Real Estate Investor Stimulus Package

Originally posted 2009-04-03 06:13:44. Republished by Blog Post Promoter

Recently, I found a podcast that gives eight steps to help real estate investors reduce expenses.

Norm Berlin and Dusty Elias Kirk give great action plans/steps to reduce expenses.  Visit http://www.pepperpodcasts.com/pepper_podcasts/2009/03/eight-steps-to-finding-real-estate-savings-in-a-tougheconomy.html to find out how you can reduce your expense by utilizing property tax appeals, lease back of unused space, life time exchanges, government incentive package, etc. 

Consult an attorney or accountant in these economic downturn times to find ways to save money and reduce expense.

Real Estate Investor Related Articles

Protecting Your Investments - This article discusses the business entities that are available that are available for investors to protect their personal assets when buying and holding properties.

 

 

Property Tax Related Articles

Indiana Property Tax Appeal (Part 2) -Filing a property tax appeal can be difficult.  This article gives links to the forms needed to file the appeal and a video tutorial on filling the forms out.

Beware of the Due on Sale Clause

Originally posted 2009-03-19 10:06:35. Republished by Blog Post Promoter

Recently, I found an article, http://realestate.bryanellis.com/25/land-trusts-misunderstood-misapplied/, that a homeowner/investor needs to be aware of if the homeowner/investor is planning to lease option or do a contract for deed on his or her property.

The due on sale clause is a clause that precludes a homeowner/investor from allowing a buyer/leasee to assume the mortgage.  If you are planning to use a lease option or contract for deed read your mortgage to ensure that this clause does not exist.  This clause will cause the mortgage company to foreclose on your property if you  utilize the lease option or contract for deed without getting consent from the mortgage company, so seller beware.   The good news about this clause though is that it may not be part of your mortgage due to the low interest rate, but it is important to make sure that you are not in violation of the clause before you do the lease option/contract for deed.

The due on sale clause may not affect you, but it very important to be aware of the possibly of this clause due to the greed of the mortgage company, so please read your mortgage before you sign.

Real Estate – Latest News

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<a href=”http://www.finweb.com/real-estate/3-non-traditional-real-estate-investing-techniques.html”>3 Non-Traditional Real Estate Investing Techniques – Financial Web</a><p>If you are looking for non-traditional real estate investing techniques, you are definitely not short on options. Many investors think that the only way that you can invest in real estate is to save up money and buy a house to rent.</p>

<a href=”http://www.bukisa.com/articles/226361_become-a-real-estate-investor”>Become a Real Estate Investor | Bukisa.com</a><p>Are you looking for a new way to make money? Are you tired of your current career? If so, you may want to look into becoming a real estate investor. Thousands of people in Arizona have become real estate investors, and have in turn made …</p>

<a href=”http://www.atlantarealestateforum.com/atlanta-business-chronicle-lists-19452/”>Atlanta Business Chronicle Book of Lists | Top Atlanta Companies …</a><p>On December 25, 2009, The Atlanta Business Chronicle released the 25th edition of The Book of Lists. This book contains 124 lists that rank metro-Atlanta.</p>

Real Estate Investor, Beware

Originally posted 2009-01-01 22:53:35. Republished by Blog Post Promoter

The IRS made changes to the tax that will affect 2007 tax returns if the investor claims a loss. In addition, just reporting a loss may cause your taxes to be audited.

The new law has to do with the real estate investor classification. The investor can be classified as a real estate professional. Under the new law, the investor qualifies as a professional, regardless if licensed real estate agent or broker by working at least 750 hours on real estate activities. The IRS considers real estate activities to be renting, leasing, converting, operating, developing, redeveloping, managing, constructing, and acquiring of real estate.

In addition, as a real estate investor you are limited on your deduction to your passive income in the amount of $25,000. That amount decreases as your passive income increases and tops $100,000. Still yet, the eligibility for the deduction disappears as your income goes over $150,000.

The reason this change came about was due to the increase in number of investors during the market “boom”.

The ramification of these modifications to the tax law hit the investor who works a full time W2 job the hardest. Remember, the losses can only be taken on passive income.

However, under that same law there are two classifications for passive losses. There is material participating passive loss and passive loss.

The material participating rule requires that the investor work on each property for 500 hours. The work can be any or all the qualifying activities listed above. The investor can also opt to combine all properties under one 500 hour block, but the election must be made at the beginning of the tax year.

Another tax law change is that in the designation of a limited partnership’s interest. The properties owned and/or held under this entity is no longer considered material participating, so are not eligible for the deduction if there is a loss.

It is important to note that no longer can research of potential properties that the investor is considering adding to his or her portfolio a valid passive activity.

Keeping accurate records is crucial. The investor needs to keep date, time, location, and activities and in some cases it may be helpful to have photos to show evidence.

The changes mention above came out in December of 2007 and are retroactive to 2007 and may be earlier tax returns. Have your accountant review your current and previous returns to make sure you are in compliance.

Related Real Estate Investing Articles

• Help Offered for Indirect Investors With Madoff (nytimes.com)
• House Flipping Makes a Comeback (online.wsj.com)
• Homebuyer Tax Credit Provides Incentives for Buyers Says Elika Associates (prweb.com)

Surviving a Recession in Real Estate (Part 5)

Reducing cost on maintenance is accomplish by planning major repairs.  If the property needs a roof, plan and budget for that repair.

Each month that you receive the rental payment the money should be divided by expense then the remaining would be considered profit.  For example, if the annual property taxes are $1200 then the monthly property taxes are $100 a month.   If the annual insurance premium is $850, then the monthly insurance premium is $70.83 month.  If there is a mortgage, the principal and interest payment maybe $250 a month.  The real estate investor needs to account for maintenance, as well.  Most real estate investors that I spoke with and including myself use $75.00 each month for maintenance.  The investor may want to consider setting aside some money for accounting and legal fees from the monthly rental amount, as well.  Fifty dollars for both should be sufficient.  This amount will give you more than enough to cover the additional income tax preparation fees when filing income taxes.

To recap, the monthly expenses are:

$50.00 accounting/legal

$75.00 maintenance

$250.00 principal and interest (mortgage)

$100.00 property taxes

$70.83 insurance

$545.83

This example has a three bedroom home that currently rents for $750.00 a month, after expenses, the investor has a profit of $204.17 a month or $2450.04 annually.   Pretty good, huh.

Well, this too may need to be evaluated for cost reduction so that your profit margin can be increased.  You may want to consider refinancing for a lower rate this one change alone may save you hundreds monthly,  and thousands in interest payments, annually.  You may want to consider an area where the rental values are higher when purchasing your investment property.

You may want to increase your insurance deductible, thereby reducing your annual insurance premium.  An important note here, unlike your auto or health insurance, the deductible for landlord insurance or home insurance is taking out of the claim payment.

Record Keeping for Real Estate Investors

Originally posted 2008-12-18 02:22:43. Republished by Blog Post Promoter

An investor needs accurate records of his or her rental income and expenses to prepare the investor’s income tax return.

                The following items should be recorded to collect required income tax information for each individual property:

·         Rental Income/Capital Expenditures

·         Rental

·         Expense

·         Additional Information

·         Sale of Rental Property

On the rental income form, enter all rents received even advance rents.  However, security deposits are not classified as rent.  Once the deposit is converted into paid rent or damages then it is calculate as rental income.  If the tenant performs services or the tenant pays for repairs and the investor compensate him or her through reduced rent, include the value of these services as rental income.  In addition, the investor will be entitled to an equivalent deduction for the expenses.

                Upkeep and maintenance of the property are considered rental expenses.  In addition, the cost of labor paid to contractor to maintain the property for the investor is a rental expense, as well. The payment to the contractor is income for the contractor; therefore, as an employer the investor needs to collect the social security number of the contractor so that the investor can withhold and pay employment taxes for the contractor.  The contractor will need to fill out W2 form.      

                Another expense that the investor will have is travel.  Travel include going to the rental property to collect the rent and trips to deposit the rent into the bank.  For mileage, keep a log. 

                Capital expenditures are expenditures that improve the useful life of the rental property.  Purchase of furniture or appliances for the tenant’s use are capital expenditures, as well.  These items may have a useful life of over one year and need to be depreciated.  For example, the difference between repair and replacement of a roof determines whether the item is an expense or capital expenditure.  If shingles on a roof is replacement, but not the whole roof replaced then the work is a deductible expense; however, if the entire roof is replaced then it is a capital expenditure because it extended the useful life of the property.

                If the property is used for both personal and business use then expense will need to separate between personal and rental use.  The interest, taxes, insurance, and utilities are partially deductible expense. On the other hand, repairs to the rental property are fully deductible expenses.   To determine the investor’s personal expenses, a business use percentage will be determined and this amount will be applied to the partially deductible expense to calculate the personal expense.

                Accurate recordkeeping will help the investor ensure that him or her get credit for every deduction that the investor is entitled too.  It is also important to keep receipts and payment records of all items listed.  Lastly, keep all records and closing papers of rental properties bought and sold.

 

 

Indiana Property Tax Appeal (Part 2)

Originally posted 2008-12-28 16:10:20. Republished by Blog Post Promoter

To get the forms needed for filing your property tax appeal visit
for Form 130 also called Form 11 CI www.in.gov/icpr/webfile/formsdiv/21513.pdf

For Form 11 RA visit http://www.in.gov/ibtr/files/DavidandPatriciaSullivan.pdf

For Form 113 visit http://www.in.gov/icpr/webfile/formsdiv/46725.pdf

Below is a video for filling out the form if your property is located in Porter or La Porte County:

If you need additional information or need the form, please email Serena at snorbrown@yahoo.com

Related Articles

Evaluation of Property Tax Appeal Findings

Property Tax Appeal Review (Video 1 of Section 1)

Indiana Property Tax Appeal

What is Assessed Value and How Does It Influence My Property Taxes

Outraged Over Property Taxes

Great News the End of High Property Taxes

The 5 Most Costly Mistakes A Real Estate Investor Can Make-How Many Are You Making Right Now?

The five costly mistakes that a real estate investor can make is not:

• protecting the assets in his or her portofolio
• researching the town or community the investor is buying in
• knowing the fair market rents
• knowing what type of property is most profitable for the investor
• knowing the cost of rehabing and maintaining a property

Protecting your assets is your number one priority because the real estate market is not yielding many opportunities for flips.  A flip is when an investor purchases a property and rehab it and then sells it to another buyer.  Sometimes this happens before the property has been owned by the investor for six months.   The longevidity of ownership is important because FHA requires that the owner owns the property for at least six months before he or she can sell it to a FHA buyer. 

The investor, on the other hand, desires to sell a property as quickly as possible to prevent paying holding cost.  Holding cost can be mortgage, maintenance, taxes, insurance, etc.

In today’s market, the investor is able to buy at a low amount, but may not be able to sell for the desired profit margin that have been enjoyed by other investors in the recent past.   Therefore, it is important to protect your asset because the investor will be holding the property  until such time that he or she can sell it for the desire profit margin.  The investor protects his or her asset with insurance.   It is also recommended that you form a business entity to protect your personal assets.

The insurance needed depends on whether the property is ready for occupancy at the time of purchase or not.  If the property needs rehab, you will need a builder’s risk policy.  A builder’s risk policy covers the building, the items needed and purchased during rehab from theft, vandalism, or from other disaster.

If the property is habitable then you will need a landlord policy.  The landlord policy covers the building and all items that you provide to the occupant.  Be sure to explain to the occupant and have it as part of your lease that the occupant will need to have rental insurance policy to cover his or her personal items. 

For added protection, the investor may consider additional liability coverage. 

The investor needs to treat his portofolio of properties as a business; therefore, it is recommended that he or she consider having the properties under a land trust and/or business entities.  Please read these articles for more information on the advantages and disadvantages for both the land trust and the business entities:

• Land Trust is a Good Option for Investors in This Market
• What is a Land Trust?
• Trust Transfer Made Easy

The investor must also understand the market, know the fair market rents, know the cost of rehabing and maintaining the property, and  research the neighborhood that he or she is interest in investing in.  Please read the articles below for more information on that:

• What to Look For In Income Property
• Thinking of Becoming A Real Estate Investor

If an investor is prepared and do research investing can still be as profit as it was in the recent past.

Thinking of Becoming a Real Estate Investor

Thinking of becoming a real estate investor? The first thing that will make this endeavor achievable is that the investor must understand his or her market. There are two different types of markets. One type of market is a seller’s market, and the other type of market is the buyer’s market.

 

The Buyer’s Market

In a buyer’s market, the buyer must be aware that being in a buyer’s market doesn’t make the buyer’s job any easier. It just gives the buyer more flexibility. Remember in a buyer’s market, there may be several buyers for one property or only one buyer for a property. If there are no other buyers for a property by virtue of the length of time the property has been on the market then a low offer may come in to the seller. Sorry sellers. However, sellers that do not mean that the property has to given away, but it may mean that the seller could have to settle for less than the seller anticipated selling his or her home for.

 

Another thing that makes a buyer’s market advantageous to the buyer and not to the seller is that there are a lot of homes to choice from that may meet the buyer’s criteria.

 

The Seller’s Market

In a seller’s market, on the other hand, the seller has the upper hand. The seller can price his or her home significantly above market value and negotiate the purchase price to exact what the seller wants the purchase price to be. Sorry buyers. If the buyer really wants a home in a seller’s market, the buyer must succumb to the seller’s terms in order to get the home. As a matter of fact, in a seller’s market the inventory of homes for sale that may meet the buyer’s criteria are fewer.

 

Choosing the Property

Once the investor has ascertained the type of market he or she is in then the investor is ready to buy. Now, the investor must determine what type of properties work best for him or her. That means does the investor want to purchase single family homes or multi units? With single family homes, it is very important to determine what will happen if the property is vacant. The investor must determine if he or she can pay the mortgage if there is a mortgage on top of other expenses if there is not a tenant or the tenant is not paying. In those calculation must be the upkeep of the building to include utilities and maintenance not only the mortgage, taxes, and insurance. If that is affordable then move forward. If not, then look at those options with a multi unit and determine which scenario works better for the investor’s financial situation if there are vacancy. Do not be fooled that there will not be vacancy during sometime of the investor’s ownership, so it is best to look at that now rather than later.

 

Now, that the investor has determined which property type works better for his or her financial situation, the investor can now move forward. Another thing that the investor must consider is that it is always must easier to rent three plus bedrooms than a two or one bedroom.

 

Buy and Hold

Up until now, the suggested scenario for the investor has been about the possibility of buy and hold. What is buy and hold? Well, buy and hold is when the investor buys the property and hold it to rent it for a pre-determine number of years. It is important to note that in order for this to be successful the investor must consider the area in which the property is located. The investor wants to purchase a property that is desirable to both renters and homeowners. By doing this, it makes it easier to sell for a profit when the investor determines that he or she wants to sell.

 

Fix and Flip

There is yet another way to be a real estate investor and it is called fix and flip. Fix and flip is fixing up the property to flip or sell it to someone else. Under the fix and flip, if the new buyer is acquiring financing to purchase the property then the investor will have to have owned the property for at least six months to be able to sell. Be aware that some lenders may require that the investor owned it longer. Incidentally, due to recent market changes the latter is no longer true.

 

The investor may be wondering how the financial institution of the buyer knows how long the seller/investor has owned the property well the lender requires a clear chain of title. The chain of title will show if there is any liens and/or judgment, but it also shows the chain of ownership. The chain of title shows the dates of transfer of title or ownership. The chain of title also let’s the lender know if the property is marketable and free to transfer ownership. The investor may also be wondering where the chain of title comes from? The chain of title comes from an abstract of the title. An abstract of the title is a condensed history of ownership of the property which is gathered by the abstracter through public record.

Once the Title Company and lender determine that the property is free and clear to sell. The lender needs to know that the buyer is free and clear of liens and judgments, as well. The reason is that the liens and judgment that the buyer may have may attach to the property, so a search is done on the buyer by their name and social security number. By the way, the liens and judgment are a concern to the lender is that those liens or judgments can super succeed the lender’s mortgage; the lender wants the mortgage to be first on the property. If judgments or liens do show up for the buyer because the buyer has a common name, then buyer completes a name affidavit that can clear up most information that may come up. The name affidavit has the buyer’s name, social security number, marital status, last five years of addresses, etc. This information is used to rule out judgment or lien that may appear.

 

Ways to Sell the Investment Property

Let’s discuss different ways to sell the property under a fix and flip scenario. The seller/investor may consider a lease option. Under a lease option, the seller must do a judgment search on the potential buyer/tenant before attaching them to the property because the judgment and or liens on the potential buyer/tenant may attach to the property. As a seller, it is apparent that the investor do not want to pay someone else bills, so pay to have the search done.

Once the search is complete and it is determined that the potential buyer/tenant does not have any judgment and/or liens draw up the lease/option contract. Consult an attorney when doing this to ensure all options of ownership and releasing option are examined.

Under most lease agreement, the buyer pays a non-refundable deposit. This deposit is negotiated between the parties and credited to the buyer at time of purchase. Under some agreement, the deposit is credited to the buyer only if the buyer does not default on the lease agreement and exercise their option before the expiration of the lease agreement.

The seller will also credit the buyer a certain portion of the monthly lease payment that the buyer/tenant makes in a timely manner to the buyer at time of closing. However, the buyer/tenant shall not receive any credit for monthly payment made after the due date specified in the contract.

Incidentally, it is important to note that the buyer/tenant can only exercise their right to purchase in writing. It is also important to note that the option to purchase is not transferable.

It is important to work with the potential tenant/buyer to help them clear their credit issue by referring them to a professional that will help the tenant/buyer determine what need to be corrected on their credit and keep up with the tenant/buyer progress on doing what is required to correct the tenant/buyer’s credit. The reason this is important for the life of the lease the investor can not sell the property without proper notice to the tenant/buyer.

 

Getting Back to the Basics

Now, that the investor’s option have discussed let’s get back to some basics. Let’s say the investor buys a fixer upper. With a fixer upper, there are not many insurance options or so the investor may think. The investor may go to one insurance company and the company may tell the investor that the insurance can not insure the new purchase until after repair, and the investor still decides to move on with the purchase. The investor does not have his or her interest in the property insured. Well, there are companies that offer the insurance the investor needs. The investor just needs to know what companies offer it and what that type of insurance is called. It is called builder’s risk or a vacancy policy. The companies that offer these policies are Allstate, American Family, and Farmers Insurance. Allstate’s policy covers the property for a year, but it does not cover the investor once the investor has a tenant in the property. Once a tenant is in the property you must have a landlord policy.

American Family’s policy covers the property for three months, and then at the end of the three month the investor either buys another three month policy because the property is not ready for occupancy or gets a landlord policy.

Once the investor’s insurance is in place or even before purchase find out about permits for the jobs needed for the fixer upper. The investor needs to do this so that jobs will not be stop by the city inspector and the investor loses money as a results. This is very important in a fix and flip scenario because the investor stands to have to pay expenses that the investor did not calculate for. This is also called holding cost, so do research that can not be spoke to enough research, research, research.