Living La Vida Local
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area at this point in time. Oftentimes when you read listings, it says “Pride of Ownership” –real estate slang meaning, be happy you own it because you’re not making any money on it. Sure, the phrase, “I own apartment buildings” runs trippingly off the tongue, but when it comes down to it, do you actually know how to run a profitable building? If you’re on the West Side and trying to stay in the black, every dollar counts toward the bottom line. Here is an effective way to get your real estate empire organized…

  • LLC: Set up a single-person limited-liability corporation, or LLC.

“An LLC is a blend of some of the best characteristics of corporations, partnerships and sole proprietorships. It is a separate legal entity like a corporation but it is entitled to be treated as a partnership for tax purposes and therefore carries with it the "flow through" or "transparent" tax benefits that corporations do not have,” notes the Limited Liability company website at http://www.llcweb.com. “It is very flexible and simple to run and, like a sole proprietorship, there is no statutory necessity to keep minutes, hold meetings or make resolutions which can trip up many corporation owners.”

If someone is injured on one of your properties, or if somebody decides to come after you because the way you trimmed your hedge gave them an allergic reaction, the LLC becomes the legal target and your personal assets will be protected from liability claims.

  • INSPECTION + REPAIRS: It’s good to know what you’re going to get. Please invest in a thorough inspection of your property before you buy. Once upon a time, there were two investors, architects with a vision, who did their own inspection on a property in Santa Monica. They were so caught on their dream, that they missed the mold issues, and didn’t notice that the wood foundation had rotted out. Their little remodel went nearly $100,000 over budget. That property never made a profit for them.

Once you’ve done your inspection and you know what you’re getting into, get prices for the necessary repairs. Line up bids from several general contractors for quotes. If you need referrals, email us.

  • ACCOUNTANT: Use an experienced accountant. Regular readers know that there are powerful tax advantages to owning rental properties. Between depreciation, maintenance allowances and capital gains issues, tax benefits are abundant. Be sure to catch them all. For tax purposes, what you make in rent is generally taxable as regular income. Real estate taxes and mortgage interest on an investment property are fully tax deductible. Operating expenses such as utilities, insurance, repairs and condominium common charges are also deductible. Also nice is the fact that the federal tax code entitles rental-property owners to a depreciation deduction even though housing prices usually go up over time. (There are, however, numerous conditions and catches, which is why it is essential to consult a tax adviser before you invest a cent.)

 

  • LOAN: Are you buying 1-4 units? Can you get a residential loan? Check out your financing options.  Borrowing to buy real estate as an investment is more expensive than borrowing to buy a home. Lenders generally think they are taking more of a risk on buildings that the owner doesn't live in. Consequently, the interest rates they charge tend to be 0.5 percentage points or more above those for traditional home mortgages. Additionally, borrowers are expected to have excellent credit scores to qualify for the lowest rates.  Also – keep in mind the downpayment is higher – some lenders may require up to 35% down – depending upon the property, the borrower and the loan scenario.

If the down payment is an issue, ask the seller whether he's willing to self-finance the mortgage. As you know, with owner financing, the buyer signs a promissory note agreeing to make the mortgage payments directly to the seller. In exchange for forgoing a down payment, the seller typically gets a premium rate.

“It's a lot faster to sell a house owner-financed than conventionally," offers landlord Juan Rodriguez. “There are also brokers who buy owner-financed notes from sellers who want their money up front.”

If you have a taxable profit on the sale of real estate, business property or personal effects, the tax law allows you to be paid in installments that may stretch out over years. The advantage is that you don't have to report the gain on your tax return until you receive the money, so the sale won't push you into a higher tax bracket or boost your income to a level where you lose tax benefits. The disadvantage is that you don't get all of the money right away.

The terms of the loan or "carryback" vary, depending on the agreement between the seller and buyer. Typically, in an installment sale, the buyer puts down 20 percent to 30 percent of the sale price up front and pays the remainder in regular increments for a designated length of time, or in a lump sum at the end of the loan period. The seller collects interest on a regular basis throughout the life of the loan. As a result, he or she must pay capital gains tax on the lump sum amount in the first year, but not on the dollars still outstanding?

Next week we will we will cover things landlords need to think about once they purchase a multiunit investment property.

For information on Southern California investment properties there is a great website at www.SoCalInvestmentRealEstate.com.

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LORD OF THE LAND: RENTING AND RENOVATIONS:

Last week, we talked about the tangibles people and things you would need to build your multi-unit rental empire. Now we’ll discuss the intangibles – tenants and repairs.

An excellent suggestion on how to deal with tenants comes from Mike Butler, author of "Landlording on Auto-Pilot." Butler suggests that the property owner never tells the tenant they are the landlord. Instead, refer to yourself as the "property manager." It’s nice to have a black hat when it comes to property management. Instead of taking responsibility, you can say, "I'm just the property manager so I will have to check with the owner." That gives you time to think and to pass the buck if the answer is ‘no.’"

Picking tenants may ultimately be the most important real estate decision you make. A bad tenant can make you lose all interest in landlording. There are many ways and suggestions for selecting tenants. Some go with the wisdom of experience. Older people tend to be easier tenants than college students, but whatever filters you put in place for finding your tenants, be advised of fair housing laws. According to “Barron’s Real Estate Handbook,” the Federal Fair Housing Law is “a federal law that forbids discrimination on the basis of race, color, sex, religion, handicap, familial status or national origin in he selling or renting of homes and apartments.”

 Melanie and Gore own two small apartment buildings in the Mid-Cities area. They require potential tenants to provide Social Security numbers, ostensibly for criminal and credit background checks (know what you’re getting into). She also believes in checking references with employers and prior landlords. “It's more about renters proving that they have nothing to hide,” Melanie offers.

If prospects pass those tests, she and her husband always meet them in person. "I need to get a vibe off of them," she explains.
Another tenant tidbit - when checking references, don't stop with the most recent landlord. Contact the second or third most recent landlords as well.

"The current landlord may just want the tenant out of the property," says Jose, a local real estate investor.
Marcia suggests making an unannounced visit to the prospect's current residence. "Explain that your house is important to you, and that you want to get a sense for how they live."

"Your tenants are your employees" is the novel approach Butler uses to manage his residents. Butler admits most of his tenant applicants have less-than-ideal credit reports, but as a retired cop, he has rented to ex-convicts who became some of his best tenants after he leveled with them that he knew their history but was willing to take a chance on them.

If you’re hurting for tenants, another option is to sign up with the Section 8 federal government rent subsidy program, which helps low-income renters afford decent housing. Usually, Section 8 tenants pay 30 percent of their income for rent and the government pays the balance. There are city-by-city maximum rents.

“My best all-star 13-year tenant was on Section 8 subsidy. And my worst tenant, who only paid $10 per month rent (when she felt like paying), was on Section 8. I've had other Section 8 tenants who were neither very good nor very bad,” offers noted real estate columnist Bob Bruss.

The concept of Section 8 is great, particular if you’re dealing with senior citizens.
The downside is there is extensive paperwork for both tenant and landlord, and  it's hard to check tenant credit. For more information go to www.hacla.org/section8/home.htm.

“My biggest complaint is the annual inspections by a local housing authority inspector,” notes Bruss about Section 8 tenants. “Some inspectors are very nice. Others are the meanest people you will ever meet.

“My best advice is, unless you have trouble filling your vacancies with good quality tenants, avoid the hassles of Section 8 tenants,” concludes Bruss. “Most Section 8 tenants are extremely appreciative, but dealing with the local housing authority bureaucrats can be very frustrating.

HAVE A BUDGET FOR PROBLEMS

Just when you think your buildings are running smoothly…inevitably something happens. Your best tenants up and leave on a month’s notice…minor leaks grow into expensive repair jobs. That's why it's so important to know what you’re buying and to have a budget for repairs. Experts suggest  putting15%-25% of the annual rental income aside for maintenance…but you can never be sure.

Renee owns several rental properties around town. Recently, she bought a run-down duplex in Westchester. Her repair budget got blown through the roof.

"The last tenant had turned on the water on purpose and flooded the whole place," she recalls. "The floor, ceiling and walls were all messed up."

MANAGEMENT COMPANIES

Once you own a lot of units, you might decide to hire a management company to tend to your property empire. On average, fees run 5 to 10 percent of rental income. Experienced landlords say it's not worth it to be frugal with management companies: Good property managers often work harder to fill vacancies and to maximize rent when they make more money.
Butler's property management style involves an annual Christmas party for his independent contractor suppliers, such as electrician, plumber, maintenance people, handymen, roofer, tree trimmer, and other vendors. His annual holiday party, which features dinner and an open bar, costs less than $1,000, but when his properties need fast service his vendors usually put him at the top of the list.

For information on Southern California investment properties there is a great website at www.SoCalInvestmentRealEstate.com.