Archive for the ‘investing’ Category

Claiming a Tax Exemption When Selling a Home That is Now a Rental

Wednesday, October 10th, 2012

I’d like to share with you a recent question that I received from a reader of my blog. The question was:

“I lived in my primary home for two years and now it’s a rental, can I sell it without paying capital gains?”

My “short” answer is:

That depends on how long the house has been a rental.

No need to push when  selling your primary residence

By Way of Background Information

The 1997 Taxpayer Relief Act was a great boost for average people who wanted to sell their home and buy a new one. It was also a great boost for investors. Couples are allowed to exclude up to $500,000 of the capital gain on the sale of their primary residence. Single individuals can exclude up to $250,000.

In other words, the sale of the house is never reported on your federal IRS forms if the capital gain is less than the $500,000 and $250,000 limits.

This exclusion is based on compliance with two requirements:

1.)  The home must have been the primary residence for both spouses during two of the last five years. The two years do not have to be consecutive but if you rent out the primary residence for more than three years you would be required to occupy it again for two years.

 2.)  The exclusion is available only once every two years.

What if you sell you house and your capital gains exceed the established limit?

Capital gains above $250,000 for singles and $500,000 for couples are taxed at the applicable rate.

What if you sell your house before meeting the two year requirement?

If you qualify under one of the “unforeseen events” listed in  Internal Revenue Service Publication 523 Selling Your Home, such as a job change, illness or an unusual hardship, you can still qualify for a prorated exclusion.

The Ideal Strategy for the Pathologically Conservative Investor

Typical conservative investor.

Utilization of this tax exemption is the safest investment strategy for the conservative investor who wants to take few risks. This is the type of investor who wears both suspenders and a belt to hold up his pants. They like to play it really safe.

Under this strategy, the investors can qualify for the least expensive type of  loan, the owner-occupied loan. There is no need to worry about tenants destroying your rental property or not paying the rent. You completely control the investment by living in the property yourself. When you sell, you have the opportunity to make up to $500,000 tax-free profit every two years.

So, following that long-winded, yet surprisingly informative, background spiel, my “final” answer to the question is:

If you have lived in your house 2 of the last 5 years, you are entitled to take the exemption.

 

Coming Soon!

How to Turn Your Home into a Rental House, Instead of Selling It

Add “Start a Rental House Business” to Your Bucket List

Friday, August 24th, 2012

Taking a break from my regular fixer upper rental house blogging, today I am going to comment on some favorite blog articles that I have recently read.

Fearless Men

While I agree with Fearless Men’s article on the silliness of most bucket lists, in their article, 12 Things A Man Doesn’t Have To Do Before He Dies-Stupid Bucket Lists, I also think that starting a part time business is the exception to the rule.

While most bucket lists consist of activities that might reduce your life expectancy ( e.g., bullfighting), or your ability to enjoy life (e.g., broken body from the ever-popular choice of skydiving), a part time business, like owning rental houses, can actually improve your life.

Landlord Investor

Chuck’s article on Vacancy, First one in a while for us . . . is an insightful description a recent episode of  losing  and replacing a tenant. I appreciate this “real life” rental story that I can both relate to and learn from.

Louisville Gals Real Estate Blog

In her article entitled, 13 Cool Tools to Make You a Marketing Superstar, Sharon describes 13 amazing tools to help real estate investor to streamline their business. This is great for me because I didn’t know a lot of these things even existed, or that I needed them, until I read her article.

Any Shiny Thing

I actually read Lynn’s article Nora Ephron Left Us Sleepless a couple of weeks ago. It’s the type of article that touches your heart and makes you reflect on life’s bigger issues.

Turn Your House into a Rental House

By now, you probably know that my theory is that one of the easiest ways to get started in real estate investing is by turning your home into a rental house, instead of selling it.

My wife, Angy, and I are presently finishing up a book about how we go about doing this, entitled, not surprisingly, How to Turn Your Home into a Rental Property, Instead of Selling It.

Here is a quote from a book

According to the American Association of Realtors, the average American purchases 7 houses during their lifetime. In our opinion, those are 7 houses that we should hold onto for the rest of our lives, to generate monthly income and for long-term economic family security. Don’t give away the goose that lays the golden eggs!

 

The usual procedure that most people follow is to sell the home that they live in and to use the cash from the sale to buy a new house. If we tweak the old procedure just a little, it can result in a huge difference in our net worth and our economic security. We propose that instead of selling your home, just refinance it, and use the money from the refinance as a down payment on your next house. Now, you own two houses and you can just turn your old home into a rental property.

Presently, the book is going through the final editing and formatting process. Of course, it’s being reviewed by Homeland Security and the Pentagon, to avoid any classified information from leaking into the wrong hands.

By September the book should be available in both Kindle and paperback editions.

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Remove that Garbarge Disposal Now!

Getting Started; Choosing a Strategy for Real Estate Investing

Thursday, November 18th, 2010

This is a guest post from Sharon Vornholt, an investor at http://bit.ly/LouisvilleGalsRealEstateBlog. Her blog provides very practical information for investing during these times of tight money. She speaks with eloquence and a solid base of knowledge in the area of wholesaling. It’s an honor to have her write today’s guest article. Visit her site to get a free copy of the classic book “The Richest Man in Babylon.”

I am asked from time to time about my real estate business, how I got started as a real estate investor, and how I chose my primary strategy for my business. I became interested in investing in real estate about a dozen years ago. A realtor friend of mine took me to my first REIA meeting as her guest, and I was completely hooked!

I had another business at the time; I owned and operated a home inspection company from 1991 until 2008. It was during that time that I began to “dabble” in real estate. It took me a couple of years to buy my first property which was a rental. In the next 7-8 years I bought several more rentals and did some rehabbing. Wholesaling was still pretty much a mystery to me at that time. Throughout the years, I always attended the monthly REIA meetings, attended seminars, boot camps etc. I have always been passionate about learning the business of real estate investing.

When I made the leap to full time investor in 2008, I needed to replace the income from my previous business. I already had a pretty good idea of which strategy that I wanted to pursue. Even though I had rental property, I really didn’t like being a landlord and that didn’t take care of my need for a paycheck. I loved rehabbing houses and the process of turning “ugly houses” into a home someone could be proud of, but houses were sitting on the market for long periods of time before being sold. So, I decided against the strategy of fixing up houses and then reselling them. But there were a lot of real estate investors that were still active rehabbers in my area, so I knew that what I would put my focus on was wholesaling.

Wholesaling is a strategy where you can earn large chunks of cash using very little of your own money in a relatively short period of time. In my opinion, it is one of the safest strategies you can pursue when you are starting out. Whatever strategy you ultimately decide to focus on, wholesaling should always be part of your business. If you are a landlord, wholesaling can provide you with cash to pay down the mortgages on your houses. Rehabbers can wholesale some of their unwanted houses to build up a cash reserves for the projects they are working on.

There are two questions that always come up for anyone new to real estate investing. How do I find deals and what do I do with them once I have found them? I have always been a marketer so finding deals was something that I understood. I knew that I would have to develop a marketing plan and work the plan. All of those books, tapes and seminars had prepared me for the many ways to find houses. But I was absolutely terrified that I would find a house, put it under contract and not be able to sell it. This is a huge concern for most folks getting started in real estate investing.

The best place you can start to build a buyers list is at your local REIA club. My club is one of the largest in the country with hundreds of members. Once a month we meet for dinner, and we always have a speaker. Our club is committed to educating its members, and we are very lucky that they bring in national speakers in addition to our local experts. Members also have the opportunity each month to put materials out on a table before the meeting. They can put out information about a property for sale or for services that they can provide to the members. Any member that has a property to sell can go up before the group and do a “property pitch”.

I have bought and sold a lot of properties within that group. You have a ready made “buyers list”. As an added bonus, we have a directory of all of the member’s contact information. So each time I have a property to sell, I can shoot out an email to the groups’ members. If you are just starting to build your buyers list, I have also had pretty good luck adding folks to my buyers list through Craigs List. When I put a property on Craigs List even if I don’t find a buyer for that particular property, I always end up adding at least a couple of investors to my list. Finding buyers and keeping a good buyers list is an ongoing process, but it’s not too difficult once you get the hang of it.

Ultimately, everyone has a different way of choosing their primary strategy for their real estate investing business. Some folks know from the get go that their primary focus is to buy and hold properties and that is all they do. Other people love the rehabbing process, but don’t like being a landlord. I have done just about everything since I started investing in real estate. There is no denying that buy and hold is the way to build long term wealth. Whatever your strategy, I would encourage you to add wholesaling to your investing business. Think of those “chunks of cash” you get from wholesaling properties as a way to fund your business and put extra cash in your pocket.

Sharon Vornholt has been investing in real estate since 1998 and is a member of the Kentuckiana Real Estate Investors Association. She also has a blog for real estate investors of all levels of experience that you can find at http://bit.ly/LouisvilleGalsRealEstateBlog.

Getting Started with Fixer Upper & Rental Houses (Video)

Friday, September 10th, 2010

I think that buying fixer upper houses and turning them into rental properties is the easiest way to make money in real estate. You can do it in your spare time and still work your 8:00 to 5:00 job. And, rental houses can create a steady new income stream, that could even allow you to retire from your regular job, as I did.

This video which provides a general overview of the process for starting up a fixer upper and rental house business.

When we buy a fixer upper house, “we are what we are”

Monday, August 2nd, 2010

I was watching the movie Australia last night, starring Nicole Kidman and Hugh Jackman. It was such a classic tale that it sent chills down my back.

A man starts up a small cattle empire in the outback of Australia. He is killed and his inexperienced wife has to take over the operation. She’s in way over her head, but in order to save the ranch she has to drive the herd thousands of miles to the market. She asks her ranch hand to lead to trail drive.

The tough ranch hand assembles a rag tag group, which include of a drunk, two aboriginal women, a young boy, and the wife, to herd the cattle.  Despite stampedes, poisoned watering holes, and other travails, they keep moving on.

We are what we are

Before the trip begins,the ranch hand addresses his team and goes over the “dos and don’ts” of working a cattle drive.

At the end of his speech he says, “Well, we are what we are.”

He said it with some degree of exasperation at having to use vastly unqualified people on the drive.

But, I also thought that he said it with a sense optimistic determination. As if he is saying, “This is all I have to work with. Its not as good as it could be, but I’m going to make it work and we’ll get these cattle to market.”

I am what I am

When you buy your first fixer upper house, it also requires that you take the attitude that “Well, I am what I am.”

You don’t have all the experience that you might want to begin, but you don’t let that stop you. There’s a lot to learn and you learn as you go. Your determination gets you over a lot of obstacles.

Upcoming Radio Interviews

August 20, 8:30 am, I will be on David Sutton’s show, KSRN 1490 am, Los Alamos, New Mexico.

August 25 at 8:08 am,  I will be on Jeff Anderson’s show, KSDR 1480 am, Watertown, South Dakota.

Watch this space for further developments!

Protecting Rental Properties: LLC vs. Insurance

Tuesday, May 18th, 2010

I met Tucson attorney John Gravina following a presentation that I gave at the Tucson Festival of Books. We talked about different ways for rental property owners to protect their properties and safeguard their liability.

I asked John if he would write a post for my blog on this topic and he kindly agreed. Below are his insightful comments.

———–

Recently at the Tucson Festival of Books workshop, in addition to self publishing, you mentioned your underlying rental property business. I was more interested in your underlying business since I too have rental properties. I am also an attorney that represents claimants in negligence claims, workers compensation, social security disability, probate and estate matters.

So, I am one of the attorneys that will sue a landlord under premises liability if there is a case. What is frustrating to me is the fear of law suits against landlords that they will lose everything.

I have found at similar seminars (not yours) business consultants coincidentally selling limited liability companies and/or promoting their use as some kind of immunity or shield against law suits.

Protect Assets with Insurance

I advise property investor’s landlords to get insurance. If you have insurance, you really don’t need to worry about lawsuits since the insurance should defend you and indemnify you (pay) for any suit. The best asset protection is purchasing insurance.

Also, premises liability suits are some of the most difficult cases to take. Call around and ask for an attorney on a slip and fall case and you will be surprised by the lack of interest.

My advice to landlord property owners is to have a good insurance broker. Discuss with the insurance broker your specific concerns of a handy man being hurt and/or a tenant suit. It’s important that you are very specific at this meeting. Later if you are sued, you can bring this conversation up for coverage under reasonable expectations.

A landlord should have a business relationship with an insurance broker. All insurance needs such as liability, workers compensation, premises and an umbrella policy should be covered. If the selling agent states coverage is available, this should be confirmed in writing, such as providing a letter itemizing specific coverage.

Reasonable Expectations

Arizona had wonderful insurance law on reasonable expectations. If you go to an insurance broker for a specific example or insurable interest, the broker or insurance company can be bound. Under Arizona Law, reasonable expectations of a contracting party are to be enforced even if the written contract, such as an insurance policy/contract is contrary under the Darner decision/doctrine- 682 P.2nd 388 (Ariz., 1984).

There is a very famous landmark case in Arizona under reasonable expectations and insurance law. An auto broker went to his insurance broker requesting insurance on all of his vehicles. The broker wrote a small policy on one vehicle. The consumer was able to have coverage on all of his vehicles under the reasonable expectations.

It really should go without saying property investors need to be reasonable in their dealings. Underlying most premises liability issues, is notice. So, as a property owner if you are on notice of a dangerous condition, it must be fixed.

Notice of Dangers

The landlord obligation for premises safety may be summed up as Notice. For example, in Siddon’s, a four year old child was injured by a heavy door removed to allow access to the leased premises. The tenant asked the landlord to remove the door.

Another example is Shields, a landlord renting to a tenant repair shop that allowed pit bulls, that the landlord knew were dangerous.

I could go into some other areas such as fraudulent transfers, but that would be well beyond the scope of your inquiry. Perhaps in the future I could address this too for your readers.

John A. Gravina
Attorney at Law
John.Gravina@Azbar.org
http://gravinalaw.com/
520.795.4330

Breakdown of townhouse purchase costs

Friday, February 13th, 2009

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Here are the final numbers on the rental property that I purchased.

Price: $106,000
Interest rate: 5.125%
Term: 30 years
Down payment: $21,200
Principal & Interest: $457.37
Taxes & Insurance: $128.87
Total monthly payment: $586.24
Estimated rent: $770

The townhouse is 1100 sq.ft., 2 beds & 2 baths, washer, dryer, carport, and small back yard. It has a great central location and should rent easily. I have another property nearby that is very easy to rent.

It needs some cleanup and repair work in the kitchen, fire alarms, blinds in the windows, new toilet sets, etc. There is nothing big that we have to do to it. With my wife and kids pitching in, we should have it ready to go by the end of the weekend.

Here are a few more photos of the kitchen, the living room, and the back yard.



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Millionaires and rental properties

Wednesday, December 31st, 2008

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What do millionaires do that most other people don’t do?

According to Thomas Stanley, in The Millionaire Next Door, most American millionaires own their own houses, and they own at least one rental property.

Rental houses are the silent wealth creator.

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The Door of Opportunity is Open

Tuesday, August 19th, 2008


It’s easy to get started investing in real estate, but there are few basics you will need to get going on the right foot.

For further guidance read my latest ezine article entitled “The Door of Opportunity For REI is Always Open, But Bring Along Good Credit and a Desire to Learn”.

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Closing day approaches on fixer-upper townhouse

Monday, July 7th, 2008


The purchase process is winding its way toward a conclusion for the fixer-upper townhouse that I am purchasing. I had the inspection done last Wednesday (naturally, I followed the inspector around so I could see the problems that he saw), the appraisal should have come in today, and we are closing Friday.

The good faith estimate from the mortgage company came in at around $650/month PITI. I plan to charge $775 for the base rent on the new townhouse. We put 20% down on the $105,000 sales price, and the seller cooperated by paying for part of the closing costs out of her proceeds at closing. (I’m going to discuss that in more detail in a future post.)

It’s a property that’s really worth a hoot because it has all the right things wrong with it. It needs paint, needs vinyl tiles replaced, needs wood putty in door holes, a few outlets are cracked, has some oil on the driveway, and it has a few leaky faucets. On the plus side, the A/C is only one year old and the roof is solid. And all the appliances work. It should take about week to get it in ship shape.

The best part about the deal is that my other unit, 3 doors down, rents like hotcakes. As soon as we put the For Rent sign up, we have people knocking on the door. I’ve been waiting for another one these units to open up at a decent price.

On another note,

There’s a good aritcle comparing oil vs. latex paints over at fliprent.com.

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