Archive | December, 2013

2013 Recap – Adventures in Real Estate Investing

26 Dec

Season’s Greetings! As 2013 draws to a close, I wanted to take a moment to highlight some of my favorite rental realities from the past year:

Purchasing Our Second Duplex
We started January strong by doubling our rental empire. With a little planning and a lot of luck, we were able to buy a HomePath foreclosure at a great price. In retrospect, I wouldn’t specifically recommend buying a duplex with two immediate vacancies to fill, but it worked out alright in the end.

Duplex Interior

The Mystery of the Haunted Duplex
After some unexplained events, our tenant was reporting paranormal activity.

An update: our tenant borrowed an infrared camera, which is used to photograph wildlife – or in this case an active kindergartener who was keeping busy at night. And all issues disappeared completely while her daughter was spending the weekend at grandma’s – so worst case the daughter is haunted, which is officially outside of my obligations as a landlord. 😀

wildlife cam

Installing Staircase Handrails
It was a labor of love, but the new handrails came out great. We relied on the good graces of my in-law’s by occupying their garage (and sanding arms) for a few weekends straight.

handrails 3

Investment Property Bookkeeping
After leaving readers hanging since my original post in Nov. 2011, I finally finished documenting the rest of my bookkeeping process. This 3-part series discusses bank account organization and budgetingthe binder system, and monthly closings using Excel.

Binder

Here’s my 2013 binder after a year of managing 4 rentals, which has been upgraded to the 3″ variety – and even then it has become a little cumbersome to manage. I also added a 6th section for management company statements. Next year I’ll make a greater effort to fit more receipts on fewer pages.

Hiring a Property Management Company
After a few back-to-back vacancies wore me out, we hired a property management company to help out. The series includes the benefits, costs, selection criteria, and our ultimate decision.

Earn $1,000,000 in 13.3 Years with Investment Property
This BiggerPockets.com article provided the momentum we needed to kick-off our mortgage pre-payment efforts. I think people could dismiss this article on the surface as “too good to be true” but my own calculations support a lot of these assumptions. We’ve already trimmed a solid 7 months off the first loan and we’re just getting started.

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Our Investment Property’s 2012 Schedule E, Final Profit/Loss

18 Dec

From the department of things-I-meant-to-do-a-long-time-ago, I wanted to share the income and expenses portion of our 2012 Schedule E, which pertained to our first rental. In anticipation of the upcoming tax season, I’m looking forward to seeing how our numbers will change vs. last year.

taxes

(photo by 401(K) 2012)

This is basically the result of the bookkeeping worksheet, plus any category modifications made by our tax professional. I do wish I had more insight into what she changed and why, but by the time I was finally finished pulling everything together I didn’t care anymore.  🙂

Income Unit #1 Unit #2
Rents received $10,500 $10,500
Expenses Unit #1 Unit #2
 Advertising  $0  $0
Auto & Travel $159 $208
Cleaning & Maintenance $0 $0
Commissions $0 $0
Insurance $373 $373
Legal and other professional fees $200 $200
Management Fees $0 $0
Mortgage interest paid to banks, etc. $3,118 $3,118
Other interest $0 $0
Repairs $269 $899
Supplies $151 $151
Taxes $2,106 $2,106
Utilities $0 $32
Depreciation expense or depletion $2,843 $3,169
Other: HOA Dues $300 $300
Other: Office Expenses  $6  $12
Other: Transaction Fees $6 $15
Total Expenses $9,531 $10,583
Subtotal $969 -$83

Total rental real estate income or loss in 2012: $886

All that work and we only made $886?! Well, it’s a little more complicated than that. First, the depreciation on the property provided a tax shelter for 27% of the income – which gives me a realized net income closer to $6,500. Then imagine the potential of a mortgage-free property – which could happen in the next 5 to 22 years – and we’d net an additional $6,236 a year, almost doubling the income. Finally, consider the likely property appreciation and increase in rental rates 10-20 years from now and you start to grasp the real (albeit long-term) value of real estate investing.

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Home Mortgage Interest Deductions – Spending a Dollar to Save a Quarter?

11 Dec

Once in a blue moon somebody says they don’t pay down their mortgage because they’ll lose the interest deduction. There are certainly valid reasons to keep a mortgage around (like investing for higher returns), but a tax deduction is not one of them.

Sure, you’ll pay less in taxes, but you’ll pay more overall. I’ll break down the math below in hopes that I can save somebody out there a little money.

A quick caveat: “home mortgage interest deductions” apply to personal residences and 2nd homes, while the mortgage interest from investment properties is technically a business expense. I’m referring to both as interest deductions for simplicity sake.

Let’s imagine we have a 30-year fixed mortgage for $150,000 at a 4.5% interest rate. In the first year of the loan, we’ll pay $6,700 in interest – which we can claim as a deduction.

Deductions can be confusing because they do not offer 1-to-1 savings like a tax credit. For example, a $6,700 tax credit is worth $6,700 at tax time, but a $6,700 deduction is only worth a fraction of that amount. How much less depends on your tax bracket, and can be determined by the formula:

[Tax Rate] x [Deduction] = [Tax Savings]

Assuming a 25% tax bracket, that hypothetical deduction is worth $1,675 in tax savings. Viewed in a vacuum, this is fairly good news – until you consider that you paid $6,700 get it. Here’s how it works out against each tax bracket:

Tax Rate Interest Paid Tax Savings Net Loss
10% $6,700 $670 -$6,030
15% $6,700 $1,005 -$5,695
25% $6,700 $1,675 -$5,025
28% $6,700 $1,876 -$4,824
33% $6,700 $2,211 -$4,489
35% $6,700 $2,345 -$4,355
39.6% $6,700 $2,653 -$4,047

That’s why some refer to the mortgage interest deduction as spending a dollar to save a quarter. And lower your tax bracket, the greater your net loss.

If you have a home mortgage, then by all means take the tax deduction. But just realize that because your tax savings will always be a percent of interest paid, you aren’t coming out ahead vs. owning the property outright.

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Lease Renewal Letter with Reasons to Renew

5 Dec

Below is a recent letter we received from our apartment complex (who we rent from), with a heavier emphasis on discouraging move-out compared to our own tenant renewal letter. While the copy could use some fine-tuning, I found it an interesting approach and worth sharing.


 

Month DD, YYYY

^Rates and Lease terms subject to change.
Below rates are good through MM/DD/YY.

Street Address
Apartment #XX
City, ST Zip Code

Dear Name,

Our records indicate that your lease is due to expire at the end of Month DD, YYYY. At this time, we wish to reaffirm our commitment to you to provide outstanding service and to maintain your community as one in which you take great pride. We sincerely enjoy having you as a resident. It is our desire to make certain that you are happy in your apartment home and that you are receiving the best value for your rental dollars.

When considering your options please remember to keep the following in mind:

Moving is expensive! Costs include:

  • New application fees and deposits
  • Hiring movers
  • Transfer fees from utility providers
  • Taking time off from work

Moving is inconvenient!  Hassles include:

  • Lost mail (late fees from creditors)
  • Forwarding your mail
  • Packing and unpacking
  • Cost of moving $$$$$

Keeping this in mind we are pleased to offer you the following renewal options:

 12 Month Renewal Month-to-Month Market plus $250
$xxx $xxx

These rates do NOT include carport or pet rent. New rates are: $x monthly pet rent (per pet) & $x monthly carport (per carport).

The above rates will be effective Month DD, YYYY.

Please call or come by our office to discuss your renewal needs or circle your desired lease term and return this letter to our signing office. A copy of your renter’s insurance certificate carrying $100,000 liability coverage will be necessary when signing your renewal.

Please remember you MUST sign your new lease by January 15th. If you have not renewed your lease prior to the expiration, effective Month DD, YYYY, your lease will go Month-to-Month.

Please remember that should you decide to leave our community (and we certainly hope you do not), a 60-day advance written notice is required.

We appreciate your residency, and look forward to being of service to you in the future. Should you have any questions or concerns, please do not hesitate to contact us at (xxx) xxx-xxxx or email@email.com.

Kind regards,

Name

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