Posts Tagged ‘dealing with tenants’

Serial Home Seller Tax Exemption, Part 3

Thursday, January 10th, 2008

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Advantages of selling a home every two years and claiming the exemption:

1. No more dealing with tenants

One of the biggest gripes of real estate investors is dealing with problem tenants. In fact, based on what I have heard from former investors that I have talked to, that is probably the biggest reason that investors decide to get out of the business. The next best thing to biting the bullet and learning how to deal with tenants through the school of hard knocks (or reading a copy of Property Management for Dummies), is to have no tenants.

Who wouldn’t want a world without tenants? It’s a dream come true! No more weekend calls about clogged garbage disposals and toilets not flushing. No more staying up late balancing the books. No more late payments and far-fetched excuses. No more rush to put the place back together and quickly rent it out again, when someone moves out. No more surprise midnight moves by tenants who get out under the cover of darkness.

2. Lower interest rate

Owner occupants can pay 1% less for their mortgages than people who don’t live in their investment properties. For a $200,000 house that can be an additional $132 a month, or $1,584 per year, that you don’t pay for your mortgage.

3. You control the whole process

If you become a serial home buyer/seller and move from one house to another every two years, you alone are in total control of your investment future. You’re captain of the ship.

Since you live in the house, maybe while you fix it up, you’re just making mortgage payments that you would be making anyway, if this wasn’t a business for you. So, you’re not out any extra money, except for the closing costs when you buy or sell.

If you decide you want to live in the house a few years longer, no problem. You can live there as long as you want to, 20 years if you like, and still take the tax exemption.

But you can also decide to buy and sell every few years, and each cycle buy a nicer home, like Suzanne Brangham did, as described in her book Housewise: the Smart Woman‘s Guide to Buying and Renovating Real Estate for Profit. She started in San Francisco in 1972 when she couldn’t find a job that she liked. She decided to create her own career. She started by investing $9,600 in a condo and wound up renovating and selling 71 houses and apartments.

Regarding self-reliance, Ms. Brangham says:

“The biggest lesson I learned in the property business in that there are no absolutes except yourself. Prices fluctuate; products change. Markets move up and down. Tax laws are rewritten every year. Interest rates are as predictable as unwired champagne corks. But there is one stable element in all of this: the person who renovates for profit.”

Disadvantages of utilizing the exemption every two years

1. No long-term profits

In addition to losing the headaches associated with tenants, you also lose many benefits by selling rather than renting. You lose:

a. An monthly rent payment. Its easy to get used to those once they start coming in.

b. Tenants are gradually paying off your mortgage for you.

c. Tax deduction for depreciation and for interest on your loan.

d. You lose the long-term appreciation of 5% per year. Its nice to have the option of cashing in on that appreciation by selling off a house or two when you are ready to retire.

2. It’s difficult to time the market

This is not a disadvantage of the exemption as much as a disadvantage of operating a business of buying and selling every two years. Under this investment strategy, you may not be able to time your house buying and selling to accommodate the fluctuations of the market. For example, many would say that now is not the best time to sell. Some real estate analysts say that cycles usually last between 2 and 10 years, and naturally the ideal time is to sell is when demand is high and the prices are up.

A similar problem exists for buying your properties, you may be caught in a cycle when prices are artificially high.

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What is the secret to overcoming these seemingly insurmountable obstacles? Where do you turn? What’s that up in the sky? A bird? A plane? Who was that masked man?

The next installment of this series will address some of those questions.

Part 4 of Serial Home Buyers/Sellers, What properties do serial home buyer/seller buy?

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Dealing With Tenants Who Suddenly Move Out and Leave the House a Mess

Wednesday, June 27th, 2007

Sometimes in our fix em up rent em out real estate business we have tenants do unexpected things.

Last week I had some tenants suddenly move out of a house they were renting from me. They left behind unpaid rent, a messy house full of clothes, magazines, food, and a lot of other things for me to haul off. They were having marital problems and money problems, so it was not totally unexpected. But what, I asked myself, could I have done to stop this hasty exit, which left me with a lot of extra cleanup work? Not much, was the answer I came back with, it just goes with the territory. We ran background checks and called references at the beginning, and they came up clean.

My wife and I use the deposit to cover clean up costs, but since we do all the clean-up and repair ourselves, its a matter of us spending more time than normal getting the property ready to go again. A change that I am going to make to the basic contract, for the next tenants, is to charge an extra $25 per month for any pets. Formerly, I had it as a $100 deposit for dogs. One thing that tenants rarely do, in addition to never changing the air filter, is to never completely clean up after their dogs. Another thing that I am getting tired of cleaning up is oil spills in the carport. So, I’m going to state in the contract that any oil spills that we have to clean will result in an automatic $100 charge taken off their deposit.

Beyond the extra time spent to clean up, I do always get a sense of enjoyment and satisfaction in cleaning up and repairing a property between tenants. I have the sense that anything they can break, we can repair. My wife and I have done it frequently enough, these are the third tenants for this property, that its become routine for us to do the repairs. It just took a little longer this time.

On a lighter side, below are five rules NOT to follow to run a successful house rental operation that I have found useful. They are adapted from Andrew Stefanczyk’s posting on Investalist.co.uk.

The Five Rules on How to Lose Money and Get Your Rental Property Trashed by Your Tenants

Rule 1
Choose the worst possible area. The location of your investment property will determine the kinds of tenants you will attract, and how much rent you can fairly charge.

Rule 2
Put the very best of everything in when fixing up an investment property. Luxury bathrooms, thick pile carpets, plasma TVs. Never shop at stores that recycle construction supplies. Spare no expense.

Rule 3
Make sure you have absolutely no experience in making basic repairs. Not knowing how to change electrical outlets, unclog drains and toilets, and replace broken windows will cost you quite a bit of money down the road.

Rule 4
Do not screen your tenants. This may be the most important step to making sure you lose money as a landlord. Do not ask for or check references. Do not call previous landlords and ask questions like, did they pay rent on time? How was the condition of the house or apartment when they left? Did they ever disturb neighbors with loud music or shouting matches? How often would you have to make special trips for repairs? Being as uninformed as possible about whom you rent to will make a huge difference and will increase the chances that you will get tenants that will trash your property and refuse to pay rent.

Rule 5
Make sure you have not learned about your rights as a landlord. Be completely unfamiliar with the eviction process to guarantee long, drawn out disputes with tenants. Don’t keep up to date financial records or copies of correspondence with your tenants. Most states provide online information about tenant and landlord rights so avoid reading these.

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