How To Price Rental Property

The amount that you’re charging for rent will either attract tenants to your listings or it will repel them.

If you set the rental price too low, then you won’t get the right value for your property.

Prospective tenants might even be suspicious.

Set the rental price too high and you won’t get any takers!

That’s why knowing how to price rental property in your specific market will help you have a successful and profitable experience.

What Is the Most Common Method of Rental Pricing?

Many rental property owners will price their rentals based on the sales comparison approach.

This approach will place a relative value on the property based on a common and easy to understand metric.

Square footage is most often used, but the number of bedrooms and bathrooms is sometimes used as a metric as well.

If other landlords are charging $1 per square foot in rent, then it’s easy to figure out what your 1,500 square foot single family home will get in rent.

It is important to remember, however, that this approach is just a base line number.

Homes that are run down or are in poor neighborhoods won’t usually command the average price.

Homes in higher priced neighborhoods bring other perks that can raise price rentals.

Capital Asset Pricing Is Also Effective

With capital asset pricing, you’re valuing the risks versus the rewards of your own finances instead of looking at what the market can sustain.

It’s based on the return on your investment that you need to meet certain budgetary landmarks.

If you want a 5% return on your investment, then you add 5% to the expected monthly costs you’re paying for a rental property, including taxes and maintenance, and that’s how much you charge.

A similar approach is called the Income Approach.

Instead of looking at the overall return that can be achieved, however, the rental property owner is looking at income benchmarks that can be achieved.

The one downfall of both of these methods, however, is if you have high costs that are associated with property ownership.

If your costs are higher than other property owners, then your rent will be higher and you’ll get fewer tenants.

The Cost Approach Might Be the Most Effective

In the cost approach, the valuation of the rental property is based on what it is actually worth.

The land values are combined with the property improvements and then the best use scenario is then considered to set the price of rent.

If your property is in the country away from everyone else and there’s a lot of land to use for farming, then there may be more value than a 1 bedroom apartment under this scenario and so more rent can be charged.

As long as you keep rental prices within a competitive range, you’ll be able to fill your properties with good tenants that will pay their rent on time.

This will give you the income that you need and help you maximize your profitability.

5 Hidden Costs To High Rental Turnover Rates

Every landlord wants to avoid high rental turnover rates, and it’s easy to understand why.

After all, there’s quite often a period of time when a unit remains unoccupied.

When this is happening frequently, a landlord can lose out on substantial amounts of rent money.

Unfortunately, lost rent payments aren’t the only costs related to having high turnover in rental properties.

1. Marketing the Property
Some people live in markets where advertising a rental property is as simple as posting an ad on Craigslist.

For most, though, this simply isn’t the case. In order to get a home rented out quickly, it’s often necessary to place classified ads, hold an open house, and post vacancy signs.

These costs are all the more substantive because there is no rental income to offset the cost during this period.

2. Rental Application Costs
It’d be amazing if all potential tenants were stellar candidates and could be fully trusted to divulge all requested information.

Unfortunately, that’s not how the world works.

There are costs related to every potential renter, such as doing criminal and credit background checks and verifying income and employment information.

3. Repair and Cleanup
Regardless of how great a tenant has been, it’s still very likely that there’s going to be some costs shouldered by a landlord to prepare a property for its next inhabitant.

Sometimes costs can be as basic as the charges for getting the carpet cleaned.

Other times, hundreds or even thousands of dollars in repair work might be necessary.

Even the smallest repair costs can start to build up if the repairs are keeping the property from being rented.

4. Processing Tenants
Many landlords neglect to account for the attention and energy that goes into taking care of a rental turnover.

It detracts from your bottom line when you have to take the time to do things such as paperwork to process departing tenants and to bring on new ones.

Using property management software can help reduce the hassle involved in this process, but it’s important to still seek out the underlying issue leading to high turnover rates.

5. Showing the Property
There are few potential tenants out there desperate enough to rent a property sight-unseen.

This means that extra hours will need to be spent by the landlord to show their property, and if they don’t have time to do this on their own, they’ll actually have to pay someone to do so.

Add this to the necessary time spent setting up appointments and dealing with emails and phone calls, and this can turn into a huge hidden cost.

Reducing Tenant Turnover Rates
Fortunately, there are things that can greatly reduce the likelihood of high turnover rates.

Pay Attention to Previous Rental History
Some people simply can’t stay in one place.

If a person’s rental history shows them moving once a year, even if they fully abide by their lease agreements, it may be smart to move on to the next candidate.

Make Life Easy For Tenants
The best way to keep good renters around for the long haul is to ensure that they’re happy, because an unhappy tenant is far more likely to leave at the first opportunity.

Make sure to respond to tenants’ requests in a timely manner.

Offer conveniences like the ability for tenants to pay their rent online.

Reconsider Rent Increases
Pay attention to the market in an area. It’s not necessary to always raise rents, and if rent increases are causing the loss of tenants, they are hardly an economical decision.

By engaging in these tasks to reduce turnover rates, a landlord can keep good tenants in their properties.

The Top 5 Tax Deductions For Rental Property Owners

There are many landlords who pay more taxes than they should every year, usually because they aren’t familiar with the deductions they can claim. It takes a thorough understanding of tax law and strategic planning to take advantage of all available deductions. Here is a guide to the top five deductions you should claim.

1. Deducting Interest
Perhaps the most important deduction to take is on interest payments, which can represent a significant amount of money each year. This can cover many types of interest payments, including interest on mortgages and loans that were used to purchase or improve your rental property. These interest rate deductions also extend to credit card interest payments that were used to purchase goods or services in relation to your rental properties. Remember that this doesn’t apply to the principal that you initially paid for the property, only the interest accrued.

2. Repair Deductions
The cost of repairs can add up significantly over the year, but the good news is that these repair costs can be deducted from your taxes. Repairs to your property can take many forms:

  • Fixing leaks
  • Repainting
  • Patching a roof
  • Plumbing work
  • Replacing a broken door
  • Plastering a hole in a wall
  • Replacing a shattered window
  • and more

Be sure to keep receipts and records of all repairs you make. Also be aware that you can only deduct repair costs made the year you performed them, so be sure not to wait on this deduction until next year.

3. Travel Costs
Do you find yourself traveling constantly to repair property, pick up building supplies or meet with a tenant to discuss a problem or complaint? The great part about travel-related expenses is that they are all deductible. This even applies to overnight travel involving flights to other cities. For example, if you attend a real estate conference to help you understand how to improve your business, the plane ticket and hotel costs would also be deductible. At the same time, overnight travel is likely to be the most scrutinized by the IRS when you file your taxes, so it’s important to keep thorough records that can back up your deduction in case of an audit.

4. Depreciation Deductions
Depreciation is one deduction many landlords don’t quite understand; however, this can add up to big savings every year. The basic concept of real estate depreciation is that the IRS allows landlords to claim a “paper loss” on the value of their property. This is based on a model that stipulates that properties will lose value over 27 and a half years, which brings the value of their property from what they originally paid for it to the price of zero dollars.

Each year you can claim 2/55ths of the purchase price for 27 years. The formula for depreciation can be much more complicated and often requires an accountant for proper calculations. It’s worth the extra work, though, due to the amount of money that can deducted. Don’t forget to deduct the cost of using your accountant either, which is also permissible when it’s related to real estate activity.

5. Insurance Premiums
If you own a rental property, you’re probably paying quite a bit for insurance. This includes flood, fire, and theft insurance, as well as certain liability insurance expenses. You might even be paying for your employees’ workers compensation and health insurance. Thankfully, all of these insurance premiums are deductible.

As you can see, there are numerous deductibles available to landlords that you can use to maximize your savings. Include these five on your list of deductibles, and you’ll be doing your rental property taxes the right way.

Please note: These articles are for informational purposes and we advise you to consult an attorney for more specific information related to your situation.

5 Property Management Bookkeeping Tips

The accounting of property management can sometimes get to be a bit complicated.

You’ve got security deposits to manage, certain fees that might be charged, utility bills that might be coming in that a tenant needs to pay – and there’s the rent, of course!

Each item generally needs its own line in a rental property’s annual budget and there may be certain responsibilities that must be accomplished by law for certain budget lines.

The first thing you must know is what must be done to store any security deposits or other required rental deposits.

Some jurisdictions require them to be stored in separate accounts from any profits that are received.

You may also need to notify tenants of changes to the account, who the account holder is, and how they can receive their security deposit back.

1. Know What You’re Required to Disclose

Some landlord/tenant laws require an itemized list of expenses and charges to security deposits or required repair bills a tenant must pay because they have violated the terms of the lease.

Other laws only require that the amount being held is disclosed by job and not a full outline of how the job is done.

2. Keep Your Documentation Clear and Concise

Tenants have the ability to challenge any charges against them if they believe that they aren’t fair.

This requires the property manager to know what going rates for services are in their community so that a fair labor charge is implemented.

If you hire someone who makes minimum wage and a tenant sees a $40 per hour labor charge on their bill, they’ll be able to challenge that charge in small claims court and generally win just by getting a lower quote.

3. Have Precise Procedures in Place if a Tenant Falls into Default

If your tenant is not paying the rent, you need to know this immediately so that you can do something about it.

You must have clear procedures in place for dealing with late rent and how you begin to start the eviction process.

If you treat households differently, then you are setting yourself up for a discrimination lawsuit that can be incredibly costly.

4. Rely on the Professionals

Landlord/tenant laws want to see that you’ve relied on accurate information as a property manager.

They don’t generally care if you’ve done the work or had someone else do it for you.

What needs to be proven is that you’ve done your due diligence to charge a fair rate. If your rental property needs to be cleaned and a licensed and bonded contractor would charge $40 per hour for 3 hours to clean the property up, the most you can charge if you do the work is $120 – even if it takes you 8 hours to get the job done.

5. Keep Every Property Separate

You certainly need to have an overall budget as a property manager, but every property needs to have its own budget line. Each property must also have line-by-line budget items that will help you to accurately track profit and loss so that you can keep up with your income ratios.

By taking these steps, you’ll be able to have a successful accounting experience with your properties and protect yourself legally.

That way you’ll always be able to maximize your revenue streams.

Guarantors, Escrow, and Rent Insurance: Options When Renters Don’t Earn Enough Income

One of the key ways to ensure that your tenants will pay the rent is to check that they have sufficient income before signing a lease with them.

Typically, landlords require tenants to have an annual income that’s between 40 to 50 times the monthly rent.

If someone seems like a good tenant but doesn’t meet your income requirements, don’t automatically turn them away.

You have some options that can give you the assurance you need to rent to these tenants despite the lack of income.

Guarantors
New graduates starting their first jobs and renting their first apartments are a typical example of when the rent would be too large a portion of their income by the usual standards.

In some cases, a grad’s parents may be willing to cosign the lease and become a guarantor, taking on the responsibility of making the rent payment if the lessee fails to do so.

Many landlords only accept guarantors if they are local.

It’s also important to verify that the guarantor has enough income to meet this commitment.

In most cases, this means checking that their income is as much as 80 to 100 times the monthly rent, allowing for their own housing expenses as well as the apartment they’re guaranteeing the rent for.

If the guarantor has no rent or mortgage payments of their own, the income they need can be less.

If you allow a guarantor, be sure the agreement specifies the circumstances when the guarantor needs to make payments and which fees, in addition to rent, they would be responsible for.

Escrow
It’s possible that the prospective tenant or guarantor has a low income but has a large amount of savings.

You shouldn’t rely on that alone, as the money could be spent on other things.

You can ask the tenant to use those savings to pay the full year’s rent upfront.

In some cases, the tenant may not want to hand over a check for the full year but may be able to fund an escrow account, from which monthly payments would be drawn.

Many banks provide services to manage escrow accounts.

Ideally the renter should establish the escrow account with the bank you use in order to simplify management of the funds.

The renter will need to provide the bank with details specifying how funds can be taken from the account.

Rent Insurance
Rent insurance should not be confused with renter’s insurance, which protects the renter’s property.

Rent insurance is insurance the renter purchases to protect their landlord; if the renter doesn’t pay the rent, the company will make the payments.

The insurer basically becomes a guarantor.

This ensures you’ll be paid, but you will need to begin eviction proceedings first.

If you are willing to accept rent insurance, you need to sign up with the insurer.

Currently there is only one institutional rent guarantor: Insurent. Their service is limited to New York, New Jersey, Washington DC, Massachusetts, Illinois, Maryland and Virginia.

There is no fee for landlords to participate; your agreement is needed solely to accept the lease guaranty.

Waive the Requirement
If none of the above options work, you can consider waiving your income requirements.

In some circumstances, the character of the prospective tenant outweighs the concern about their rent.

You also need to consider how long it will take to find another tenant who can meet the income standard.

Depending on the rental market in your location, you may not want to wait to find another potential renter.

Your Guide to Landlord Insurance

Are you a small-scale property manager or “accidental landlord,” trying to learn the ropes of renting out property so you can develop a more professional business model?

Many people who fit this description are not familiar with landlord insurance, and may be relying on homeowner’s insurance to protect them against property damage or liability.

Perhaps you own a vacation home and plan to rent it out for four years to help cover your child’s college expenses.

Maybe you have an aging relative who has moved into long term care, and your family is not quite ready to sell the house.

Or, you might be a real estate broker with a few vacant properties that could be bringing in income.

Whatever circumstances have led you to becoming a landlord, buying landlord insurance should probably go on your short list of tasks.

This guide will introduce you to everything you need to know about landlord insurance: whether you need it, what it covers, how to buy it, and a handful of other crucial considerations.

Do you need landlord insurance?
The answer is: Probably.

It’s not legally required, but carrying the right insurance is a basic element of protecting your investment.

Landlord insurance covers areas of risk that regular homeowners don’t have to worry about, such as legal costs in case your tenant sues you.

Landlord insurance also offers special options like rental income replacement and emergency appliance repair cost coverage.

Landlord insurance is most likely not necessary if your rental situation resembles one of the following scenarios:

  • You leave your home and rent it out for one weekend each year when a big local festival happens.
  • You rent out the basement of your home to a local college student.
  • You have a vacation cabin that you let your friends use for three weeks each summer.

In these examples, you’re either renting out property for a very short term (less than 4 weeks) or a tenant is sharing the home you live in.

Homeowner’s policies assume you’re living in the dwelling that you’re insuring — although they do offer additional coverage or a second policy to cover vacation homes.

While your homeowner’s insurance is probably sufficient in the situations listed above, it’s necessary to talk to your insurance agent and make sure.

Insurance companies may legally refuse to pay claims if they discover the existence of a landlord-tenant relationship that they didn’t know about.

Differences between homeowner’s insurance and landlord insurance:

  • Different pricing structure: Landlord insurance will probably cost you 12 percent to 25 percent more than homeowner’s insurance, but it provides wider coverage.
  • Different risks: Landlord insurance takes into account the extra risks you face from everything that can happen at a property that’s not your own home. These risks may include your tenants vandalizing or accidentally breaking your property, suing you for some rental policy they disagree with, or not reporting a problem to you until it becomes a crisis. For example, even the nicest tenants can be confused about what’s going on with the washing machine, and they may ignore all the warning signs of a blocked outlet pipe until the machine overflows and floods half the downstairs.
  • Rental income: Landlord insurance may pay you the rental income you were counting on if the dwelling is rendered uninhabitable during repairs (only if those repairs are covered, though).

What landlord insurance covers
The main coverage areas of landlord insurance are property, liability, and rental income replacement, in addition to extra options.

Each of these coverage types is discussed below:

Property Coverage
Landlord property coverage is offered in three different tiers: DP-1, DP-2 and DP-3 (DP stands for Dwelling Protection).

  • DP-1: The lowest coverage level, this tier only covers basics like fire and vandalism. If the dwelling is a complete loss, DP-1 policies pay the depreciated cash value of the home at the time it was lost, rather than the actual cost of replacement.
  • DP-2: This tier adds more coverage with a list of specific covered events. These typically include such things as tenant damage, windstorm, hail, and even collision (if a car crashes into your property and damages it). If a damaging event is not named on the DP-2 list, it is not covered.
  • DP-3: Called an “open-peril” policy, this tier covers all instances of damage unless they are specifically excluded. Also, DP-3 policies pay actual replacement cost if a dwelling is lost. This type of policy is usually the best choice, unless you’re already partially covered for losses by a condo association.

Insurance policies generally don’t cover flood damage.

Flood insurance is sold by the federal National Flood Insurance Program (NFIP).

Your agent should be able to sell you one of these policies, but the amounts and premiums are set by the government.

The insurance company may offer its own excess flood insurance if the NFIP amount available to you isn’t sufficient.

Landlord insurance can be written to include any items you own that are kept on the premises, including appliances, tools you keep on site and other structures (e.g. sheds) on the property.

Liability
Landlord insurance takes into account the additional risks you acquire when you put property into a tenant’s hands:

  • Personal injury coverage: Tenants or their visitors may file a liability claim against you for their medical costs if they get hurt due to an unsafe condition they feel is your fault. Additionally, if they suffer property damage as a result of something you did not repair, they may sue you for replacement costs. Finally, you are also legally liable for issues entirely unrelated to the physical state of the dwelling. For example, your tenant may make a legal claim against you for wrongful entry, illegal eviction, invasion of privacy, or disputes over deposits.
  • Legal counsel: As you can see, the numerous kinds of liabilities you encounter as a landlord make access to legal counsel an essential part of your financial security.

Loss of Rental Income
This category of insurance protects you against losing rental income if the unit becomes uninhabitable.

It is important to be aware that this insurance does not cover you if you simply lose rent because of eviction or vacancy; you must have actual physical damage that is covered by your insurance and be losing rent while it’s being repaired.

Optional Coverage
Creative insurance underwriters have come up with a whole toolkit of optional extras that they feel will benefit landlords.

You don’t have to purchase all of them:

  • Emergency lock replacement
  • Emergency repair service: for furnaces, hot water heaters, air conditioners, and other crucial appliances. This is generally accompanied by a network of preferred contractors whom you can contact for repairs.
  • Personal property (contents) coverage: This expands your property coverage to include all furnishings within the dwelling that belong to you, including carpets, curtains, and contents of outbuildings. Contents coverage is essential if you’re renting a furnished home, but you may also want to consider it if you have high-value appliances or personal tools at the rented dwelling. Your policy will not cover the possessions of your tenants, so it’s advisable to ask that they carry their own renters insurance.
  • Mold coverage: Juries have awarded substantial damages to tenants who have been exposed to toxic mold, because it’s not always visible and it can cause serious health problems. For this reason, some landlord insurance companies specifically exclude mold coverage. To guard against future mold problems, it’s important that you impress upon your tenants their responsibility to report any type of leak to you immediately.
  • Online policy management
  • Coverage for specific acts of nature: you will certainly want some of these, but the needs vary from region to region. It’s helpful to discuss coverage specifics with your insurance agent in order to make appropriate choices. For example, hurricane insurance in Florida can be so expensive that rebuilding your dwelling may cost less than insuring it against hurricanes.

What to look for in a landlord insurance policy

  • Customization: The policy you end up with should be tailored to your specific needs, because each landlord’s situation is very different. For example, if your rental units come with a swimming pool, you will probably want to increase your liability coverage.
  • Flood insurance: The federal government offers flood insurance through a designated set of insurance agencies. If you live in a flood-prone region, you should make sure your insurer participates in this program. The price for flood insurance is set by the government, and its cost depends on the level of risk in your region. (Flood insurance refers only to weather-related flooding. Water damage due to burst pipes or other accidental causes is already covered in your regular policy.)
  • Guaranteed replacement costs: Some low-cost landlord insurance policies pay you the “cash value” of covered items. While this phrase may sound good, it’s actually something to avoid. “Cash value” refers to depreciated cost: If a storm damages your ten-year-old roof, for example, a cash value policy will be based on how much you paid for that roof ten years ago, and will then decrease that value for each year you’ve had the roof. Your insurance company may end up paying you only a fraction of what it costs you to replace the roof in today’s marketplace. Better-quality policies guarantee that payouts will cover your actual replacement costs.
  • Inflation protection: The cost of professional home repair continues to rise, so it’s helpful to have a policy that automatically adjusts its coverage level to keep pace with inflation.

How to keep rates low
Make your coverage decisions carefully, depending on your particular situation.

Don’t buy every possible type of coverage automatically, just because it’s available; there’s a certain point at which additional insurance simply becomes an unnecessary expense.

For example, if you purchased a condo unit to rent out, the condo association may already cover certain building-related costs.

If you happen to have your own personal homeowner or auto insurance through a company that also sells landlord insurance, you are likely to qualify for a discount through that company.

Like any insurance policy, you’ll pay lower premiums if you are willing to bear the risk of a higher deductible.

Take all your tax deductions
Being a landlord means running your own business, and landlord insurance premiums can be deducted as a business expense.

Also, if you experience financial loss due to property damage that’s not fully covered by your insurance, you can often count that “casualty loss” as a tax deduction as well. (While you’re thinking about taxes, don’t forget all the other deductions you can take as a landlord. These include depreciation on the cost of your rental property as well as repair costs, accountant fees, mortgage interest and more.)

Lower your risk
Insurance agents will offer you better rates on your landlord policy if you have certain safety measures in place.

All of the following can potentially lower the cost of your policy by decreasing your risk:

  • Sprinkler system
  • Burglar alarms
  • Gated or locked access
  • Absence of known risks in the area
  • Current electrical inspection
  • Mold inspection
  • Requirement that tenants be non-smokers
  • Requirement that tenants purchase renters insurance
  • A clean bill of health on the dwelling’s CLUE report. CLUE stands for Comprehensive Loss Underwriting Exchange, and it is a report on any insurance claims made on a property for the past seven years. This report is generated by LexisNexis, a consumer reporting agency. If the dwelling’s CLUE report shows previous claims, the insurer will charge more to cover it. Only owners and insurance companies can request these reports, but the Fair Credit Act made these reports free to the owner.

The importance of maintenance
A well-maintained property will result in fewer headaches overall, and will also contribute to lowering your landlord insurance premiums.

Over time, the CLUE report on a well-maintained property will reflect fewer insurance claims, because you’re less likely to experience damage related to faulty household systems.

When you maintain your property well, it’s much easier to track how well your tenants are performing the upkeep that you require of them.

You will also be in a position to effectively defend yourself against any claims by your tenant that they suffered damage due to your neglect.

Renters insurance
Renters insurance is not required by law, but you can write your lease to require tenants to carry their own insurance.

This reduces your liability in cases where a tenant’s possessions are stolen or someone is injured due to the tenants not maintaining the property in a safe condition.

While renters insurance certainly offers you some protections, it doesn’t substitute for your own landlord insurance.

Specifically, renters insurance won’t cover damage to tenant’s possessions that results from your lack of maintenance.

For example, if tenants lose expensive musical instruments to a fire that started from faulty house wiring, renters insurance won’t cover their loss.

Likewise, if a tenant’s visitor slips and falls on icy steps because the tenant neglected to clear the snow away, renters insurance will cover the claim.

However, if the visitor falls because one of the steps isn’t nailed down properly, then you’ll be liable for the cost of the claim.

Umbrella policies: sometimes a good option
If you’re renting multiple units, your potential liability may be high enough that your insurance agent will recommend an umbrella policy.

This protects your personal assets in case your liability exceeds the levels of your landlord insurance policy.

It also ensures that you’ll be able to recover your investment in the case of catastrophic damage, and may be required by your mortgage lender.

What to do if your insurer drops you

  • Check your CLUE report: You’re entitled to a new copy every time you are turned down for insurance coverage.
  • Contact other insurance companies: If they turn you down, find out why. See if it’s something you have control over.
  • Get in touch with your state’s insurance commissioner: Their office may have a pool of insurers who cover higher-risk insurance needs.
  • File a complaint: If you feel you were unfairly denied insurance, you can complain to your state’s insurance commissioner, the FTC, or the insurance company itself.

How to Buy Landlord Insurance
The first step is always to speak with an agent in person and see if you feel comfortable talking with them.

In addition to your sense of personal trust, consider the following points before agreeing to buy:

  • Check the quality rating the company has been given by the rating agencies (Moody’s, Standard & Poor’s, A.M. Best, and Fitch). The Insurance Information Institute provides some background on how these agencies work, as well as extensive unbiased information on all insurance-related topics.
  • Check for any unpaid claims or complaints against the company with your state’s insurance commissioner.
  • Does the company (or your agent) specialize in landlord insurance?
  • Do they offer adequate coverage?
  • Are their premium and deductible amounts competitive?
  • Do they offer discounts for bundling several insurance products together?
  • Is their office nearby and/or easy to access by phone?
  • What is their claims paying process?

When you become a landlord, there’s suddenly a lot you have to learn.

You’re responsible for the welfare of people whom you can’t directly supervise, and this makes you subject to a whole new set of legal liabilities.

Purchasing a good landlord insurance policy will protect your real estate investment, give you peace of mind, and help you conduct your rental business in a professional and profitable manner.

 

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What do you do when your tenants expect you to mediate their problems?

In an ideal world, your tenants get along without any problems.

In reality, minor and major problems occur as a result of differing lifestyles, lack of communication, or inconsiderate behavior.

Your tenants should handle most minor disputes among themselves, without requiring your input, as solving every issue that comes up between tenants could take a significant amount of your time.

Some of your tenants may expect meditation with all of their disputes, though, and some situations require your direct attention.

Setting Mediation Expectations
Let your tenants know mediation expectations upfront so they know when you will step in and when you will allow tenants to figure it out for themselves.

Write these expectations into the lease or include it in the tenant’s resources.

Give examples of appropriate landlord mediation situations, the process for involving you in the dispute and the resolution methods available.

You also want to make it clear that tenants are expected to work out minor disputes among themselves, if possible, to cut down on the hands-on time you spend engaged in mediation.

Lease Clause Complaints
Tenant disputes related to lease clauses are the type of situation most likely to require your attention.

These complaints revolve around tenants who are breaking a lease clause of some sort, such as denying another tenant’s quiet enjoyment of her home, keeping animals in a pet-free house, or conducting a business out of the home.

Remind tenants about their legal responsibility to follow the terms of the lease contract if they want to remain in your property.

In the event of noise complaints, find out when the noise problems are and how loud the noise level actually is.

Use a decibel recorder, if necessary. Some tenants are more sensitive and complain even when sound levels are reasonable.

Additional soundproofing measures or even a white noise machine may quell this issue before it becomes a major problem.

Minor Complaints
Tenants may have minor complaints about where another tenant parked or perhaps what items are left on the tenant’s patio or strewn across a common area.

Encourage tenants to work out these minor issues by directly communicating with each other.

Try to avoid stepping in before the tenants have time to work the situation out themselves.

Don’t let a lot of minor annoyances pile up without being addressed, though, as you don’t want high tenant turnover due to passive-aggressive behavior.

In the event of an ongoing issue, request that tenants document the situation and the steps taken to resolve the complaint before involving you.

Criminal Complaints
Step in as soon as possible if a tenant has concerns of a criminal nature.

These concerns may be about direct threats or violence from another tenant, allegations of drug use or production, or other concerns best addressed by the appropriate authorities.

If you suspect a potentially dangerous situation with a tenant, contact the police for assistance while finding out more about the situation.

If criminal activity is occurring on your property, most states have landlord-tenant laws facilitating eviction within a few days to minimize the potential for harm.

Knowing the appropriate time to step in to solve tenant problems helps you promote a healthy environment at your properties.

Some situations, such as criminal complaints, need your direct intervention, while others benefit from some tenant-to-tenant time.

DIY Accounting Options for Your Rental Business

As your rental or property management business is expanding, it’s easy to get bogged down in paperwork.

If you’re dealing with just a small property, though, you may not handle enough transactions to want to hire a full-time accountant yet.

Get your paperwork on track as soon as possible with some of these DIY accounting solutions.

Some are general accounting programs, while others are specifically designed to tackle the needs of property managers, rental businesses and real estate companies.

GnuCash
GnuCash runs on most modern operating systems and even has a mobile app, if you need it.

GnuCash is free software, so there’s no cost to you to try it out.

While GnuCash works fine for most businesses, be aware that it has no specific options for rental companies or property management.

You may need to manually set up accounts within the system to reflect your business’ unique needs.

While GnuCash is free and versatile, be aware that it uses what’s called a double entry accounting system, which many novices find confusing.

Double entry bookkeeping means that all transactions are recorded as being a deficit to one account and a credit to another account.

While GnuCash’s documentation helps smooth the transition for new accountants, you may find the adjustment period difficult.

Unfortunately, GnuCash offers no options for the single entry accounting systems that most novices find more intuitive.

Wave
Wave is a free, online accounting system.

Because it’s online, you can use it anywhere. All the data is saved on the cloud, and all you need to do is log in.

Its online and mobile options extend to an invoice-creation app, which also tracks payments based on when they’re due.

This may not be useful for rental payments, but this system works well to track rental deposits.

Wave can even take credit and debit card payments, if you allow your tenants to pay their rent that way.

Quicken
Quicken offers a specific Rental Property Management program that handles specific needs like tracking rent and security deposits.

One of Quicken Rental Property Management’s more unusual features is that it makes it easy for property managers to find tax deductible expenses.

The program also integrates cleanly with your bank accounts and comes with mobile options.

The program is not free, and due to its features that deal with taxes, you would need to buy a new version each year to have the right updates.

FreshBooks
FreshBooks is a cloud-based program, and its primary selling point is its ease of use.

It boasts a clean, simple interface that many users describe as intuitive.

FreshBooks also provides rapid customer support for users who need help with the program (or with accounting in general).

In addition to accounting features, the program also offers online billing and invoicing, along with importing of expenses, ability to accept online payments, and tracking timesheets.

FreshBooks is a subscription-based service, but offers a free trial.

Intuit QuickBooks
QuickBooks is a software program designed to handle accounts for many kinds of businesses, including property management companies.

In addition to all vital accounting functions, it allows easy synchronization with banks, online invoicing, and bill payment, and so forth.

If you need extra help, you can hire an accountant or financial adviser from their site directly.

QuickBooks is a subscription service, although there is a free trial for the program.

However, many professional accountants use QuickBooks, so if you choose in the future to hire an accountant to handle your finances, you’ll be able to simply hand them your QuickBooks files with no need to convert.

Sage 50
Formerly known as Peachtree, Sage 50 is an accounting program specifically designed for small businesses.

While a lot of the program’s functions are for retail businesses, there’s plenty for property management companies as well.

Unlike many of the programs listed here, Sage 50 is a subscription purchase that’s paid for by the year.

That yearly fee is in the hundreds of dollars, so if you have the luxury of time and are looking to convert to Sage 50 you may want to wait for them to hold a sale.

Sage 50 offers multiple tiers of their software for different purposes.

The higher tiers allow more individuals within your company access to the software, and provide more sophisticated options.

For instance, the Premium version handles audits and automation, while the Quantum version is specifically designed to handle large amounts of data, and offers plenty of options that are specific to various industries. Sage 50 offers free trials for its software, so you can test your desired version and explore its options before paying.

There’s a wide range of accounting programs available to property managers.

The simpler ones are generally less expensive and focus purely on general accounting.

More complicated programs are usually subscription-based and offer options tailored specifically to the needs of individual businesses, including property management companies.

Many of these services offer free trials, so you can decide if you like their product.

Take advantage of this period to decide if they’re useful to your business before making a choice, and you’ll walk away happy.

Avoiding Liens and Legal Issues When Buying a New Property

If you invest in rental properties, you know that purchasing a property can be lucrative when the price and location are right.

However, it’s easy to get caught up in deals that seem too good to be true.

When buying any property, it’s important to conduct a check to determine whether there are any strings attached.

Tax liens against a property, for example, could cost you thousands of dollars, so you need to know how to do your homework before you make a purchase.

Tracing Lien Information
Property investors may flock to foreclosure auctions to try to make the most of their investment by purchasing a property at a great price.

The problem with foreclosure auctions, short sales, and other property sales that involve a below-market selling price is that the properties in question often come with liens attached.

Tax liens may be levied against the property, but liens can also be placed in relation to delinquent credit card or loan debt, unpaid bills from contractors and even child support back payments.

When a person purchases a property that has liens attached to it, he or she becomes responsible for settling the liens.

Liens have the potential to cost buyers thousands of dollars, and a purchase price that seems like a good investment can end up taking hard-earned money out of your pocket.

Follow these steps to ensure there are no liens on the properties that you are considering adding to your portfolio:

  • Obtain the parcel ID number from the seller.
  • Access the local county clerk office’s website.
  • Navigate the website to find where a lien search can be completed. If you are having trouble locating this search option, contact the county clerk’s office for help.
  • Be sure that you are selecting “liens” during the parcel ID search. After you search for liens, do a search for all records related to the parcel ID to ensure that financial liabilities attached to the property are not listed under another category.

If you are worried that the results of a parcel ID search are not sufficient, you can visit the county clerk’s office to ensure that a professional is conducting the search for you.

If you would prefer not to do the search on your own, it is also possible to hire someone who is knowledgeable about searching for liens to do it for you.

Title search companies are responsible for ensuring that the property title is clean.

While you will have to pay to hire a title search professional, it’s often worth it to ensure that properties do not have hidden costs.

Finding Out About Legal Issues
Even if the property does not have a lien on it, there are other legal issues that could make it a bad investment for you.

To avoid dealing with the headache of a property that is tied up in legal issues, you can start by asking the seller if they have a legal representative who you could talk to.

However, sellers who are highly motivated to sell or who are selling due to legal issues may be inclined to hide these issues from potential buyers.

Legal issues that may be encountered in relation to a property you are purchasing include:

  • Unlawful additions: If the previous owner added rooms or changed the layout of the house, these additions may not have been completed with the proper permits in hand. Once you purchase the property, you are responsible for ensuring that any additions comply with zoning and building safety requirements. You could end up having to do a large-scale renovation to get the property in compliance with regulations.
  • Lead-based paint, mold, and asbestos. If you are purchasing an older home, there is a chance that lead-based paint or asbestos were used when it was constructed. Even in a newer home, mold can grow if the previous owners were not proactive about managing moisture levels. When you’re purchasing an investment property that you plan to rent out, the presence of these dangerous building materials could open you up to liability.
  • How do you protect yourself against these issues? Here are some options that will help you invest wisely.
  • Hire a lawyer: Lawyers who specialize in real estate transactions are able to navigate through the legal issues that may be attached to a property you are purchasing. In fact, legal professionals are also often able to help with your lien search to ensure that you are not liable for expenses that you did not incur.
  • Have a home inspection completed: Home inspectors are knowledgeable about building safety regulations and will look over the structure of the building, as well as the electrical and plumbing structures, to ensure that everything complies with legal requirements. In addition, home inspectors are able to determine whether wear or damage could require costly repairs in the future.

When you purchase a property without doing your homework, you stand to lose money on your investment.

You’re not in property investment to suffer financial losses, so it’s important that you take a proactive role in determining whether a property will yield positive financial results.

Liens and legal issues threaten to eat up your profits, but you can protect yourself by taking a few precautionary steps.

 

Mortgages as They Relate to Landlords

Getting a loan for a rental property is not the same as getting a mortgage for a residence.

While the two situations have some similarities, they also have important differences.

Landlords who are considering applying for a loan to purchase a new rental property should look at the requirements carefully.

Credit Scores
You can do a few things before you apply or put in an offer to make getting a mortgage and closing on the loan easier. First, make sure your credit score is where it should be.

Fannie Mae allows up to 10 loans for investment properties at a given time, but the credit score requirements vary; more loans mean higher risks.

  • The first four loans require a minimum credit score of 630.
  • The remaining six loans require a minimum credit score of 720.

Cash Reserves
You also need cash reserves.

Many lenders require six months of loan payments in savings to ensure you can make the payments even if your property remains unrented for a period of time.

Cash reserves may include the mortgage payment for the rental property and any other loans or expenses you have.

Down Payment and Income
Another requirement is a higher down payment.

You may be required to put down 25 or 30 percent, but the minimum is usually 20 percent.

Many investment mortgages have stringent limits on loan to value. Unlike personal home mortgages that allow up to 97 percent LTV, investment loans may limit the LTV to 70 or 80 percent.

You must show stable income on your W-2s or tax returns.

Your rental income may be considered if you have a history as a landlord.

If you are a first-time landlord purchasing an initial rental property, your regular income must be sufficient.

You need to have higher income to qualify, especially if you already have a personal mortgage.

Find the Right Lender
Not all lenders are experienced with investment properties. Make sure the lender you choose has handled loans for landlords and investors in the past. Otherwise, you may end up in a nightmare with delays and even the loss of a property you want.
Ask your lenders about their experience.

Even better, work with lenders who have purchased investment properties. They will understand where you’re coming from.

Find out how many loans they allow for investment properties.

Just because Fannie Mae increased its allowance from four to 10 doesn’t mean every lender has relaxed their standards.

Rent Loss Insurance
Another requirement you can expect for many investment loans is the need to purchase rent loss insurance.

This policy protects you if you should lose out on rent income for various reasons that result in damage to the property.

This can include fire, water damage, or other natural disasters.

It doesn’t cover you if your property is vacant because you can’t find a tenant.

This policy is usually included in your property insurance once you let the insurance provider know what kind of property it is.

It is purchased at an additional cost based on cost of property, mortgage payments and vacancy rate in the area.

FHA
You may be surprised to learn you can get an FHA loan for a rental property.

Most people assume these loans are limited to people who plan to occupy the residence. In essence, this is true because you are required to live in the property for 12 months.

After that time, you can rent it out.
An FHA loan is a viable option for someone who wants to get started in real estate investment with limited cash.

Only one loan is allowed from FHA, so you have to find other options for your second and future rental properties.

Types of Loans
If you plan to rent out your property immediately, you have to choose between a residential and a commercial property loan.

The residential loan is usually designed for properties with four or fewer units and is most similar to traditional mortgages.

You still have more stringent requirements, but not as complex as for commercial investment loans.

The benefit of this type of loan is that previous experience as a landlord isn’t generally required, and the interest rates are only slightly higher than for traditional home mortgages.

Commercial loans aren’t just for rental properties, but for any type of business.

They require much of the same information as residential investment loans, but the details may be different.

For instance, lenders look closer at the amount of cash flow that is expected over just verifying income. They also check your background and experience in managing the properties.

These loans include DSCR or Debt Service Coverage Ratio.

This means the lender is checking the cash flow as compared to the income and expenses.

The formula is DSCR=(Net Operating Income)/(Debt Service).

It’s possible to get a loan to purchase new rental properties, but be prepared for things to work differently than with a traditional home loan.

Know what is expected and find a lender who can guide you and support you through the process.