E-Renter News

Q: What’s the best thing about collecting rent every month?
A: Collecting rent every month!

Cash flow is the life force of any business—and in the real estate investment business, your rental properties provide a nice inflow of cash every month. Unlike a retail business owner, you don’t have to wait for a customer to walk in your door and buy something. And instead of the service business owner’s fight for new clients, your tenants come to you needing a home to live in. And you get to open your mailbox or bank statement and see the money coming in.

The challenge is to find new ways to keep rental property expenses down—which is the best way to improve cash flow. Keep in mind, that even small profits add up—and profit is absolutely necessary. Losing money by paying too much for a property, taking on big mortgages or paying out too much in expenses—even for the short term—can cripple your rental property business.

Cash flow can help you grow your business. Having cash on hand means you can take advantage of new opportunities—like transitioning from smaller properties to larger properties. Or purchasing a ready-to-go building instead of a fixer-upper.

When you buy properties at the right price, and the rents pay the mortgage, taxes, insurance and other expenses, you will have positive cash flow. Conversely, if a property is not making a profit, consider getting rid of it to return to positive cash flow. And remember, the promise of potential profit and increasing value does not equal cash flow.

A tax-deferred exchange allows taxpayers to sell income property and replace it with a “like-kind” property. If you are selling an investment property with the intention to reinvest in another investment property, you might be able to avoid capital gains taxes on the sale.

Section 1031 of the Internal Revenue Code allows such exchanges, which permit the postponement of capital gains tax payments when another property is purchased within a specified time period. Income property investors can use it to defer taxes when they sell an apartment building, for example, and buy land to build a new duplex on.

This has been called the most powerful wealth building tool available to taxpayers. For landlords, it’s an important tool to increase the size of your real estate holdings. It’s also a good way to sell non-income-producing property, like land, in exchange for income-producing property, like a rental house.

In theory, an investor could continue deferring capital gains on investment property forever, avoiding them completely. But as with any tax rule, following the 1031 Exchange mandates to the letter is a must.

What property qualifies for 1031 Exchange?

What properties do not qualify for 1031 Exchange?

• Property purchased to fix up and “flip”
• Vacation or second homes not held as rental properties may not qualify—check with your tax advisor
• Personal residences

Important Information on 1031 Exchanges:

• There are certain disadvantages of 1031 Exchanges, regarding losses and depreciation. Check with your tax advisor.
• Every taxpayer’s situation is different. Check with your tax professional for more information on whether the 1031 can benefit you.
• The limitations and requirement of 1031 Exchanges are complicated and should be undertaken with the guidance of an expert.

Maggie is a landlord facing her first eviction. She asks, “My tenant owes me four months’ rent. Can I sue for the back rent once the eviction is finished?”

First, it’s not a good thing when a tenant goes that long without paying rent. The more serious landlords we know post a “pay or quit” notice on the very first day the rent is late. Others wait longer, hoping the tenant will come up with the full amount. But four months? It must have been tough to get that tenant out of the rental unit.

Whether a tenant owes four days’ or four months’ rent, is it possible to collect any of it once you go to the eviction process?

That depends a lot on where you live. Suing in small claims court can be worth the effort in some areas; in others, the odds are against the landlord ever collecting—even after winning the claim. Why?

1. If the tenant isn’t paying rent, they probably don’t have any money to pay a claim, either.
2. Collecting debts can be a full-time job, which is why there are professional collection agencies. You could certainly hire one, but they might not be any more successful than you. And if they are, they will take a cut of your money.
3. See if you can hire a service to send a letter to the tenant stating if the rent is not paid, they will be turned over to a collections agency. These services usually charge a fairly low, one-time fee. Whether or not the money is collected, a mark will go on the tenant’s credit report.
4. Check with a tax professional about whether or not the lost claim can be considered a tax write-off.
5. Depending on the amount of money owed, a collection agency might be the best idea. Check the terms and conditions carefully, and understand completely whether you pay for non-collection and what percentage of the recovered sum you will actually see.
Ask your fellow landlords about their experience collecting back rent in your area.

Government reports this week reveal that new home construction fell in June to an 8-month low, but there are indications of increased activity coming up. The Commerce Department reported that housing starts fell 5% from May, to a seasonally-adjusted annual rate of 549,000. This is the lowest figure since October, 2009.

Economists had expected a smaller fall to 575,000. The 549,000 figure represents a 5.8% decline from June, 2009.

What do these housing start numbers mean?
Analysts think builders lack the confidence or the financing to ramp up construction. And housing sales and construction are still in a rut—sales even more so, since the government’s home buyer’s tax credit expired.

Any good news in the housing report?
A good sign did appear in the report: building permits posted a gain for the first time since March. May’s permit number rose to a seasonally adjusted annual rate of 586,000 in June, which is a 2.1% increase over May. While down 2.3% for June, 2009 permits, the drop was not as bad as economists expected. They had predicted only 572,000 permits for June.

What do the housing report numbers mean for landlords?
As mortgage rates hit historical lows, along with housing prices in many areas, some people will be able to purchase a home. But unemployment hasn’t eased at all—so the market should stay depressed for the foreseeable future. This means more foreclosures, and possibly more former homeowners who will become renters.

Landlords might also be interested to know that, while multi-family housing starts were down for the third straight month, and down from June 2009, permits issued for multi-family housing were up for the third month in a row—and up from June, 2009. Looks like investors are starting to become active again.

What does Seasonally Adjusted Annual Rate mean?
Glad you asked! Seasonally Adjusted Annual Rate, or SAAR, is a way to remove seasonal variations in data. The number of building permits issued (and ice cream cones sold!) tends to vary greatly depending on the season. So adjusting for seasonality means more accurate comparisons can be made month to month throughout the year.

The SAAR is calculated by dividing the unadjusted annual rate for the month by its seasonality factor. These adjustments are most often used when economic data is released to the public.

Source: Investopedia.com

We know plenty of landlords who could be considered the original environmentalists. You know the type: they re-use fixtures, cabinets, carpeting, paint, and flooring in any way they can. They used to be considered “cheap,” but their way has always been better for the environment.

And now, “green” people are a whole section of the demographic landscape. Many landlords are specifically appealing to them, knowing that these folks tend to vote with their dollars. They will choose a place to rent based on its greenness.

If you’d like to borrow a few tricks from green landlords, and appeal to environmentalist renters, here’s five things you can do:

1. Re-use as much as you can. Keep usable fixtures and materials out of the landfill. It’s perfectly fine to let prospective tenants know that you recycle and re-use. Most of your environmentalist renters are shopping at thrift stores, anyway—they’re accustomed to used merchandise.
2. Host a "stuff swap" every six months or so. Allow tenants to display things they no longer need or want, and pick up the same from their neighbors. Offer to take leftovers to Goodwill, the Salvation Army, or other charity re-selling organization.
3. Install bike storage. More and more folks are turning to bikes as an alternate (or even their only) form of transportation. Don’t make them lug their bikes up several flights of stairs or chain them to light poles. Providing bike racks is the way to go—and if you remove a parking space or two to accommodate bikes, even better!
4. Switch to a green lawn maintenance company. Chemicals and pesticides are no good around kids and pets—and the groundwater and streams can benefit from fewer fertilizers.
5. Provide opportunities to recycle. You can probably order bins and even composting containers from your waste disposal service company. People will recycle if given the opportunity--and it might even cut your garbage pick-up bill.
6. Reduce water use. Replace water-wasting toilets with new reduced-flow models, install aerators on faucets, and switch to low-flow shower heads.

The news is filled with stories of the foreclosure crisis in America. When the real estate bubble burst, too many homes lost too much value, leaving too many people unable (or unwilling) to continue paying their mortgages.

If you’re thinking of buying a foreclosed home with the intention of renting it, there are risks and rewards—just like with any other transaction. Here are a few things to consider about buying foreclosed homes as rental properties:

Dos and don’ts for dealing with a bank: Purchasing a foreclosed property is different than buying a home from an individual directly or through a real estate broker. You might be dealing with the bank, or the mortgage holder’s representatives or legal team. Expect the process to take longer than you think. Don’t expect to deal with one person throughout the process (although you might, if you’re lucky). And do keep meticulous records of each communication.

Try to buy when the property is in preforeclosure: Preforeclosure is the time after the homeowner receives a default notice but before the auction occurs. You might be able to work with the homeowner, instead of the mortgage holder. This is usually a quicker process, since the homeowner will be anxious to complete the transaction.

Scrutinize the neighborhood: if the home you’re buying is in an area full of foreclosed homes, its value may take a long time to appreciate. And, you’ll have plenty of competition for fewer potential tenants.
Why?

• Tenants might not be as interested in renting in an empty neighborhood.
• Some of those who would normally rent will instead be purchasing foreclosed properties to live in.
• If other rental property owners are purchasing foreclosed homes in the same neighborhood, you’ll be competing with them for tenants as well.

Find out whether the home was a rental or owner-occupied: 40% of foreclosures were purchased as investment properties. Find out if yours is one of them, and if you’ll be inheriting tenants. Ask how they cared for the property, and if they paid the rent on time. If the home was owner-occupied, make sure the fixtures are still in place (disgruntled people often strip the home prior to moving) and that there are no squatters to deal with (an increasingly common problem). If the place is trashed, you’ll spend a lot of your profit making it habitable before you even get to rent it.

A realistic view of a foreclosed property can help you determine whether or not to purchase it, and whether or not you’ll have a successful experience. Not all bargains turn out to be good rental property investments!

Due Dates
Many tenants have difficulty with the concept of due dates for rent. If rent is due on the 1st and late by the 3rd, is it really due on the 3rd? Plenty of people will interpret it that way, so plenty of landlords deal with this issue by allowing no grace period—rent is due on the 1st and late on the 2nd. This policy, while rigid, eliminates a lot of headaches.

If a tenant moves in on the 10th of the month, some landlords elect to prorate the first month’s rent and have subsequent rent due on the 1st of each month. Other landlords would have the rent due on the 10th of each month.

Prorating
To charge a tenant rent for 15, 20, or 25 days of occupancy, just divide the rent by 30 to obtain a per-diem rental rate. (Use 30 days as standard.) Then multiply by the number of days left until the 1st of the following month, when the full rent is due. For a $1200 per month rent, the daily figure would be $40. A tenant moving in on the 10th owes 20 days rent, or $800.

Late Fees
Depending on your state, late fees for delinquent rent payments may or may not be allowed. Often laws allow “reasonable” late charges . How will you know if your late fee is “reasonable?” Often, you won’t know until a tenant complains.

Ask other landlords in your area about average late fees—or search around the internet and you’ll find plenty of opinions. Some landlords charge flat rates; others do percentages. A 5% late fee on $1200 rent is $60. That’s enough to keep some tenants right on time. A $25 flat fee might not be much incentive. Some landlords charge by the day, increasing it as the days tick by.

If you plan to charge your tenants a late fee, state it clearly in your lease. For example:

Rent is due on the 1st of each month, and is considered late on the 3rd. Beginning with the 3rd day of the month, a $10 per day late charge will be assessed. On the 11th day of the month, the per-day late fee increases to $25, and a pay or quit notice will be issued.

Grace Periods
States that regulate late fees also specify that they cannot be charged until after a 3, 5, 7, 10 or other number of days after the rent is due. Some states require you give notice that late fee will be charged. Check your local and state laws regarding grace periods.

Accepting Late Rent Payments
If you have tenants who consistently pay rent late, along with the fee, they could feel that the rent isn’t “really late.” You should let them know in writing that late rent is late rent, and you will report their late payments as such.

Waiving the Late Fee
Most landlords would tell you “don’t do it.” Not even once. But waiving a late fee, just like whether to charge one in the first place, is completely up to you—it’s your money, after all!

What do you do when a good tenant is a couple days late on her rent because she was laid off? While some landlords would evict their grandmothers over a late rent payment, others won’t evict tenants no matter what. Most landlords probably operate somewhere in between these two extremes.

Here are a few tips from some understanding landlords about what to do when a good tenant is late with the rent:

1. Talk to the tenant: Quick communication is key. Don’t wait, and don’t ignore the problem.
2. Consider the market: If you’ve had trouble filling your vacant rentals, you might give the laid-off tenant more time to come up with the rent. It’s still cheaper and easier than kicking her out and getting a new tenant in.
3. Find out the bottom line: Is the laid-off tenant going to receive unemployment benefits? If so, that’s a good sign. Is she planning on staying in the area and looking for a new job? Does she want a different lease, or  out of the existing lease? Answers to these questions will help you make good decisions.
4. Consider offering a month-to-month lease: This gives you the most flexibility. If she finds a new job, you can always start over with a one-year lease.
5. Remember, she's a good tenant:  If there have been no other problems, complaints, or property damages, you might be better off to just add your late charges and let her stay.
6. But, don’t be a pushover: Just because you are willing to work with this good tenant doesn’t mean she's in control. Be firm, be clear in what you will and will not tolerate, and back up your words with actions.

Every situation with every tenant and landlord is different. If working with a good tenant who is having a tough time works for you, by all means do it. If it doesn’t, you’re under no obligation other than fulfilling your responsibilities under the lease.

There is a right way and a wrong way to handle tenant move-in/move-out inspections—and the wrong way can cost landlords lots of money. And who has extra money to lose in this economy?

So don’t make the classic landlord error of handing a new tenant the keys to your rental property, along with a move-in checklist to fill out. It’s up to you, the rental property owner, to ensure that the inspection is done correctly.

Here are some dos and don’ts on how to properly conduct a move-in inspection with a new tenant—before you hand them the keys!

1. Do conduct the move-in inspection with the new tenant. Don’t allow them to go through your rental property unaccompanied prior to moving in. And do have everyone present who is on the lease .

2. It’s not a bad idea to have your own witness, but don’t make it look as though you’re “ganging up” on your new tenant.

3. Do document the entire process with a camera and/or video, which can serve as your “extra witness.” And photos are a necessary part of the move-in inspection. Video is even better, since voices and comments can be recorded.

4. Do pay extra attention to areas that have problems, such as scratches in the floors or stains on the carpet. Bent window blinds, loose hinges, and dents in the walls should all be recorded.

5. Conversely, do pay extra attention to pristine areas of the rental unit for comparison when the tenant moves out. Spotless carpets, perfect hardwood and linoleum, and smooth walls should be pointed out.

6. Do have all tenants who signed the lease sign the inspection check list, and initial each page. You, the landlord, should do the same.

7. Don’t hand over the keys until you do all of the above and tell the tenant verbally and in writing that you expect them to take care of the rental unit.

8. Do make the consequences for damaging the rental property very clear in the lease and on the move-in inspection sheet.

Deciding which tenant is the right fit for your vacant rental property doesn’t have to be a difficult task. Your specific requirements will depend on your situation and the local rent market. But not matter how landlords’ requirements differ, the one thing all can agree on is that a thorough tenant screening check is a must for every tenant applicant. It’s just too risky to approve a tenant to sign your lease and live in your rental property unless you have thoroughly screened their criminal background and credit history.

Here’s what to expect from a basic tenant screening report:

Social Security Number and Address Confirmation: Using the Social Security Number provided, the applicant’s name and provided date of birth are compared with the records for that SSN. Alias names associated with that SSN will also be reported. Then, an address history is run, for insight into which court jurisdictions need to be researched for criminal records. With the SSN, alias names, and address report, all the information to run a criminal record check is on hand.

Evictions Reports: Standard credit reports do not include past evictions. Eviction reports provide details on any applicant court appearances, case numbers, dates, and the defendant’s name and address.

Bankruptcies, Liens & Judgments: Information about tax liens, small claims and civil action judgments as well as nationwide bankruptcy filings is provided, including court descriptions, case numbers, dates, amounts, and name and address.

Criminal Background: National court databases are checked, based on the tenant applicant’s name and date of birth. Data provided usually includes offense, date, courthouse, sentence, case number, and aliases. Not all states or all counties provide criminal database information.

Sex Offender Status: All 50 states require sex offender registration. From these registries, the report will include name, date of birth, SSN, physical descriptions, address, and offense type, date, and disposition. This information varies by state.

OFAC/Patriot Act Report: This report includes information from several government agencies to alert to an individual who appears on any terrorist watch lists or who is listed as an international narcotics trafficker.

Whether your new tenant applicant is a landlord’s dream or has a poor credit rating, lied about previous addresses, or hides a criminal past—you’ll want to know before you sign a lease! Tenant screening is your best choice if you want peace of mind about a new tenant.