People-holding-question-marks-b4d383Buying real estate is complex, and it’s imperative to select a competent, honest agent who will skillfully represent your best interests throughout the entire process of selecting, negotiating and closing on your property.

Here are several things to look for and consider when selecting the real estate professional to represent you in a transaction:


Real estate is a learn-by-doing process, and an experienced agent should be closing at least five to seven property transactions per year. Every transaction is complex, and each agent obtains new and relevant “training” on each deal. So ask each agent — you should interview at least three — how many transactions they’ve closed in the past 12 months and several years. If they have not closed that many, ask who is guiding them as they learn the business and what professional training they had to prepare them to assist you.


You also want to get references from the sales professionals’ recently closed transactions. Then take the time to call those references to ask how the agents performed. You will learn a lot by listening to what their past customers have to say. Google their names, too, and check the state for licensing information and any disciplinary information.

Time to work with you

An agent who has too many clients may be too busy for you and may not be right for you, either. Make sure they have the time to sit with and educate you, show you lots of properties and are willing to write offers on properties that you would like to buy. If they have too many clients at once, service to you may suffer. So make your best judgment.


Make sure they know the location, location, location in which you want to purchase property. Some agents are going to be familiar with the entire county and can talk to you about each neighborhood. Find a sales professional who is very knowledgeable about your targeted location.

Help you protect yourself

Will they help you make smart decisions? This is the largest purchase you are ever going to make, and your real estate professional should be well-versed in and advise you on how to do your “homework” when buying a property. Does buying make financial sense? Did you get a fair deal on yourmortgage? Have you looked at the HOA documentstitle abstract or plat? Are you procuring the rightinsurance for the proper amount? A good agent can guide you in these areas and should be on your side in a transaction.

The sales professional you use should be someone you trust and feel can do a great job helping you evaluate homes and get a property under contract. They should also help you navigate the escrow and closing process and negotiate in your best interest, whether it is the price, repair requests or other contract terms.

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