Archive | 2011

Investment Property Bookkeeping, Part 1

28 Nov

Happy Thanksgiving weekend… this holiday we’re thankful for our first rent checks!

This post details how we’re organizing the income we collect from our investment property to properly anticipate future expenses.

I should start by stating for the record one of my personal rental property goals: everything we spend on the duplex after the initial purchase should come from income generated by the duplex.

Put another way, with careful planning and a little luck, we won’t have to apply another cent of our work income towards the duplex. Future mortgage pre-payment would be an acceptable exception – but I’ll ignore that issue for today’s purposes.

First, I needed a new checking and savings account exclusively for rental property income/expenses. There are several good reasons to separate personal and investment funds:

  1. It’s easier to report your expenses and deductions at tax time.
  2. In the event of an audit, they want to see that you’re treating this property as a business.
  3. If I slacked a bit on our record keeping, we can still easily eyeball whether we’re making money or not.

I opened an ING DIRECT checking and savings accounts for our rental funds. I was already a customer of ING DIRECT, and I really like the savings sub-accounts where you can name each pool of money differently. The most annoying part about using ING DIRECT is that I have to mail my rent checks to deposit them, but hopefully that will be a short-term problem.

So now I have 1 checking account and 4 savings sub-accounts: Variable Expenses, Security Deposit A, Security Depsoit B, and Income Taxes. Some details about each of these accounts:

  • Checking Account – where all rent is initally deposited, and always holds the budgeted funds for PITI ($1,104), repairs ($87.50), and excess cash flow ($200). Cash flow we can apply to anything we want, like mortgage pre-payment, upgrades, miscellaneous expenses like office supplies, or saving for the next duplex. In the short term I’m going to use excess the cash flow to beef up our repair fund just in case something large breaks soon.
  • Variable Expenses – this savings account includes the budgeted funds for things that are irregularly paid, including: future vancancies ($87.50), HOA dues ($50), and professional fees ($25). This savings account is automatically funded $162.50 from our checking account each month. Because I’m a nerd, I then use Quicken to further allocate the money to each sub-category.
  • Income Taxes – I need to dig deeper into this, but my git-r-done way of estimating our tax burden was to start with total rent minus deductions for HOA dues, insurance, property taxes, and 75% of the principal/interest payment (only the interest is deductable). Then I take 25% of that number to get an estimated amount to save for each month, which comes out to $192.47. Rounded up, this savings account is automatically funded $195 from our checking account.
  • Security Deposit A & B – these were transferred to us at closing, and we named each one in ING as Security Deposit + the name of the address the security deposit applies to. I’m leaving those alone until a tenant moves out.

The amount allocated to each fund is directly related to the balance sheet I created previously, with roughtly half of the positive cash flow money being allocated to income taxes.

Update: be sure to check out part 2 and part 3 of my investment property bookkeeping series.


“Landlording is probably the world’s second oldest profession and certainly the most lucrative.” -How to Buy & Manage Rental Properties, 1986

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Our Investment Property Balance Sheet

10 Nov

We’ve officially closed on our duplex!

investment property closing

At Closing for Our First Investment Property

The Complete Guide to Investing in Rental PropertiesThe primary purpose of this post is to share the (expected) financial breakdown of this property’s cash flow. Every property will have different financial pros and cons, and I’m sure the details vary wildly based on geographic location – but this will provide others interested in investment property a data point to compare their opportunities against.  This analysis was done before we made an offer, and is largely based on advice from The Complete Guide to Investing in Rental Properties (thanks for the recommendation, Daniel!).

Total cost: $181,350
 Down Payment: $45,350 (min 25% required)
Mortgage: $136,000

Revenue Monthly Annually
Rental Income $1,750 $21,000
Vacancy Rate (5%) $87.50 $1,050
Net Income $1,662.50 $19,950
Expenses Monthly Annually
Principle & Interest $699.29 $8,391.48
Taxes $348.31 $4,179.72
Insurance $57.33 $688
Repairs (5%) $87.50 $1,050
Professional Fees $25 $300
HOA $50 $600
Total Expenses $1,267.43 $15,209.20
Cash Flow $395.07 $4,740.80

A few explainations about the above chart:

  • Vacancy Rate – this is an assumed average, taking into consideration rent loss between tenants.
  • Insurance – we have a 2% deductable on $215,000 of “landlord” insurance coverage – i.e everything but the tenants’ possessions.
  • Repairs – also an assumed average, using rules of thumb. Time will tell how accurate they are long-term, but it probably depends greatly on the age of the property, etc.  Luckily ours was built in 2009, which is probably newer than average for a rental.  I’m planning on making this more sophisticated with a “major expected repairs” fund for the big ticket items – roof, a/c units, water heaters, etc which I’ll detail in a future post.
  • Professional Fees – lawyers, accountants, etc. No immediate plans for this fund, but I would expect it will be needed eventually.

If you own an investment property and want to share your balance sheet on this blog – send me a note!

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Introduction Letter to Existing Tenants

25 Oct

In anticipation of our upcoming duplex ownership, I prepared an introduction letter to the existing tenants that we’ll put in the mail the day we close. This letter serves several purposes:

    • First Impressions and Goodwill:  We began by informing tenants of the completed purchase, thanking them for their cooperation with inspectors and appraisers, and including some background information about us + a picture. The more tenants see us as average people (instead of the L word) the better they’ll probably treat our property, and the more patient / flexible they’re likely to be when we need it most. We also offered assurances that their security deposit was transferred to us during the sale.
    • How to Pay Rent:  Particularly because closing will be towards the end of the month, we need to inform the tenants ASAP where and how to pay next month’s rent. We want to use a service called erentpayment.com, so we included a note about how this service is a win-win and we’re hoping they agree. More to come on that later.
    • Exchange Contact Information: We included a blank tenant information form, a homemade 2″x3″ business card printed on cardstock with our contact information, and a self-addressed postage paid envelope. The tenant information form simply asks for email addresses and phone numbers, and their preferred method of contact.

You’re welcome to download a copy of this letter and the tenant information form here, but I’ve also included the text of the letter below.


Month DD, YYYY

Dear Name,

Your New LandlordsGreetings! We wanted to take this opportunity to introduce ourselves. Your unit was purchased by us on [DATE]. We sincerely appreciate your assistance and patience during the inspection and appraisals that were necessary to complete the purchase.

A little about us: we’re a soon-to-be-married couple who live and work in Austin. This is our first investment property, and we look forward to meeting your housing needs!

Our Contact Information

  • Name: [Name] & [Name]
  • Address: 123 Main Street  City, ST ZIP CODE
  • Email: youremail@email.com  (*preferred method of contact)
  • Phone: 555-555-5555
  • Included are business cards with our contact information for easy reference.

Rent Payment

  • We would like to use a rent payment service called eRentPayment that automatically
    deducts rent from an account of your choosing on the 1st of the month.
  • This service offers a win-win situation: it saves time, postage, hassle and avoids
    late fees – and we are paying the transaction fees associated with using this service.
  • To register, please visit www.erentpayment.com:
    • Click on the Register link (upper right-hand corner) and complete the form.
    • You will receive an email containing your password (you may change this later).
    • Enter the checking or savings account you wish to use for rent payments.
    • Enter your unique Renter Code in the specified field and select Enter to add your unit to your profile.  Your Unique Renter Code: XXXX
    • Please register in a timely manner to prevent any issues with your rent payment on November 1st.
    • Definitely let us know if you have any concerns about using eRentPayment.

Security Deposit

  • Rest assured, your security deposit of $875 was transferred to us at closing.

Maintenance Requests

  • Please notify us of items in need of repair using the contact information above – we will do our best to remedy the situation as soon as possible.

Tenant Information

  • Please complete the attached Tenant Information Sheet and return in the self-address stamped envelope provided so that we know the best way to reach you.

Property Inspection

  • We would like to inspect and address some minor concerns noted in the inspection. Once we’ve received your Tenant Information Form, we will contact you to find a mutually-agreeable time (weekends are usually best for us). Or feel free to contact us first at youremail@email.com.

Please feel free to contact us anytime with any questions or concerns.

Sincerely,
Name & Name

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Final Countdown to Investment Property Ownership!

13 Oct

Pending any unforeseen circumstances, we’ll be closing on our first investment property on October 20th. The process thus far has consisted of 40% investment property books, 30% Excel formulas, 20% leap of faith, and 10% luck. Hopefully this is the first of several (many?) ventures, but alas real estate empire building is necessarily a slow journey.

Invesment Duplex

Our (Soon-To-Be) First Duplex!

I admit, I have a tendency to nerd out on topics I become interested in. Lately I’ve been absorbing all things landlord, but I’ve yet to find a passionate, online community that shares this specific interest.

I’ve only scratched the surface, but investment properties (like any other small business) require a plethora of decisions.  Given my natural tendency to “maximize” situations, my mind often idly ponders the best way to approach these challenges.

To that end I created Rental Realities – a place for other landlords to exchange strategies and ideas, successes and failures.  There’s a lot left to learn – and they say the best way to learn is to teach – so the goal is of this blog is to become a resource for both myself and other landlords using real estate to achieve their goals.

Onward!

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