Archive | May, 2012

Report: Effects of Trees on Rental Rates

17 May

Courtesy of Consumerist.com, I stumbled upon a 2010 report on the effects of trees on rental values. While there were other motivations for planting the tree from our wedding ceremony, I do plan to add more in the future to improve the property overall.

“A new study by the U.S. Forest Service found that planting trees along the perimeter of a rental property increase the rates the landlord could charge by $21 a month. Planting right on the property increase the value by at least $5 a month. The survey was done by combining the price of rental listings on Craigslist for Portland, Oregon with tree data gleaned from Google Earth.”

It’s a little dry, but in case you’re interested here’s a PDF of the full report.

Want to be notified of new posts?

Join 178 other subscribers

Tree Ceremony and Rental Property Improvements

10 May

The Wedding Tree Ceremony
We were married last month, and during the planning process our officiate suggested we make the ceremony longer – apparently I took my abhorrence for mushy wedding stuff a little too far.  I found a tree planting ceremony online, which fit well with our park-setting.  The tree ceremony is essentially a metaphor on the nurturing of marriage:

Tree Ceremony During WeddingLike this tree, marriage must be resilient. It must weather the challenges of daily life and the passage of time. And just like the tree that they are planting, marriage requires constant nurturing and nourishment. As they provide the sun, soil, and water for this tree, they will provide the encouragement, trust, and love needed on a daily basis to consciously nurture and nourish their connection to each other.”

Which then begs the practical question – what do you do with the tree afterwards?  Since we live in an apartment, we decided to plant it at our investment duplex.

Wedding Tree CeremonyPicking the Tree
With tenants in play, I needed to pick a variety that had good odds of living on its own devices.  I went to a local nursery to get some expert opinions with a few criteria in mind:

  1. Relatively Attractive – for both curb appeal and the wedding photos.  🙂
  2. Low Water Needs / Heat Tolerant – 2011 saw a bad drought for Texas, so this could be the difference between the tree surviving the summer or not.
  3. No Acorns or Fruit – with rental properties, this could be a recipe for disaster.

The nursery staff was crazy helpful and knew their stuff – she understood exactly what I was trying to accomplish, recommended several trees, and introduced me to some city resources on native trees suggested for the area.  I ended up picking a small Cedar Elm.  Total cost for the tree: $4.32 – what a deal!

Planting the Tree
YouTube.com is a great resource for DIY projects:

Cedar Elm Investment PropertyHere’s the tree in its new, permanent home.  Now I just need to keep it alive during the upcoming Texas summer – it sounds like the first year is the hardest and then I’m probably good. 

We intentionally planted it in the front yard so we could help supplement the watering as needed.  I expect I’ll make frequent trips to ensure it survives the summer, which will give me an excellent opportunity practice tracking my driving mileage.

 

 

Want to be notified of new posts?

Join 178 other subscribers

Choosing an Investment Property to Purchase

7 May

Q: I’m an aspiring investor looking for my first property. Lately I’ve been frustrated because I can’t seem to find properties that meet my criteria AND generate the cash flow I’m looking for. Could you share your experience of how you found your first property?

Glad to be of service!  This post details the process we used to select our first investment property. Now I should start by saying there will be exceptions to all of these rules of thumb, but this logic seemed to work for us and I would use it again in the future:

    • More units = Easier to cash flow.  Generally a duplex will usually be easier to cash flow than a single-family home, and a fourplex is easier than a duplex, etc. Because of this, we started with duplexes and removed single family homes from our search entirely. In a perfect world we’d have moved straight to a fourplex but our down payment wasn’t large enough.
    • 25% Down. Because this was an investment property that we would not be living in ourselves, we were required to put a down payment of 25% the purchase price to get financing. While that amount of money is a pain to save up, this really helps the cash flow equation because with a large enough down payment pretty much any property can cash flow.
    • Our Strategy: we went into this process with a few assumptions – (1) we’d be managing the property ourselves (2) we weren’t exceptionally handy (3)  we’d both be working full time in other careers for the foreseeable future. This meant that the ideal property for us would be in good condition so reduce maintenance/tenant hassle.  I’m a firm believer that the better the property, the better the quality of tenants it will attract. As a result, we weren’t looking for the very best cash flow possible – instead we got additional quality in exchange for slightly reduced cash flow.
    • Alternative Strategy: I have a coworker who went into their investment property purchase with a very different assumption: they would use a property management company from day 1.  Now not only is their hassle factor reduced, but they need to maximize cash flow to off-set the cost of the property management fees. This resulted in a very different property purchase. There isn’t a “right” strategy – it’s more important to pick the strategy that’s right for your situation.
    • Investment Property Realtor. We had the good fortune of finding a realtor that specialized in investment properties. Before then we had spoken to a few others, and it was clear in retrospect that they didn’t know what they were doing when it came to investment buys. Buying an investment property has unique financing options, down payment requirements, and evaluation metrics that many realtors just don’t have experience with. Once we found an investment property-savvy realtor, the process went very quickly.

Our realtor sent us a chart of the top 20 properties in the area terms of current monthly rent / asking price. Because this encompassed different cities with different property taxes, I created a modified rent/asking price ratio by accounting for HOA fees and monthly taxes. The formula for this modified ratio was:

Modif. Ratio = ((Monthly Rent – (Monthly Taxes + Monthly HOA Fee)) / Price

Then the list was sorted by modified ratio to see which properties rose to the top. We drove around to see each property/neighborhood in person, which allowed us to eliminate some options immediately. Then we scheduled some time with the realtor to see our top picks, and we ended up buying one of those properties. Because of the lower-hassle strategy I described above, our pick was in the middle of the pack.

Here’s our property-comparison chart for reference (our unit is in pink):

Price Taxes Rent Modified Rent Modified   Rent/Cost Ratio
$170,000 $4,090 $1,700 $1,359 0.800%
$175,000 $3,227 $1,650 $1,381 0.789%
$165,000 $3,727 $1,600 $1,289 0.781%
$174,900 $3,626 $1,650 $1,348 0.771%
$175,900 $4,482 $1,725 $1,352 0.768%
$174,900 $3,990 $1,650 $1,318 0.753%
$192,500 $4,877 $1,843 $1,437 0.746%
$178,000 $3,433 $1,590 $1,304 0.733%
$181,350 $4,226 $1,750 $1,348 0.743%
$204,900 $4,887 $1,900 $1,493 0.729%
$175,000 $4,023 $1,550 $1,215 0.694%
$189,950 $3,630 $1,620 $1,318 0.694%
$214,990 $5,018 $1,850 $1,432 0.666%
$217,900 $4,226 $1,850 $1,448 0.664%
$200,000 $4,131 $1,650 $1,306 0.653%
$178,000 $4,143 $1,500 $1,155 0.649%
$259,400 $4,237 $2,020 $1,667 0.643%
$239,000 $5,720 $1,990 $1,513 0.633%
$185,000 $4,190 $1,500 $1,151 0.622%
$215,000 $4,352 $1,700 $1,337 0.622%

Want to be notified of new posts?

Join 178 other subscribers

Preparing Rental Property Taxes: The Good, The Bad and the Ugly

2 May

Tax preparation for our investment property has always been intimidating to me.  Lots of things weren’t in my favor: decoding depreciation vs. deductions, repairs vs. improvements, 1-time expenses incurred while purchasing the property, and 50/50 ownership (and income distribution) between myself and my fiancé.  But being a do-it-yourself kind of individual, I was determined to put on my big-girl pants and figure it out.

Every Landlord's Tax Deduction GuideFirst I brushed up on the basic of rental property investing with the help of this great book, Every Landlord’s Tax Deduction Guide.  I really recommend this book – it explains a niche area of tax code in a very easy-to-understand way.

I planned to rely heavily on my go-to tax software, TurboTax.com. They offered a “Premier Investments and Rental Property” service for $74.95 that seemed ideal for my situation. I also appreciated their handy (and free) Real Estate Tax and Rental Property page to organize my expense categories.

The end result: I fought the tax law and the tax law won. For the first time in my tax-preparing life, I raised the metaphorical white flag and took my taxes to a professional.  Honestly if I hadn’t read the book, the TurboTax.com product probably would have sufficed, but I realized the step-by-step online guide wasn’t asking me everything I felt I needed to satisfy the level of detail the book recommended. For example, I knew gift expenses were deductible to a max of only $25 per unit, but Turbo Tax didn’t question whether any of my expenses were gifts – so what else wasn’t it asking? Maybe it was user error, but I was pretty confident I was about to screw this up.

I found an accounting firm to prepare my taxes through yelp.com – first looking for a large number of positive reviews and then evidence of real estate investment experience. I called my chosen accountant and explained the situation, and she gave me some basic instructions about what information to provide her.

Pulling together expenses was relatively easy because I was already in the habit of putting all rental property receipts in a manila folder as they come in, and then I cross-referenced that with a rental-only checking account that would remind me of anything else I’d forgotten. One twist I wasn’t expecting was the requirement to separate the expenses and income by unit, not by property, so that all expenses for Unit A are separate from Unit B. This will affect how I purchase supplies in the future, including going through the check-out line twice in order to separate expenses at the time of purchase.  Dividing sales tax based on what % of the receipt is for which unit is… unpleasant.

As a reminder, we closed on our duplex in October 2011, so here’s our 2011 income:

Side A Side B
October 2011 Rent $310.40 $301.53
November 2011 Rent $875.00 $875.00
December 2011 Rent $875.00 $875.00
Security Deposit Interest $0.82 $0.76
Total $2,061.22 $2,052.29

And 2011 variable expenses, which doesn’t count insurance/taxes/and mortgage payments:

Payee Side A Side B Both
Amazon.com – 9/13 $26.39
Property Inspection – 9/14 $495.00
Office Depot – 9/17 $16.22
Appraiser – 10/6 $575.00
Office Depot – 10/19 $5.73
USPS – 10/20 $1.08
USPS – 10/20 $1.68
Office Depot – 10/22 $17.31
Safeco of Indiana – 11/9 $8.00
USPS – 11/9 $1.48
Walmart – 11/19 $5.38
Lowe’s – 11/19 $66.45
Lowe’s – 11/19 $17.99
Toys R Us – 12/16 $26.95
Jo-Ann – 12/16 $26.95
The Home Depot – 12/23 $25.94
Total $94.48 $79.77 $1,143.30

Something I vow to do better in 2012: recording the driving mileage to and from the investment property – otherwise we’re just leaving money on the table. I acquired an inexpensive vehicle mileage book from Office Depot and it lives in my glove box.  The trick will be remembering to use it.

Want to be notified of new posts?

Join 178 other subscribers