Owning Property

Partnerships and Rent Collection

Partnerships in investment property is a fairly common practice.  I was never one to want a partner initially, but after watching some successful investment property partnerships, I am convinced more than ever that there is at least one place they can be a huge benefit.  This place is in rent collection.
I am often amazed at [...]

Partnerships in investment property is a fairly common practice.  I was never one to want a partner initially, but after watching some successful investment property partnerships, I am convinced more than ever that there is at least one place they can be a huge benefit.  This place is in rent collection.

I am often amazed at how far a landlord will let a tenant go on paying their rent.  I even fall into this siren song occasionally:  “if I evict them today, I will get nothing, but if I wait just one more week (like the tenant says they need), I might get paid”.  While it rarely works out that you get paid, it always seems like the smoother path to wait another week that go to through the ugly process of filing and eviction.  Most individual landlords make this mistake.  Call it Minnesota nice or just the fear of confrontation, I have not met many individual landlords that are really as hardcore at rent collection as they need to be.

When watching several successful partnerships recently, I noticed that they seem to be much more business-like and unwavering at rent collection.  It is due on the 5th, by the 6th they send letters and statements, by the 11th they are filing evictions.  Maybe it is male ego or something, but it seems like one partner will not allow the other partner to deviate from the rental collection rules.  I suspect that individually, they might make exceptions if they weren’t accountable to anyone else.  Together the partners make a stronger team.

Rent collection is necessary part of being a landlord, but also one of the least enjoyed or maintained.  This is how you get paid, this is how you pay your bills. If you don’t have a partner in the business, be accountable to your spouse to collect all the rent and in a timely manner.

MAAR Report: Home prices continue to stabilize in November [Really?]

As much as I want to believe the following stats, I am skeptical.  I think they make some good assumptions and per the stats, sales prices are rising.  I think it is a little early to call the war won and that we are on a recovery.  If you pull your head out of just [...]

As much as I want to believe the following stats, I am skeptical.  I think they make some good assumptions and per the stats, sales prices are rising.  I think it is a little early to call the war won and that we are on a recovery.  If you pull your head out of just the housing market and take a look at the rest of the economy, how can you say we are on the recovery road?  With unemployment at 10%+, a 2nd stimulus package looming, congress’s approval rating at historic lows, and inflation just waiting to take off from all the money printing the Fed is doing, I suspect we are going to being the housing market get worse again before it gets better.

From the Minneapolis Area Association of Realtors, December 10, 2009

Extremely heavy buyer activity and shrinking inventory led to strengthening Twin Cities home prices in November.

The November median sales price of $170,000 was a slight increase from October—a rare occurrence in this month that typically marks the beginning of a temporary winter price swoon. This mark is 2.9 percent behind last October, the lowest year-over-year price decline in more than two years.

“This is the surest sign we’ve seen yet that we’re on recovery road,” said Steve Havig, President of the Minneapolis Area Association of REALTORS® (MAAR). “We’ve seen sales growing for almost a year and a half, and prices are starting to reflect that, particularly in the lower price ranges.”

The median sales price of traditional homes (excluding foreclosures and short sales) in November was $190,000, down 15.6 percent from a year ago. Since a heavy share of buyers in November were likely first-timers who typically buy in the more affordable price ranges, prices in the traditional segment have been weighted downward. Foreclosures posted a November figure of $127,500, up 2.0 percent from a year ago, while short sales prices were at $143,500, down 15.6 percent from a year ago.

There were 2,987 signed purchase agreements in November, a big dip from October due to seasonal trends and to the tax credit’s initial expiration date. That’s still up 10.2 percent from a year ago—the 17th consecutive month of year-over-year increases in pending sales. Closed sales posted a whopping 67.0 percent jump from a year ago, again due to the tax credit.

The Months Supply of Inventory has dropped to 5.7 months, the lowest mark since April 2006. Traditional homes have 7.6 months of supply, foreclosures have 1.4 months and short sales have 12.8 months.

“Supply is dropping in the traditional and foreclosure markets,” said MAAR President-Elect, Brad Fisher. “Short sale supply is stagnant because of the headaches involved in purchasing them. The process needs to improve, but industry and government efforts that are coming soon could help.”

All information is according to the Minneapolis Area Association of REALTORS® (MAAR) based on data from the Regional Multiple Listing Service of Minnesota, Inc. MAAR is the leading regional advocate and provider of information services and research on the real estate industry for brokers, real estate professionals and the public. MAAR serves the Twin Cities 13-county metro area and western Wisconsin.

Best Property for First Time Investor

I was meeting with another Realtor on our team on Friday.  He wanted to discuss buying investment properties sometime in the future as a long term retirement plan.  One of the questions that came up was “what type of property would you buy if you had to do it all over again”.  I had actually [...]

I was meeting with another Realtor on our team on Friday.  He wanted to discuss buying investment properties sometime in the future as a long term retirement plan.  One of the questions that came up was “what type of property would you buy if you had to do it all over again”.  I had actually answered this question a long time ago when a reader asked “What Type of Property Investment is Best for First Time Investors“.  Now 2+ years and 100’s of properties later, I would have to answer:  a nice single family home.  I have really come to appreciate the simplicity of buying, owning, and managing a single tenant in a single property.

Single family rentals have some great pros:

• More desired by the average tenant than a duplex or apartment, consequently it is easier to rent a single family home.
• Higher rent possible.
• Tenant takes care of all lawn care and snow removal (typically).
• Minimal monthly landlord expenses (usually just water/sewer/garbage).
• Single Family Home tenants tend to be less transient.
• Easier to sell this property in the future to either an owner occupant or investor.
• Problem tenants can’t sour other tenants (unlike multi-family).

Now, there are some drawbacks, but I think they are manageable:

• When the property is vacant, no rent is coming in.
• Capital improvements can not be spread out across a larger gross rent.  In other words, a duplex may generate $800 per month in cash flow versus a single family home that generates $400 per month.  Unfortunately, the roof on the single family house may cost just as much as the duplex to replace, resulting in it taking twice as long to recover that cost.

Ultimately, this Realtor friend is making the right decision to buy an investment property.  The type doesn’t matter, just get in the game.

Can any owner of rental real estate qualify as a real estate professional?

Disclaimer: I am not an attorney or tax accountant.  This is a summary of information I have learned over the years.  You should consult a qualified professional for full information.
So in additional to your regular job/career (which have nothing to do with real estate), maybe you own an investment property or two.  Typically these [...]

Disclaimer: I am not an attorney or tax accountant.  This is a summary of information I have learned over the years.  You should consult a qualified professional for full information.

So in additional to your regular job/career (which have nothing to do with real estate), maybe you own an investment property or two.  Typically these investment properties will generate paper/tax losses when factoring in your initial down payments and depreciation.  It would be nice to deduct these paper losses against your other income for tax purposes. Unfortunately, under current tax law, losses from passive activities, which you do not “materially participate” (definition below), cannot be deducted against non-passive income (from your job or business which is your principle source of income).  Rental real estate activities are automatically treated as passive activities, even if the owner “materially participates” in the management, operations, leasing, etc.

One exception is that taxpayers can deduct up to $25,000 in losses and credits from passive real estate activities against non-passive income if they “actively participation” in those activities (active participation is a much lower bar than material participation).  The exception on the exception is that this does not apply to taxpayers with adjusted gross incomes over $100,000.

What’s “material participation” in an activity?
Material participation in an activity means involvement in the operations of the activity on a regular, continuous, and substantial basis. If a person passes one of the following seven tests, IRS accepts that as establishing material participation in an activity:

• participating in the activity for more than 500 hours in the tax year (the most frequently utilized test);
• participating in the activity if the taxpayer’s participation is substantially all of the participation in that activity by any individuals (including non-owners);
• participating in the activity for more than 100 hours in the tax year, if nobody else (including nonowners) participated more;
• participating significantly in the activity, if participation in all “significant participation” activities for the tax year exceeds 500 hours (but this test isn’t accepted for showing material participation in rental activities);
• having materially participated in the activity during any five of the ten tax years before the year at issue;
• with respect to personal service activities, having materially participated in the activity for any three years (not necessarily consecutive) before the year at issue;
• showing regular, continuous and substantial participation on the basis of all the relevant facts and circumstances, but only if more than 100 hours of participation during the tax year can be shown (and management services aren’t taken into account for purposes of this test unless certain stringent requirements are satisfied).

Why do I want to be a Real Estate Professional?
If you qualify as a “real estate professional,” your rental real estate activities are not automatically treated as passive.  Consequently, you will be entitled to deduct losses from that activity against non-passive income.  Additionally, the $25,000 deduction cap is removed to all you to deduct an unlimited amount against your non-passive income.

So how do you qualify as a Real Estate Professional?
Here is the summary details:

• You must materially participate in a real estate business (renting and leasing do qualify).
• More than 50% of the personal services you perform in all your businesses during the year must be performed in real estate businesses in which you material participate.
• Your personal services in a material participation real estate business must account to more than 750 hours per year.
• You must own at least 5% of the business that materially participates in the real estate business.  In other words, you can’t be the receptionist of large leasing company, work their 40 hours per week and claim material participation (as you don’t own 5% of the company doing that work).
• These tests are applied annually. This means that you may qualify as a real estate professional in some years but not in other years. As a result, the same real estate activity may generate passive losses in some years and non-passive losses in other years.

How do I prove Material Participation?
The extent of an individual’s material participation in an activity may be established by any reasonable means. But the most reliable means of showing material participation consists of keeping appointment books, calendars, daily time reports, logs, or similar documents that provide a detailed account of what yoy did with respect to an activity, when he or she did it, and how much time it took. Failure to document material participation is one of the most common ways of losing the right to treat rental real estate activities as non-passive (and to be in hot water during an IRS audit).

How Do You Lower Your Real Estate Taxes?

We all know that tax assessed value never keeps up with the market value.
In “the good ole days” when property was appreciating at alarming rates, we got lucky and saw our tax values way below the market value.  It would only typically adjust when you bought that new house and then it was capped at [...]

We all know that tax assessed value never keeps up with the market value.

In “the good ole days” when property was appreciating at alarming rates, we got lucky and saw our tax values way below the market value.  It would only typically adjust when you bought that new house and then it was capped at typically 15% increases per year.  Alternatively, if you took the “this old house” clause while  renovating your existing house, any increase in value was waived until you sold the property.

Now in this market of deflating home prices, my customers are buying properties for up to 75% off what the property sold for 2-3 years ago.  I have one customer that is buying a home that sold in 2006 for $840k for only $150k.  Unfortunately, now we are feeling the hangover from the years of double digit appreciation.  The tax values are just as upside down as the prices we are paying.

So, How Do You Lower Your Real Estate Taxes?

If you want an example of one official answer, here is the diagram from the Hennepin County Assessor’s office:

Got that?

I asked a few other agents on our team if they (or their customers) have had any success in negotiating with the Tax Assessor’s to lower their property taxes.  Here is what a few of them said:

Steve Howe from Minnesota First Home Buyers said:  “I actually spoke to the Hennepin County tax assessor for my district directly in December, when my wife and I filed for homestead on our house.

I knew that the 2008 assessed value was at $170,000, and we just bought the home this year for $122,000. Obviously some difference there.

However, after speaking with him for a few minutes, he told us that filing for a petition and getting a lower assessed value probably wouldn’t be worth our time and effort. Most of us know that the tax assessed values are about 2 years behind market value rates. So we’re just now seeing those assessed values come down from record highs a year ago (just like the market crashing 2-3 years back).

Our new 2009 assessed value came in the mail a few weeks ago, and it dropped from 2008-$170,000 to 2009-$139,000. On top of that, they also gave us a prediction of what the 2010 assessed value would be, and it is listed at $119,000. That’s more like it!!

So, as you can see, unless there’s a huge difference (more than $60,000) they are probably going to naturally adjust over the next year or two”

Bob with the MN Real Estate Team said:  “In November I requested this for a duplex my wife and I own in Edina. I contacted the assessor’s office and made an appointment with the assessor at the property. He came out and I walked through with him. The value came in much closer to market.  Earlier I did a similar thing with Scott county on my own home. The Scott county value is now spot on with a refi appraisal done in Dec. “

Then both Matt Siggerud, at www.mnrealestatesearch.com, and Jesse Grumdahl, at Minnesota Short Sale said that bringing a closing statement from your recent purchase or sale data from 2 properties that sold in the previous 6 months on the same neighborhood is hard for the assessor to ignore.

While this may seem like trying to save money on your Water Bill, it does pay off in the long run.  What if you could reduce your taxes by $100-200 per month?  On your investment property, that may mean the difference between breaking even and a decent cash flow.

Have you always wanted to buy investment property, but never knew where to start?
Don’t Wait! Get Started now.

Minnesota 2008 Certificate of Rent Paid

The CRP’s are here, the CRP’s are here!  (Ok, I just had to say it.)  Minnesota waits until January 1 to publish the 2008 Certificate of Rent Paid (CRP) forms.  Here are the details.
If you owned an investment property in Minnesota during 2008, you are required by law to send each tenant a Certificate of [...]

The CRP’s are here, the CRP’s are here!  (Ok, I just had to say it.)  Minnesota waits until January 1 to publish the 2008 Certificate of Rent Paid (CRP) forms.  Here are the details.

If you owned an investment property in Minnesota during 2008, you are required by law to send each tenant a Certificate of Rent Paid.  You can find the form here.  Depending upon the tenant’s income, they may be eligible for a tax deduction for a portion of the rent they paid for 2008. Although you must send your tenant this form, this does not affect any Minnesota taxes you pay or anything else. It is simply for the tenants tax reporting purposes.

Like any other government form, the instructions are rather confusing and lengthy.  I am not attempting to interpret the instructions for you, but here are some of the tips that I have figured out over the years:

• Do not include any damage deposits, late fees, or other non-rent payments in the total amount.  Additionally, I typically only include actual rent paid, not rent billed (or accounts receivable).
• Section 8 or other rent subsidies are not included in the total line on the CRP. Only rent paid by the tenant(s).  In Quickbooks, I mark each subsidy payment in the memo field to make this easier at the end of the year.
• Fill in a copy of the form with your business information and make copies to save yourself time when completing many of them. With almost 30 rental units, you can imagine how much time this saves me!
• Alternatively, the Certificate of Rent Paid form comes in a PDF format, so last year I entered my business info once and then simply changed the property and tenant info and printed them out (I am faster at typing than writing!).
• I just wait for past tenants to call me and request them (again, there is no penalty for not sending these forms or for them being late).
• When calculating the total amount, you must divide the total rent paid by the total number of adults (married couples are considered 1 person) in the unit regardless of how much rent each paid. You should then send a form to each adult.  This may cause some frustration among roommates, but just tell them you are simply following the instructions.
• To save on postage, I send the CRP and monthly statement in the same envelope.
• Lastly, make a copy of all of them for yourself.  I will always get a least 2-3 calls in August (when the tenants turn these in for their taxes) from someone looking for a new copy.

You can purchase software packages or services to do this work for you, but I have always found that they are too expensive. Simply do a couple each night until you have them all finished. Turn the music or TV on and just fill them out!