Having a little on-to-one with Tim Mooney about rentals and the finance side of things.
Tim suggesting that during his medical problems the rentals kept food on the family’s table and he works hard to keep tenants. We also discussed finances ….
“Just remember . You dont have to have positive cash flow above payments , taxes, insurance, and some figgured upkeep. They are making payments for you every month on equity. If the price ever goes up and
when has it not ?
Sweat equity is tax free until you sell it .
Rentals have a a good write off in the business your in.
I would take no profit on a 12 year note. On good property that will go into the future. Were talking about a 12 year full retirement on money you didnt pay for.
Look a little closer.”
Now, here in Vancouver, you can rent just about anything, depending on the rent you ask for. The biggest problem is getting something you do not have to subsidize. I have positive cash flow and feel (contrary to Tim) that even with the tax and write-off rules here which are different than in the USA, that that part is important.
The previous owner(s) of my property deferred all maintenance and I am slowly but surely repairing and improving – I will not get back the money in hard cash, but I will hopefully get better clients. I just did a full paint-out on the main suite, new carpets, new stove and repaired some deficiencies, but I upped the rent $50.00/month too. The back suite needs kitchen cabinets and carpets and I will do that when the tenant leaves or asks for it (he just wants to be left alone), and downstairs they are happy with the new stove and weatherstripping.
My question is: What do you do, in your market, to keep your places rented and what do you accept as a reasonable vacancy level? I don’t just mean maintenance, but on the landlord/tenant level, too.
Quality repairs for your home.
Aaron the Handyman
Vancouver, Canada
Replies
Hi Aaron - I look after rental homes for absentee owners, in a BC Rockies ski town that experiences wild seasonal fluctuations in occupancy and residency levels due to our economy's reliance on lifestyle travellers and seasonal workers. I am sorry if this rambles on but it is a subject I've come to know, and which I find rewarding rather than frustrating.
In this town, making money means being sensitive to the cyclical nature of the market. Rent a house for the ski season (Oct. 1 to April 30) and you'll get from 30-50% more for each of those 7 months. Rent year-round and it's cheaper per month, but steady. The seasonal market gives a wild ride, with micro-fluctuations at the beginning and end of each season. It is amazing how quickly rents will rise, drop, then rise again week-to-week in October to mid-November, only to firm up again in the last 2 weeks of November. Holding out till late in November is risky - you're lucky to make up for the loss of December rent. My seasonally rented houses tend to go vacant for a month - sometimes 2 months - each Spring. The other houses keep their tenants for 2 to 3 years, which is where the money is.
To keep vacancy levels to a minimum, I always try and rent year-round to the best possible tenants I can find. I'd rather the property bring in less each month and have an uninterrupted cash-flow with no damage to the property (if you're not selective and you overcharge, youngsters will pile 3 or 4 people to a room in order to make rent and utilities).
Quality tenants: All prospective tenants - whether locals or from away - must apply in writing, which gives me lots of info to check backgrounds, past behaviour and performance, employability, payment history, and so on. The majority of my houses are rented year-round. The others are rented to people ranging in age from 18 to 30, often from Europe or Australia. I advertise on local websites and newspapers, post in town, send pics and application forms by email, receive completed applications the same way. References are checked by long-distance and by e-mail.
Young tenants have worked out well for my houses, on the other hand, local realty Prop. Mgt. types hate young tenants and treat them like #### - of course, the youngster behave accordingly. I treat mine like customers, and they come back the next season, or refer their responsible friends to me. The past 2 years I've had prospective tenants introduced to me by current or past tenants. Strangers have approached me on the street, asking if I've got a place for them. Sweet.
All of this may leave you with the impression I'm a left-wing softie - actually, it is the opposite: All my tenancy agreements describe the details of what each party expects from the other. I usually have a 4 to 6 page addendum detailing such issues as landlord's use of a basement suite; laundry appliances reserved for tenant use only; whether fires are allowed in the yard and who pays the $2000 fire bylaw fine if there is no FD approved fire ring; no grow shows; sanitation standards; periodic inspections; taking out the garbage for municipal pickup; keeping driveway and walkway cleared of snow for emergency services access; lawn-mowing frequency; decorating limitations; and on and on. The addendum is the meat of the tenancy; it is a Material Term of the agreement.
On the rare occasion there is a problem, I call the tenant and follow up in writing - each and every time. The only bad tenant I've ever had was a self-employed 50+ y.o. man and his teenage son. His references - two property managers - managed to con me into thinking he was a responsible tenant. He wasn't. He bounced his 2nd month's rent and was avoiding me. I had him out of there by the end of that very month, and put his bounced cheque up for collection at his bank. Two months later, there was enough money in his account for this cheque to clear. The owner was pleased.
The addendum also makes it clear that the tenants are entitled to peaceful and private enjoyment of the premises, that repairs will be done promptly, and so on. A fair and balanced agreement is easier to enforce via arbitration if push comes to shove. A detailed agreement enables the prospective tenant and I to talk about how we each see this relationship carrying on, which minimizes misunderstandings. Only when we've read and discussed the whole thing will we sign and exchange $ for keys.
What works is a well-maintained reasonably priced property, strict reference checks, clear discussion and write-up of expectations, mutual respect, and good documentation habits (think change orders). A hand of steel in a silk glove, if you will. A tenant treated like a customer tends to behave responsibly. I hold up my end of the deal, they do theirs. Tenants are not stupid, they know what works for them. I like smart tenants, they stay employed and pay their rent on time. Once they leave, the house only needs mild cleaning and we're ready to go.
I just signed 3 young people in the main floor of my place. At the beginning it was a lot of trouble: I had just fixed the place, was worried about constant complaints by neighbour of noise.
Once we sorted out that the cable was not working (unknown to us), and got it fixed, the noise is way down, and the neighbors are happier.
I welcome people who are being helped by Social Assistance. The money usually comes regularly and it works out well, usually.
I try to make sure all of my tenants are happy. The one in the back wants to be left alone and so, as much as I can, I leave him alone.
I'm sociable when I need to be and ask permission to enter premises when I do need to come in unexpectedly.
As I said, here, you can rent almost anything, to someone. I try and keep a nice place and work with the tenants. I also come by often and make sure I'm seen. I want a nice place with nice people, young or old.Quality repairs for your home.
Aaron the HandymanVancouver, Canada
Nice to see you too are having good results with young tenants.
Friends have invested in several condo suites in a building that only houses retired people. Much less turnover in renters, no noise, no parties, no damages, rent paid on time. They did have two tenants die in November though, but there's a waiting list to choose from. The downside is having to make bldg. mtce. decisions through the condo ####'n.
I've had some duplexes and some single family homes here in Albany, Georgia for . . . . well, long enough to get some of them paid for. The whole experience has been very positive for me. The paid-for properties are putting my daughter through college. My philosophy at age 23 was;
I could put $5,000 in a Mutual Fund and have $5,000 worth of Mutual Fund shares, or I could put $5,000 down on a duplex and have a $75,000 property. Yep, the tenants make the payments for you. But you need to be aware that the market is what sets the rent, not the owner / landlord. If you price it too high, higher than the local market, it will sit empty.
Kitchens and baths are what people look for and what keeps them rented. Don't let your guard down - keep up appearances, keep your standards high. Ceiling fans make a property show better. New appliances help attract a better tenant.
KNOW that stuff is going to tear up. Most people I know that say, "Yes, I had some rental property, I'll never do that again !" are the ones that never expected a plumbing call in the middle of the night, never expected to replace a roof.
No dogs, no dogs, no dogs, no matter how many times they tell you it's a yard dog, never comes into the house. Pass them up, someone else will come along. People that have multiple dogs should be owners, not tenants.
Greg.
You know, I could kick myself when I passed up the chance for my dad to help us buy our first home, in this neighborhood 30 years ago. I would have had 10 places by now - but what I know now is more important.
My tenants had problems with mice. It's the area, too. I did what I could, but they started feeding stray cats, and getting cats given to them. Mouse problems are going away.
The new upstairs tenants said they were getting a pit bull. I mentioned that it was not the place to have one and the girl friend agreed. We all love dogs, but ......
You are right about the kitchens and baths. I spend a lot of time repairing them for other people, and I know a clean,painted place will play dividends. I even paid the people upstairs $20.00 each, cash, to do the final cleanup the way they wanted the place, to get them on board.
Now, how do you do the depreciation and the maintenance? Do you pay yourself by book entry for repairs, or do you just do the job and pocket the equity? Personally, I debit the property and credit the maintenance account.Quality repairs for your home.
Aaron the HandymanVancouver, Canada
Aaron, congrats to you for running a class landlording program.
One of the tips that I remember was making sure you do a walk through every month. The expert advised scheduling routine maintenace once a month per contract...like changing filters, testing smoke alarms, etc. That way, you're not there "inspecting" how they live, but living up to your promise to be a good landlord and provide good safe housing.
I suppose you might look around a bit as your changing the furnace filter!
blueWarning! Be cautious when taking any framing advice from me. Although I have a lifetime of framing experience, all of it is considered bottom of the barrel by Gabe. I am not to be counted amongst the worst of the worst. If you want real framing information...don't listen to me..just ask Gabe!
Pierre1,
For an individual with one or two properties and who wishes to manage the properties themselves, do you have a suggestion as to where to find solid lease agreements with the type of addedums you spoke of? Also ways to individuals to do serious background checks?
Quality of tenants MUST BE key. Anything short of that just seems like a disaster.
Also advice on damage deposits? Both for long term agreements and for short term. If you rent for a week or a month in tourist or ski town, can you just have an open book on their credit card, somehow perhaps, I dream LOL!
Jack....what DanT said.
And....get a book by Robert Shemin (amazon sells them). He is a professional landlord and will give you a ton of addendums in his book (s).
Also, check out Mr Landlord and mrlandlord.com. He was an amazingly funny speaker but he just has the most wonderful "programs". For instance, he has a program that will make the down payment on a new house for long term tenants called the "new Home program". Its designed so that it costs him nothing, but rewards a tenant for making all their payments on time.
blueWarning! Be cautious when taking any framing advice from me. Although I have a lifetime of framing experience, all of it is considered bottom of the barrel by Gabe. I am not to be counted amongst the worst of the worst. If you want real framing information...don't listen to me..just ask Gabe!
Jackofall, please send me a PM through the board and I'll give you some details. Of course, since Residential Tenancy laws vary from place to place, you'll have to adapt to your particular legislative - and market - environment. Where are your rental units located?
Damage deposits under a tenancy agreement are set by legislation or regulation. My advice is to stick to the max allowable under law, no more and no less. You always want to be on the legal side of things, so that if a dispute arises, you're sitting pretty as all your ducks are in a row. If the tenant is able to show you broke the law at the onset by overcharging the damage deposit, why would an arbitrator or judge take your word at par in an unrelated dispute?
Renting space for a few days, a week or a couple months usually falls under some sort of Innkeeper's Act. I'm not in the 'vacation rentals' business. The folk who spend the week in a ski chalet are not tenants, they're guests. Again, rights and obligations will vary by locality. I think that local vacation rental outfits use a credit card imprint as the deposit.
You're right, quality tenants are THE key. I have a duty of due diligence to protect the landlord's investment and cash-flow. The application form I use requires the prospective tenant (the applicant) to provide lots of info, each bit of which is checked/cross-checked. Investigate any gap or discrepancy in information: this is how I found out from an ex-landlord, through open-ended questions to a former employer ("the lad was a great worker, always on time, .....problems with his landlord"), that the sweet-as-pie young couple had been evicted by the police, after causing willful property damage. They couldn't remember their last landlord's name you see, which may or may not mean anything other than it ought to be investigated.
Open ended questions lead the former employer, previous landlords, current employer, teacher/professor, etc to chat away as you listen carefully, taking notes. If told the tenant was responsible, ask followup questions such as "Please give me a couple examples of his responsible behaviour." The "would you rent to him again?" question is easily answered with a 'yes' - which means squat - so you follow up with "If you were to rent to him again, what improvements or changes would you like to see in his behaviour? Please tell me what could have gone a bit better?" "How much cleaning did you have to do when he left?" "How does he handle parties and music...what kind of friends does he have...? What about alcohol?" It helps to think of it as interviewing a job applicant. What I'm looking for is examples of behaviour, good or bad, which helps me predict future behaviour.
If the applicant lives in town, I'll try and meet them in their current appartment or house, on short notice, whereupon I can easily ask permission to go have a pee.... Seeing where they currently live is very very predictive of how well they'll keep your place if you rent to them.
Solvency: Unfortunately, my clients don't want to spend the $ for a full-blown credit check, so I accompany the applicant to his bank branch where he asks the teller to look up his account and state whether his account is in good standing and whether there have been any bounced cheques in the last 6 months, or are there any cheques up for collection. If I feel good about what I hear at the counter, I won't ask for a letter of referral.
If the applicant is from out of country, I have them fax me a letter of introduction from their financial institution, which I follow up with an overseas call or email to confirm what's what. One thing that I've not done and could do is ask to see a photo ID, to ensure that the person is the person they purport to be. Experienced travellers have letters of reference from previous landlords and employers; these are easily confirmed by phone or email.
If you do your homework thoroughly, your gut will tell you whether to enter into a tenancy agreement or not. Gather the facts and listen to your instincts, not your prejudices, no matter how anxious you are to rent a vacant place. Renting to the wrong person will not restore cashflow; it will usually cost you time and money, and another vacancy very soon down the road.
I made up my own form for prospective tenants to fill out. Do you have one you would like to share?
I like your idea of the open ended questions - I'm not good at that yet.
We live and learn.
I have a friend at the Residential Tenancy Office, a judge. She always warns me to keep to the letter of the law for inspections, and document everything.
Is that what you do, keep notes on all the calls and repairs?Quality repairs for your home.
Aaron the HandymanVancouver, Canada
Sure, I'll send you my application form, which is an amalgam of several other forms I purchased in Kelowna. Yeah, I keep detailed notes for myself. If it looks like a 'situation' might be brewing, I talk it over with the tenant - face to face if I can - to find out if what I think is going on is going on. I avoid starting off half-cocked, preferring to gather information and then bring the discussion to the Tenancy Addendum, ending with what the tenant (or I) can do differently next time.
When you see the addendum - I'll email you a copy - you'll see how reassuring it can be for nervous owners. A few weeks ago, an owner was saying "I hope these people work out". I answered by joking that if they didn't, they'd soon be feeling the weight and power of our 6 page addendum. ;)
Whether we reach verbal agreement or not, I follow up the chat with a polite professional letter which I keep on file. It takes a lot of discipline to keep good notes, esp. when I'm frustrated with the situation. But I do. I try to end a conversation with a recap of what the facts are - his and mine, what was agreed or not, and what I expect next, by when, and where, or what I'll do to correct a deficiency, and by when.
Written confirmation is delivered by hand; if posted on their door, a copy is also mailed by Canada Post. Even when I'm all fired up inside, I restrain myself and keep to the facts at hand, focused on my objective, which is that all parties will live up to the Tenancy Agreement, rent will be paid, damages will be repaired and we carry on.
I too have a great contact at the RTO - phone rings on the dudes' desk, no messing around waiting 45 minutes on hold. I give each tenant their own copy of the RTO's "Guide for Landlords & Tenants in BC". You should see how pleased they are; this sets a tone of mutual respect that usually carries through the length of the tenancy.
Repairs are kept track of through the invoices I send the homeowners. The details of the repair, receipts, warranties are kept in the property file along with the tenancy docs. Digital pics are on the hardrive, archived by address.
I do not play the collect-the-rent game, knocking on people's doors on the 1st of each month. This is too intrusive imho, inconvenient for all, and time consuming for me. Each tenant initially agrees to pay rent by post-dated cheques, payable to the landlord. I mail these to the landlord. Another option is for the tenant to make a direct deposit into the landlord's bank acct. The only time I deal with rent is at the onset when I collect the DD (security and pet DDs) and usually cash or cheque for the 1st month, and drop those into the landlord's bank acct. The other time is when the landlord tells me rent was not paid or that it bounced.
Edited 12/10/2004 1:54 am ET by Pierre1
Edited 12/10/2004 2:33 am ET by Pierre1
Pierre1,
You are too kind. Such a thoughtful and detailed response.
Excuse my ignorance, a PM?
As for my rentals. I have one in a mid size city in the Pacific Northwest. And I have a second potential for a vacation rental in a up and coming ski/retirement area.
I think the vacation rental is a receipe for craming twenty college kids in a three bedroom and a beer keg in the bathtub. Don't know how to handle that one.
PM is a personal message. Click on my screen name, type in your message and send. I'll reply by email with a Word file attachment.
We have had rental propery for 20 years now. I buy rehabable units, single family or multi doesn't matter. We buy low and repair with the goal of having none of our own cash in them but we provide the labor.
We believe in positive cash flow, around $100 a month per unit above payment, taxes and insurance. The tax issues are great and so is the equity but I don't want to add my money into the operation of them, so we look for properties that work in that formula. We only buy one or two a year because of sticking with this formula. I also don't like negative cash flow or break even property because I think that things can change quickly in life and don't suddenly want to have to figure out how to pay for something.
One of the great things about real estate is it not only works great with the folks who own construction related businesses but you can tailor it to match your investment desires and needs. It really is a business that is about managing people and repairing homes which most here do anyway.
As far as sharing conracts you will find that laws and tennant rights vary greatly from state to state and sometimes county to county so finding someone in your own area is important. Here in Ohio you can put almost any clause on a rental agreement as long as it makes sense and if the tennant signs it they are bound to it. Not true in say Michigan which I believe is one of the states that say anytime during eviction a tennant can make restitution and stay in the property, in Ohio that is true but only if the landlord ok's it. Just one example of the many differences you will find.
Another great thing with property is you can work on it if you are slow and if you have a crew you can do little of the work it you so choose. We do screen tennants by checking with the previous landlords and friend that they give us. I don't care how good there credit is or isn't as with perfect credit they usually don't need to rent anyway. DanT
In British Columbia, the Province I live in, for many years the landlords could do what they wanted. Evict for any reason, raise rents, harass....
Then the government changed to a more socialist one, and landlords started leaving the province because the tenant rights groups exerted more and more influence.
Landlord tenant relations are governed by an act of legislature, <http://www.pssg.gov.bc.ca/rto/publications/factsheets/index.htm> with guidelines as to rent increases allowable to arbitration procedures.
I also screen, but I am happy to get people on welfare too, since the cheques (checks) are steady.
I have repaired enough places that were such holes, and wondered why ANYONE would live there, that I decided I would never own a place like that.
I bought my first place in May and I'm looking for another place now. The economics here are such that there is not much upside to renoing a place for a rent increase - and maybe not even for a capital gain. The only benefit would be a better class of tenant, and you better have a good area to rent in, for that to happen.Quality repairs for your home.
Aaron the HandymanVancouver, Canada
contrary to Tim
Take a closer look.
A brand new duplex on a choice lot , in a choice subdivision, on a 12 year note to be 100 percent vested with no cost to you , but no profit .
You would turn that down , but wish you had bought more years ago? If you had bought 10 of the above 12 years ago , you could be retired.
What Dan T has done is a little different . Some of mine is simalar to him and some like Greg. Still others are different. Dan T and I have bought some older properties and they pay better. We remodeled them and I mean big time. We bought some dumps and now have respectable property. I built some new stuff and when I did it , broke even. That was several years ago and now those newly built units are making money before their time.
Heres why I would take the top deal if I was younger; Properties we rehab are 20 years or better old. Some are 40 years for me and some people have 100 year old property. If a person buys older property it has to bring more money because it could remain the same value or even go down. A bad hood and an old unit is risky. Dan T has traded out of some of that. I didnt ever go there. Most of mine were 5 years old to new builds in choice hoods. I bought and rehabbed two 20 year olds in poorer hoods and got better transition when I bought them, but now they are the hardest to rent . The new ones in new hoods when bought are now bringing more money and rent in 24 to 48 hrs. I picked the lots and built them a block from schools. Some 1000 or so cars drive by them every morning taking kids to school. Parents rent them with one sign in the yard on the spot.
I picked the spots I built on, and on the old ones I took what they gave me at the time. Big differences in the future. Less work to be done on a new one for 12 years and they bring more money when their done. Less chance of loss on new ones when the best lots are bought.
Now if crunch time ever happened and you needed some income , you could always refinance to 15 to 20 years. Yes, even 30. Then back to 5, 8, 10 ,... where ever you are on the loan.
12 years on new property in choice hoods is very tuff to beat. Its important that the units are the ones that do the paying , not you on your taxed income.
Tim Mooney
Edited 12/10/2004 3:21 am ET by Tim Mooney
I am in the process of building a duplex in a good area that I intent to keep as a rental property. My accountant is saying that I will owe taxes on this property when is is complete. He is saying that if the lot is $40k, the construction costs are $160k and when the building is complete it will be valued at $240k I will owe taxes on the 40k profit even if I keep the building to rent. Does this make sense to anyone? I can understand paying the taxes when I sell the property.
Thanks, Dan
I have never heard of this. I typically buy and rehab property with a goal of owning it with 70% of value invested. In other words I have roughly 30% equity in the property the day it is complete or rented. And at no time have I ever paid taxes on that as property.
All my properties are held by me and my wife or me and my brother privately. If you are buying and holding through a corporationg or an LLC that might be different but I can't see how. Get a second opinion.
One of the huge advantages to rentals are the tax benefits, especially if you are 2 income family. And the fact that taxes are not paid on equity till sold so you can control it to a degree hopefully. DanT
I could have copied and pasted Dan Ts post.
We have two incomes not counting the rentals. The reason we started with rentals years ago was taxes. All the books say the same things over and over.
I buy houses with 100 percent loans . But ,.... I only will pay a maximum of 70 percent loan to value. New and old rentals I have sweat equity thats still there .
If I ever sell a property then I owe Uncle Sam taxes on equity. But he doesnt get paid till I get paid. I have never heard of what you are saying . Theres not a profit till its sold , so Im at a loss as how you would even have the money to pay taxes on an estimated profit . What would he do if you decided to sell it at a loss? You may do that . I can sell any property Ive got at cost , its no ones business. I can also sell it at a loss.
Tim Mooney
I'm going to repeat an earlier question I posted.
I take time out of my handyman/contracting business to do a repair on the house, either at the request of a tenant or because there is an issue I have noticed. Either way, I buy parts and show up to do the job.
How do you treat the time? Obviously the materials gets put directly on to the balance sheet of the rental - what about your time (or the crew's time)?
Quality repairs for your home.
Aaron the HandymanVancouver, Canada
If the rental thing is one business and the contracting is another (as in structured separately, with separate books and accounts), couldn't the contracting biz invoice the rental biz? Wouldn't the paid invoice (made up of the contractor's materials, labour, taxes - and profit and overhead) be a DR to the rental biz and the payment received be a CR to the contractor biz? Just guessing.
I think so, but I'm going to check with my accountant.Quality repairs for your home.
Aaron the HandymanVancouver, Canada
Any material you pay and all labor you pay out goes on the spread sheet of that rental . If you pay your self on that rental , you will pay taxes on your self for taking a check. Your sons and daughters can be paid up to 600 a piece tax free.
Tim Mooney
One of the reasons I incorperated my home improvement business is to allow me to bill the rentals for time if needed as they are then treated as to different entities.
You can actually pay your kids up to (the figure moves with inflation) around 4k a year with no tax issues. You have to 1099 them but since they are students or dependent they pay no income tax until after that threshhold.
We originally set up my son with a "job" and paid him out of the rental account around the age of 9. Part of his "income" went to a college savings account using savings bonds which if designated for education grow tax free. So in essence we were paying him with tax free money that was a deduction and he was able to gain tax free interest with the money. Nice set up.
We also out of this income provided an allowance and school clothing which was bought with his "income". And to this day, he is now 21 and in college, when he comes home for Thanksgiving or Christmas he helps around the businesses and is paid in this manner. DanT
Well, the truth is that for a builder/remodeler type of person to be in the rental businesss , real estate investment , contracting business and for hire , opens up a lot of things . Theres more fruit there than needed. All my rentals are set up on a depreciation schedule and the fact is they are gaining value . I understand it is things that wear out for replacement. But when I replace it , its an expense again.
Im gonna stop talkin about it and just say one thing Ive said over and over on Breaktime in different versions of statements;
Any person that owns a home that is in the contracting business of home remodeling or home repair may benifit from owning rentals. Everyone in that category should take a serious look. I will very quickly add builders and subs , but for the person that "does it all" , [ has perfected each trade dealing with rehab and can professionally do several trades] the business is awsome. The tax breaks for a poor tradesman to finally have an advantage is just one reason why its awsome. The tradesmen here [ in this town] get beat to death with taxes [ self employment tax and social security equals49 percent ] and have nothing for the future . Subs and hourly are both working as self employed taking the full hit of taxes with out the profits to make it profitable . A sub thinks hes making money, but doesnt understand his operating expenses. Most cant afford health care or its insurance. There is no retirement accounts . Bad years seem to wipe out good years efforts. I know no one thats in the remodeling business[ or building] thats bought their wife a new car and " paid cash'. I know no one in the business that pays cash every year for a new car. Few tradesmen drive a new truck or anything close to new thats paid for , but most of the new rigs driven are "leased". . None that I know even own their own home out right. Maybe I dont know much and my comparison is of a small area, but that is my knowledge .
Most peoples SS is around 1000 that I have heard. Two retired people living together draw 1700 or so and all this is just throwing numbers around. Lots of them live on less. Yall voted for a president that thinks each one of us should pay for our own drugs and health care or recieve none. Well, my drugs are 700 per month and health care for me was just over 165,000 in last years period. DW pushed it over 250,000 and a few thousand change. Her drugs now after a stroke are around 500 per month. She has a few other problems. Now before I get to paint a picture I wasnt after, we are doing fine. We both have jobs and rentals. Im going back to contracting and investing because I feel well as can be expected. Im ready to get back in the fight. Inspecting , well is another subject , but it sucks in several areas. I said all that to say this ; A carpenter for instance working as sole support for his family , around here , could not weather bad weather as I had above. Checks were written from the rental account and our ship stayed on course. 1 four plex paid for here beats a couples ss on average. Its just about as easy to own 20 four plexes . Well its probably easiar, but Im not there yet.
Taxes are a small portion of the rewards.
Paying your self on rentals has come up. What difference does it make ? We draw from them day one, and will sit on our butts and draw from them for years from just a little labor and paper signing. I say take the paycheck from our work to live on and save the rentals till needed for a nest egg. My rental profits buy more rentals , unless there is an emergency like last year. Before that happened , I had never took a dime . I would only pay money in I had to spare all these years to buy and rehab more. Spent it on upgrades too. I never ever took anything out.
Ive often wondered how many times labor will be payed back muliplied by rentals . Ever thought about it ? The banker loaned the money, the renter payed for the unit and you have some sweat equity and some good judgement in it. The lessee loses and the bank makes some money , but they put their money up. I didnt have hardly any money in it. You didnt either from what you said.
Tim Mooney
Tim...an excellent summary.
The downside is managing people (tenants). It sounds like that hasn't been a problem for you and the rewards will surely out weigh the extra work.
blueWarning! Be cautious when taking any framing advice from me. Although I have a lifetime of framing experience, all of it is considered bottom of the barrel by Gabe. I am not to be counted amongst the worst of the worst. If you want real framing information...don't listen to me..just ask Gabe!
Thanks for your post on all the advantages of rentals for someone in the contracting trades. I agree 100% but sometimes need a pep talk. Just had a bad week with my properties and needed a little reminding of how good it is overall. One of my tenants moved out and stole the stove and refrigerator out of his unit, and the washer and dryer that was in the basement for all three tenants of the triplex to use. I found out that he skipped town just before his felony cocaine charge..... I'm srill not great at picking tenants. :)I spent 12 hours this past weekend crawling around in the mud under another house repairing a burst pipe. However, my best year as a carpentry sub I netted about 80,000.00 which has to offset my two worst years of about 15,000.00. Except for my rentals, I would have no savings and probably no real net worth. I bought my first rental when I was 28 by maxing out two credit cards and getting the owner to finance the balance. That loan was at ten percent, you should have heard them crying when I refinanced and paid it off early.I have never really invested any cash in the rental "empire" just a bunch of time and sweat. I think that for the average person real estate is still the best vehicle for financial stability and security.
I always tell new landlords that 10 months a year rentals are the easiest money I ever made, 2 months of the year I would give them away if I could. Just seems like it goes like that. Hope it gets better. DanT
Last summer I had been called repeatedly by one renter. It was getting expensive . There for a while after uncovering a septic tank and finding it clogged with rubber gloves that float to the exit hole and tissue paper mixed in to make a beaver dam, I had had enough! I would have sold that rental cheap or gave someone that renter and moved them. My out look had my dobber down on rentals for at least three weeks. I was very busy and its was of course summer time .
I think we all have those weeks and need reminded of where the goal line is marked. If I was retired ,those calls would have been somthing to do with my time. Granted Ive never enjoyed digging a septic lid off and cleaning it , but the truth of the matter was , it only lasted a morning.
Tim Mooney
That loan was at ten percent, you should have heard them crying when I refinanced and paid it off early.
Doug.....if they were so upset, did you try getting them to refinance it at a lower rate just to save your closing costs? (I'm assuming that you took out a mortgage on it to pay them off early...might be a false assumption though)
blueWarning! Be cautious when taking any framing advice from me. Although I have a lifetime of framing experience, all of it is considered bottom of the barrel by Gabe. I am not to be counted amongst the worst of the worst. If you want real framing information...don't listen to me..just ask Gabe!
Actually, I did a cash out refi and used the proceeds to put a down payment on another property. However, you are right that I should have approached them about negotiating a lower rate.
"One of the reasons I incorperated my home improvement business is to allow me to bill the rentals for time if needed as they are then treated as to different entities."I don't see where there is any benifit to doing that unless you are trying to maximize SS.You are reducing the rental income by XX and increasing the business income by xx. And unless you have losses or loss carry farwards that is a net zero affect on the bottom line of the AGI.BUT you have increased the business profits by xx and you will pay SE taxes on that amount.
The reason I set it up that way is at time, certainly not all the time, one business or the other has made much money with little expense while the other is a little short. I can simply bill one for work and transfer money that is now a true deduction. Just a strategy and certainly one that may or may not work for others but has helped me in my situation.
You are correct about the Canadian tax laws and Aaron not listening to American advice. I got caught up in a response to Tim and didnt' give it a thought. DanT
Bill, the ss issue isn't the only reason why some might use the C Corp for income.
C Corps generally have a couple advantages regarding health benefit deductions. An officer of the corporation can receive a full compliment of health benefits, including coverage for his dependents. That expense can be 100% written off. Additionally, the corporation can fully deduct all out of pocket medical expenses for officers...and it's not income to the recipient.
Also, billing the C Corp creates additional ways to minimize liabilities...
If you guys are going to continue this thread...I'm going to have to re-visit a few sources..
blueWarning! Be cautious when taking any framing advice from me. Although I have a lifetime of framing experience, all of it is considered bottom of the barrel by Gabe. I am not to be counted amongst the worst of the worst. If you want real framing information...don't listen to me..just ask Gabe!
If you guys are going to continue this thread...I'm going to have to re-visit a few sources..
blue
Bout time you started earning your keep in this thread. <G>
Oh and thanks.
Tim Mooney
I've already loaded up the resources in the throne room.
blueWarning! Be cautious when taking any framing advice from me. Although I have a lifetime of framing experience, all of it is considered bottom of the barrel by Gabe. I am not to be counted amongst the worst of the worst. If you want real framing information...don't listen to me..just ask Gabe!
Tim and I have always seen eye-to-eye on rentals. I've had some tenants for 10 plus years. It's great. My rentals are paying my daughter's way through college.
I can't see paying myself for my own labor . . . then you'd have to report the income and might also have to pay self-employment tax. Believe me, even as an S corp., I pay plenty.
My own way of rewarding myself for my own labor is to buy and expense any tools I might need for a particular job. New Bosch jigsaw for that sink cutout I had to do on the apartment - hey, how else was I going to cut that countertop ? Trim job equals the pin nailer I've been wanting. Structural work got me a new Milwaukee side-winder.
My book keeping can be pretty sloppy - I sometimes get my own receipts mixed up with the rentals. I've said it before . . . when I have to have appliances in the units, they get my old ones, and I get the new ones. Keeps me current, and the apartments get good, gently used stuff.
Greg.
Let's go a step further. Damage caused by clients, not malicious but damage nevertheless.
Do you repair it no cost to the client? Do you charge it to the property? How do you handle the expense?
Now, realizing jurisdictions are different, and the laws change from area to area, I'd be intersted in a cross section of your thoughts.
In my case, if it's minor, I just repair it (minor being less than $100.00).
But, let's say there is an interior door and jamb broken, or a newer stove gets damaged. Who pays for that one?Quality repairs for your home.
Aaron the HandymanVancouver, Canada
Depends. If the tennant moves out in 8 months and the place looks like they lived there 8 years then yes I bill the tennant. If the tennant has lived there 8 years and it looks like it, I am not worried as I feel I have made my money.
It is important to be fair and consistent. But it is also impossible to cover all areas of managing property to the point of it being black and white. I have a $50 late fee for example. But frankly if you have rented from me for a couple of years and paid on time every month but had your transmission go out and are 3 days late I will generally give you a pass. Happens again you get to pay. DanT
Yep, it depends. You can't charge the tenant for regular wear and tear. Breakage from negligence or abuse they pay for.
So for instance, I can accept a small cut (by a dropped knife for instance) in a kitchen vinyl floor, but will have them pay for a long cut or abrasion caused by dragging something across the floor. Carpets slowly wear out and lose their lustre. A ciggy burn on the floor of a non-smoking house they pay for; a ciggy burn in a smoking-allowed house is to be expected. A counter burn, done by a parked ciggy, is not accepted, nor are knife marks from prepping food without a cutting block. It all depends.
You been using the Province's new "Condition Inspection Report" I hope. Back this up with digital pics taken at the time you and the tenant do the inspection.
I absolutely use the condition inspection report.
Hey, did you ever send me the copy of the addendum you were going to email me? I never saw it.Quality repairs for your home.
Aaron the HandymanVancouver, Canada
You need to send me your email address first. Click on my profile, then click on Send an email, type in your email address and send. I'll reply direct without going through BT.
Damage caused by clients, not malicious but damage nevertheless.Do you repair it no cost to the client? Do you charge it to the property? How do you handle the expense?
In U.S. I would expense it.
You get out of life what you put into it......minus taxes.
Marv
U.S. Law not Canadian.
Edited 12/15/2004 2:19 pm ET by Marv
In Canada, unless my wife and I incorporate a limited company, all income to the business (mine) her employment income and the real estate is attributed to our global income and we pay income taxes, and what you would call SS taxes.
Now, true, there is depreciation and the normal expenses which will lower the gross to the net.
I have not spoken to my accountant about this yet since we just recently bought the property, but I'm sure there is a way within Canadian tax laws to defer income so that it does not get taxed until I am in a lower bracket. Accountants can do all sorts of things.
This goes to your earlier post to me.
The other part of this question is about improvements. Let's say I add something to the house to improve the livability of the tenants. It is not maintenance but an addition to the house. The parts are expensible, but what about my labour, time for purchasing, vehicle expenses etc.Quality repairs for your home.
Aaron the HandymanVancouver, Canada
I'm not qualified to answer questions about Canadian tax law. SorryYou get out of life what you put into it......minus taxes.
Marv
I stated earlier that my business is an S-Corp while my rentals are simply owned by my wife and I. That is what I was refering to as far as the 4k to the pay the kids, not the corp. DanT
Dan-
I would not file 1099s. Then the IRS computer looks for a Sch C and cause a lot of extra correspondance.You get out of life what you put into it......minus taxes.
Marv
Thanks, my accountant handles all that. DanT
Aaron...speaking about US tax law: If you pay yourself from a company to do the work, the labor payed out would be expensed, unless it was an improvement, which would then be depreciated.
Paying yourself to get the deduction is a tax neutral event for repairs and maintenance...so there's no reason to jump through the papwork hoops....and pay the insurances on top of it.
Your vehicle expenses are a deduction.
blueWarning! Be cautious when taking any framing advice from me. Although I have a lifetime of framing experience, all of it is considered bottom of the barrel by Gabe. I am not to be counted amongst the worst of the worst. If you want real framing information...don't listen to me..just ask Gabe!
some might use the C Corp for income.
Caution here. There are special rules for C Corps that only own rental property. A better way to go would be S Corp (IMO).You get out of life what you put into it......minus taxes.
Marv
I don't think I was suggesting that a c corp hold property...
blueWarning! Be cautious when taking any framing advice from me. Although I have a lifetime of framing experience, all of it is considered bottom of the barrel by Gabe. I am not to be counted amongst the worst of the worst. If you want real framing information...don't listen to me..just ask Gabe!
One of the reasons I incorperated my home improvement business is to allow me to bill the rentals for time if needed as they are then treated as to different entities.
You can actually pay your kids up to (the figure moves with inflation) around 4k a year with no tax issues. You have to 1099 them but since they are students or dependent they pay no income tax until after that threshhold.
There's a problem here. A Child receiveing a 1099 from a corporation for work performed will have to file a Sch C and pay social security taxes on the profit if over $400.
If you are a Sole Prop, you don't have to pay social security on your kids (up to the age of 18) for the work they do.You get out of life what you put into it......minus taxes.
Marv
There's a problem here. A Child receiveing a 1099 from a corporation for work performed will have to file a Sch C and pay social security taxes on the profit if over $400.
If you are a Sole Prop, you don't have to pay social security on your kids (up to the age of 18) for the work they do.
Marv...I'm having a problem with the sole prop statement.
Wouldn't you have to set up a payroll system either way if your a sole proprietor or a Corp to pay your children? I'm making the assumption that the kids are getting over $600, the trheshold for 1099ing them.
Because of deductions, generally speaking, the first $4500 will be tax free for each child...but to expense this amount out of the company...either a sole proprietor, or a Corp...they would have to be part of the payroll, including withholding (which they'll get back).
Also, its still a great idea to pay your kids more, if it reduces your taxes, which may be in a much higher bracket. For instance, if you're paying 28% marginal rate, and the kids are paying 15%, then theres a 13% tax savings.....
But there's more....if the kids are earning income, they can open up a Roth IRA and their money can grow tax free...without paying any taxes on it in the first place! This is probably one of the best wealth building tactics that poor construction people can do for their kids!
The kids have to actually be doing something...like modeling for ads, cleaning, computer work...etc and the hourly pay has to be reasonable.
blueWarning! Be cautious when taking any framing advice from me. Although I have a lifetime of framing experience, all of it is considered bottom of the barrel by Gabe. I am not to be counted amongst the worst of the worst. If you want real framing information...don't listen to me..just ask Gabe!
Wouldn't you have to set up a payroll system either way if your a sole proprietor or a Corp to pay your children?
Yes you set up a payroll system. For example, a sole proprietor would pay his kids $2,000 for work performed and not deduct anything if they are under the age of 18. Then at the end of the year, he would make out W-2s (not 1099s) and indicate the wages paid (no social security wages). this is how its done all the time.You get out of life what you put into it......minus taxes.
Marv
IIRC (and it's been some years since I was in the rental business), you can't count your own time as an expense. I'm sure there are various funny money dodges you can try to get a deductible expense, but in the end, most of them are going to show up as taxable income somewhere else.
Don't listen to any of these guys. US tax system treats investment income much different than busniss income.You need to talk to someone familar with Canadain tax system.
Bill, you are right about taxes and Canada. Never gave it a thought about the difference.
Tim Mooney
i do nothing, because if i book my labor charge and pay the bill to myself, i then have to pay taxes and ss etc. sure i now have more to write off on the expense side of the property, but no matter what i'm going to lose ss $. larryhand me the chainsaw, i need to trim the casing just a hair.
Well then, surely the idea must be that when you need to buy parts or outside services, you would handle the books as if you were a property manager and the property income would be debited, but your time would not be.
It's true that in Canada, all my personal income needs to be declared no matter if it's the property or the contracting business.
Still, I put in time and effort and gasoline and van depreciation, cellular telephone bills, sawzall blades and management skills into running an income property. Since the property will only sell for it's fair market value, and I will have to pay capital gains in that as well as the income tax on the year to year profit, which way am I better off?
More so than that: If I sell the property, is it not an advantage for the purchaser to know that the costs of operating the property and the management fee and the maintenance labour involved still allowed a positive cash flow?Quality repairs for your home.
Aaron the HandymanVancouver, Canada
How do you treat the (my) time?
As others have posted, if you pay yourself out of the rental account (expense) then you have income subject to social security on your schedule C.
You get out of life what you put into it......minus taxes.
Marv
Whoops. Sorry. I was giving advice on US law not Canadian.
Edited 12/15/2004 2:19 pm ET by Marv
Dan, get a real estate CPA.
There are special tax rules that govern real estate and regular CPA's might not be up to par on the issues.
There's a system called compartmentalizing, or something like that, that will save you big bucks on taxes. IF I remember correctly, the guy who is theexpert on that is Soomebody Aiello. I haven't been able to review his stuff, but I did hear him speak and I knew somebody that used his services and saved a ton of money...like 25k....as soon as he changed his thinking. The most important feature of his methods are to put the depreciable assets in the fastest compartments for escallating depreciation.
For instance, when you depreciate your roof, it is spread over 27 years (I think that is the number). If you re-roof in ten years, do you write that roof off over 27 years? No, you write the repair off as an expense, then WRITE OFF THE REMAINING 17 YEARS OF THE ORIGINAL ROOF! You could see where normal accountants might not keep up on stuff like that.
This isn't quack stuff....it's just taking advantage of all the tax laws that help the wealthy get wealthier.
Does your accountant own and operate real estate? If not, find one that does for your rentals.
blueWarning! Be cautious when taking any framing advice from me. Although I have a lifetime of framing experience, all of it is considered bottom of the barrel by Gabe. I am not to be counted amongst the worst of the worst. If you want real framing information...don't listen to me..just ask Gabe!
I agree on the issue of an accountant that has had investment real estate or at least a history of dealing with it. Mine was a landlord/owner/operator in the 80's. I think accounting is like most business, you get what you pay for. I have a friend that just changed away from my accountant and was bragging that he was paying half. By the time he described all the hand holding he was doing with the new guy and the fact he was recieving 1/3 less in service we came to the conclusion you get what you pay for. DanT
Exactly DanT!
I was discussing some various investing strategies with a friend. I mentioned the possibility of him moving some of his investment dollars into a self directed Roth Ira to hold investment real estate. He said he'd never heard of it and would run it by his investestment planner. The next time we spoke, he wanted the information so he could share it with the investment planner!
None of us are experts on everything. If you can find experts, they usually don't cost you more...they save you more!
blueWarning! Be cautious when taking any framing advice from me. Although I have a lifetime of framing experience, all of it is considered bottom of the barrel by Gabe. I am not to be counted amongst the worst of the worst. If you want real framing information...don't listen to me..just ask Gabe!
self directed Roth Ira to hold investment real estate.
Theoretically this is possible but first you must find someone who has a plan set up and accepted by the IRS. I don't know of anyone who has done this and made it available to the general public.
Stock brokers have these plans set up and anyone can use them to buy stocks.You get out of life what you put into it......minus taxes.
Marv
Marv, I know of only about three companies that will do this. http://www.trustetc.com/ is the website of equity trust....which bought Mid-Ohio about two years ago.
Actually this particular loophole might very well get taken away in the next rash of tax reform...so get your account set up and don't forget to set up accounts for your kids!
blueWarning! Be cautious when taking any framing advice from me. Although I have a lifetime of framing experience, all of it is considered bottom of the barrel by Gabe. I am not to be counted amongst the worst of the worst. If you want real framing information...don't listen to me..just ask Gabe!
http://www.trustetc.com/
Very interesting!You get out of life what you put into it......minus taxes.
Marv
That company has been doing that for a very long time Marv. I've heard the owner give a very enlightening speech at a seminar.
He opened an account for his grandkids as a birthday present!
blueWarning! Be cautious when taking any framing advice from me. Although I have a lifetime of framing experience, all of it is considered bottom of the barrel by Gabe. I am not to be counted amongst the worst of the worst. If you want real framing information...don't listen to me..just ask Gabe!
WRITE OFF THE REMAINING 17 YEARS OF THE ORIGINAL ROOF
Most accountants will split up the house and the furnishings, but to split off things that are fastened down to a building (furnace, roof, driveway) is a little over the top for me.
Here's a rule of thumb: If it puts you in business depreciate it (new building), If it keeps you in business, expense it (roof repair).You get out of life what you put into it......minus taxes.
Marv
Marv, the components in the house have different shelf lifes. You might think this is over the top, but Aiello's program gives you a life expentency for every component in the house, and the IRS section and page number to cite. His program is by far the most aggressive I've see, but everything is documented....and his entire approach is extremely comprehensive.
blueWarning! Be cautious when taking any framing advice from me. Although I have a lifetime of framing experience, all of it is considered bottom of the barrel by Gabe. I am not to be counted amongst the worst of the worst. If you want real framing information...don't listen to me..just ask Gabe!
are you sure he doesn't mean property taxes will be owed on the full valueation? no way can uncle sam tax you on the equity, because when you sell it might be in a slump and you would then have a loss. larryhand me the chainsaw, i need to trim the casing just a hair.
when the building is complete it will be valued at $240k I will owe taxes on the 40k profit even if I keep the building to rent.
This is false. Get a new accountant. You get out of life what you put into it......minus taxes.
Marv
Tim, thank you for your post regarding the advisability of newer units over older ones.
I agree that newer houses are the answer, but in Vancouver (indeed, the entire lower mainland of British Columbia), the housing market is very highly priced. My option was to get an older home, knowing I would improve it and straighten the rent roll, then after 2-3 years, flip it and get one in a better area of town/newer unit.
It was not a choice of a newer one or 2 older ones. I bought a place with a positive cash flow with the money I had and the credit union even had to take a small position on my private residence.
The other option, of course, was to get a place far out of town, 30-60 Kilometers out, or even a boat ride away. Probably great capital gain, but I like inspecting the property often: it keeps Marajuana grow-ops out of the place, and the province is lousy with them.Quality repairs for your home.
Aaron the HandymanVancouver, Canada
Aaron, here's my marijuana clause from the Addendum:
No Grow Shows: The tenants agree that they will not use the premises - or allow the premises to be used by others - for the sprouting, cloning, or cultivation of marijuana, or for any other criminal activity.
The problem is, writing the addendum means nothing to someone determined to do it.
Worse, municipalities and cities here are not only cracking open grow-ops, they are fining the landlords for penalties and policing costs.Quality repairs for your home.
Aaron the HandymanVancouver, Canada
Of course, but you've got to do your periodic inspections. If there's a show, you'll smell it right away. Get into the basement to 'check' the furnace. My addendum is identified at the very beginning as forming a Material Term of the Residential Tenancy Agreement. This means that any breach leads to eviction. In the case of a show, pick up the phone and call the cops. They'll get a warrant on your say-so, and voilà , you file for an eviction order from the Residential Tenancy's Arbitrator. Having strong language in the Addendum backed up by periodic inspections, is proof that you're taking your responsibilities seriously. How could they fine you then?
Try to keep the place well-maintained. The best way to keep vacancy level down is to look for the "right" tenants upfront and sign them to a year lease. What I mean by the "right" tenants is someone that is a good fit for your place. Tell them upfront if it's not a good fit, even if they're ready to write you a check. Because if it's not a good fit it will show up in a few months and then there's all kinds of issues.
Personally I expect one month vacancy per year. Over 15 years of ownership that's what it's worked out to for me.
- Rob