Single Family houses make great additions to your Minnesota investment real estate portfolios. They are stable, good income producing properties. The tenants tend to be longer term and the buildings tend to have less management requirements. Unfortunately, they can also leave very little opportunity to improve your cash flow. Here are 7 ways that I can suggest to make a few more dollars each month from your single family investment properties:

1. Work hard to lower your water bill by replacing all the toilets with low consumption models. Replace all the shower heads with low flow units. Check for any dripping or leaking faucets. Remove the outside faucets on the house (there is no need to water the grass at your investment property). Even though I never put the water bill in the tenants name, consider putting a stipulation in your lease that any water bills higher than $xx will be paid by the tenant.
2. If the house has a garage, charge extra for it. Even $25 extra each month is worth it. Most Minnesota tenants, expect to pay extra for it.
3. Eliminate “paying” the tenant or someone else to cut the grass and shovel the snow at your investment property. Charge market rent for the house and set those duties as just part of their responsibility.
4. You have (or should have) a late fee; USE it! I make about $120-300 extra per month because I charge my tenants late fees when they don’t pay rent by the 5th. In fact, I have tenants that have paid late fees every month for years because they can’t get their life together. Also, I charge late fees on past due amounts.
5. I don’t personally do this in Minnesota, but I know landlords in other states that actually rent some appliances to the tenants. Although not the norm, you could maybe rent some window AC units to them.
6. Improve the property and then raise then rent. Work to put your investment property on the upper end of the rent curve and get “premium rent” because it is nicer.
7. Change the property to “rent to own”. Typically a tenant that wants to own the property will pay $200-300 more per month that will be credited toward their down payment to buy the property in 2-4 years. Unfortunately, only about 50% of these tenants ever decided or qualify to buy your investment property, thereby forfeiting the additional rent they were paying. Do not set this up to prey on innocent people, but this is just reality and an option.

Implementing even a couple of these options may allow you to generate enough extra income from your single family investment properties. Try them out and enjoy the extra cash flow!

I have attended this event in the past and it is fantastic for any new landlord in Minneapolis. It is a great place to meet the Minneapolis Police, inspectors, and other Minneapolis landlords and talk about any issues your are having with your investment property, your tenants or neighbors.

Community Crime Prevention/SAFE of the Minneapolis Police Department and Minneapolis Housing Inspections are providing this workshop. Attending the workshop provides owners and managers with valuable information, resources and opportunities to network with other property owners. Workshop topics:

• The ABCs of property management
• Working with the Minneapolis Police Department
• Working with Housing Inspections
• Tenant behavior issues
• The risk of lead poisoning
• Hennepin County Housing Court / mediation
• Networking opportunities

The training and landlord guide provided by Community Crime Prevention/SAFE is intended to foster healthy and safe neighborhoods through property owner/manager involvement to reduce drug dealing and other illegal activity in the community. The materials and training should not be regarded as legal advice or considered a replacement for the property owner/manager’s responsibility to be familiar with the law.  If you register and do not attend, you will receive the materials and a DVD on Hennepin County Housing Court instead of a refund.

Rental Property Owners Workshop
DATE: Thursday, April 10
WHEN: 5 p.m. to 9 p.m.
(Registration at 4:30 p.m.)

PLACE: St. Mary’s Greek
Orthodox Church
3450 Irving Ave. S.
Minneapolis, MN 55408

Registration Form can be found online at http://www.ci.minneapolis.mn.us/police/outreach/docs/RPOW.pdf
Please be sure to bring your check to the workshop. Please register by April 3 to ensure your space.

Cost: $20.00 — checks payable to City of Minneapolis
(Includes cost of workshop, materials, DVD on Hennepin County Housing Court, and box meal.)

Pre-registration is required. RSVP by email to ccsafe@ci.minneapolis.mn.us or 612-673-2812, and bring the registration form with your check for $20 to the workshop.

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

It is amazing how often I am asked by people starting in real estate investment: “What type of corporate structure is best for owning investment property“. I hear that question more often than I am asked how to find tenants or how to finance the property. Here is some information that I have compiled and learned over the years.

Disclaimer: Right up front I need to remind everyone that I am not an attorney nor do I play one on television. You should seek competent legal advice in your area, regarding this topic. These details are simply what I have learned through reading, executing, and talking with attorneys.

Best entity for Investment Property

Although there are many different business entities (LLC, C-Corporation, S-Corporation, partnership), the easiest to set up and cheapest to maintain, for real estate investments, is an LLC (limited liability company). Additionally, an LLC is very flexible and can have any number of owners (technically called ‘members’). Each member can own any percentage of the company (as long as the total equals 100%). Lastly, members can be other LLCs, corporations, and trusts. This flexibility allows you to customize the configuration to suit your tax situation and liability protection goals.

Tax Implications for the Investment Property LLC

C-Corporations pay taxes on profits generated by the corporation, first. The owners pay taxes again on the profits they receive as dividends. Although, S-Corporations avoid the corporate tax, their corporate structure and number/type of owners is severely limited (S-Corporations can only be owned by individuals, not LLCs or trusts). Fortunately, unlike corporations, LLCs do not pay any corporate tax. All profit and losses “pass through” to the member’s tax returns at the percent that they own the company. This is especially helpful if you own multiple LLCs as the profit and losses from each roll up to your personal taxes (a loss on one can offset a profit on another).

Liability Protection for the Real Estate Investor

As the name implies, an LLC provides limited liability to its members, meaning that any liability created by the company is limited to the company. The members’ personal assets are protected from all claims against the company. Partnerships and unincorporated businesses do NOT provide liability protection. It is critical that you protect your personal assets as a 2005 Congressional study stated: “small businesses bear 68 percent of business tort liability costs”. A properly set-up and maintained LLC can protect the owner’s interests in the assets of an LLC from the owner’s personal creditors.

Setting up an LLC for your Investment Properties

I recommend that you consult with a qualified real estate attorney when you set up your first LLC (or purchase your first investment property). Pay them to establish the LLC on paper and with the state. Have them teach you what should/must be done on an annual basis to maintain both the legal entity of the LLC and the litigation protection of the LLC. This may cost up to $1000 per LLC.  Some attorneys may offer a discounted price.

How Many Properties per LLC?

This is where a good attorney can weigh the liability protection versus the costs. Many advisors will tell you to set up one LLC per property. Practically speaking this is easy when you own 2-4 properties, but it will become increasingly cost prohibitive when you own 15 properties. Not only does it cost about $360 (in Minnesota, using BizFilings.com) to set up an LLC initially, but each year your CPA will charge you to prepare and file the tax return for each LLC (this costs me about $400 per LLC-you can imagine your tax bill if you had 15 LLCs!). Most real estate investors will put 3-5 properties in each LLC (grouping them based upon geography, age, liability risk, or equity position).

Moving your Properties into your LLC

A common misconception is that you must buy the investment property in the LLC’s name. Unfortunately, you would need to use commercial financing (with a 20% down payment) to have your LLC buy the property initially. A “Quit Claim deed” is all that is required to legally transfer the property from your personal name to your LLC. The mortgage(s) will stay in your personal name and it will remain on your credit report, but you will gain the liability protection mentioned above. This Quit Claim deed process requires a simple one page document signed and notarized by all owners of the property and it is then mailed with the appropriate filing fees (about $50-75) to the County recorder where the property is located.

Property Management Considerations

Technically, each LLC should have its own checking account, corporate credit card, and Quickbooks file. Again, as above, this may be possible with a limited number of LLCs, but it can be overwhelming to think about 15 checkbooks, 15 corporate credit cards, and 15 LLCs signing leases and performing evictions. Many real estate investors will transfer their properties into “ownership” LLCs which simply hold the properties. They will then set up a “management” LLC that signs all leases, pays all bills (including mortgages), contracts for all repairs, and retains one or two corporate credit cards. To keep the liability protection intact, you should have a management agreement signed by both the “ownership” and “management” LLC.

Using the LLC

All the work and cost of establishing the LLCs can be wasted if a judge agrees with the lawsuit plaintiff, that the LLCs are just shells. Follow your attorney’s advice, but generally, you should hold meetings (and keep written minutes of the meeting) on a bi-annual to annual basis. You should record decisions and “vote” on changes to the company. Lastly, have your attorney review your work annually to insure you are maintaining your legal protection in the event of litigation.

As you can see, an LLC has many benefits over other corporate entities (or no entity at all). Having an LLC for your real estate investment is an important step in providing protection for both your personal and corporate assets. Consider the creation and use of an LLC as important as learning how to find tenants.

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

When I meet a new investor, I always discuss how it is critical to building a team of advisers to support your Real Estate Investment career. One of my advisers is my CPA, John Caylor. As we head into tax season, I decided he should be our first guest writer of 2008 to discuss the tax implications of owning Investment Property:

Let’s Talk Taxes

by John Caylor, CPA

So, you are thinking of buying some rental properties? Or maybe adding a few more to your portfolio? There are many reasons to own real estate beyond the joy of maintaining properties and tenant relations.

A well analyzed real estate purchase can be a great part of your retirement portfolio, and can be very similar to a tax deferred retirement plan, such as a 401(k). The difference is with a 401 (k), the IRS tells you when you can retire and start drawing the income while a rental property

retirement portfolio can be accessed any time penalty free (in other words, you can pick your own retirement date).

An example is a property that is purchased for $100,000. If the property grows at an average rate of 5% per year, you are getting tax deferred asset growth, or investment income. You are not taxed on an increase in property value until a sale occurs. Even then a Like Kind Exchange can defer the taxes even further. If you put that same $100,000 in a mutual fund, you would be taxed annually on the investment income (growth) of the account, and in a 401(k), the income is tax deferred but locked up until IRS defined retirement.

Also, in many cases the tenants are paying for the property for you via rent, so there may be no money out of your pocket to fund your retirement. In a 401(k) setting, almost all of the money to fund the account is directly from your pocket.

In addition to the tax free asset growth, there is current tax benefit to owning real estate. In a rental property situation, you can deduct all operating costs associated with owning the property as well as depreciation of the property. Depreciation is a deduction of the cost of the property over time, normally 27.5 years. Example; a $100,000 property would generate $3,636 ($100,000 / 27.5 years) tax deduction each year.

These tax deductions can be deducted directly against rental income, or other taxable income. Keep in mind there are some limitations to be considered. Please consult with your tax advisor for more details.

Note: If the property is an investment property, rather than a rental, you do not get to deduct current expenses. These costs are generally accumulated over time and upon sale of the property, they reduce the gain on sale, very similar to a stock buy and sell. You also cannot deduct depreciation on an investment property.

Another benefit to real estate is most gains on sale of property are taxed at the favorable capital gains rates, rather than ordinary income. This can make a major difference in total taxes paid and when adding the lower capital gains rates to the operating expense deductions and depreciation, you can see the long term tax benefits to real estate.

In summary, there are many reasons to own real estate, and the tax benefits rank as one of the most significant.

Please contact my office with any questions you may have.

Sincerely,

JOHN D CAYLOR, CPA
JOHN@CAYLORLTD.COM
952-767-9070

First Story: I realized last week that I had not been inside one of my rental properties in about 14 months. This is despite the fact that I drive by it every week or so as it is near my parent’s new house. The building was built in 2006, these are the first tenants to live there, they have never called about anything, and their rent is always on time. Regardless, I did get a little anxious thinking about what condition this property could be in as they have an active 25 pound dog and 2 cats.

I called the tenant 24 hours in advance and told them I needed to do a walk through to check out the place and review the mechanicals. The next day I arrived and found the townhouse in perfect condition. I dare say that it looks as good now as the day they moved in 18 months ago. Thank you!

Second Story: I received a letter from the City of Minneapolis Rental Property Department, about 2 weeks ago, informing me of a rental inspection at one of my duplexes this Friday. Both units were renovated about 18 months ago and should be in good condition. Additionally, I speak to these tenants at least monthly and they rarely have any maintenance issues. I decided to schedule an inspection several days in advance to check things such as smoke detectors, fire extinguishers, and other safety items that I know the Minneapolis inspectors love to catch.

After changing batteries in the smoke detectors in unit #1, I headed up to the other unit to find that all the smoke detectors had been put in a drawer. After replacing all those units, the tenant mentioned a window on the porch that had a problem. The window was 100 years old and the sash had finally separated from the rest of the window. Consequently, it was pouring cold air into the unit. I pulled it out, brought it to the shop and re-glued and re-glazed everything. Good as new and I have a happy tenant to boot.

My advice: Now that the holidays are a distant memory, now is a good time to get back into your properties and check them out. Call it a mechanical inspection or what ever, but get in and see how the property looks. This will also give you a chance find those items that the tenants have not called about (or don’t want to call about). It is important for the health and safety of your tenants as well as the longevity of your property.

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

Jeff at BawldGuy Talking has done a great job of reminding us how important it is to keep our feet on the ground and prepare for “Uncle Murphy” as he puts it. He is absolutely right that as real estate investors we must have cash reserves available at all times in this business. I have met more than a few investment property owners that are in financial trouble or foreclosures because they have no reserves available to deal with the occasional vacancy, water heater replacement, or other unexpected (and sometimes expensive) repair or issue. Read his article about Real Estate Investing through Purposeful Planning.

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