Tenants facing bankruptcy may present additional problems for property owners and property managers. When a tenant files for bankruptcy protection, the tenant’s debts and obligations become a matter of public record. The court (or designated trustee) will most likely terminate the tenant’s existing lease. Since many tenants want to stay, you will need to get a new lease approved and signed by the court/trustee.
Property owners and managers should have a clause in their lease to address tenants filing for bankruptcy. Owners and property managers should be notified if a tenant files for bankruptcy protection, but many times the tenants forget to notify the property manager or owner.
During the application process, property owners and managers should ask if prospective applicants have ever (or plans to) filed for bankruptcy protection.
Note: Owners and property managers should always consult a competent legal professional for their specific situation.
A common scam circulating on Craigslist is the rental property scam. Thieves take the pictures of a property currently on the market and then re-market it on Craigslist (or other websites) as a rental. The thief then steals the prospective tenant’s money.
The common story begins with the property owner that had to leave the country on an emergency mission and the property needs to be rented. The thief takes the property information and photos directly from a listing agent (Realtor.com or REMAX.com or any site that “syndicates/shares” the photos) and re-posts them on Craigslist.
The typical ad has a picture with a phone number to call for a showing. Prospective tenants call the phone number and the thief usually gives you the address and tells you to drive by. The thief may show the property or send pictures and then pressure prospective tenants to pay (or wire) the deposit to reserve the property since the rental market is tight and the property will rent quickly. The rental price is usually very low and the thief claims it is a “great deal”. BEWARE!
THIS IS A SCAM; DON’T FALL FOR IT!
Do your homework and look out for the signs such as “out of area phone number” or “wire the money” or “cash only”. Reputable parties usually use a well-known local company or the property owner’s name to accept deposits. When renting a property, a personal check, money order or cashiers check is usually sufficient and should be made out to a property management company, if not-BEWARE!
PROTECT YOURSELF
How can you as a tenant protect yourself? Call a local Realtor or property management company to verify that the property is available for rent. Most likely, the property is FOR SALE, not for rent. Most property management companies know what properties are for rent and the employees/owners know each other. If you meet at the property, make sure you get a business card and license plate number of the person’s vehicle. You should take pictures of the person or see some sort of identification to verify that they own or manage the property. You should sign the lease at the property manager’s office or other location where other people know the owner/landlord (a local bank or real estate office is good).
As a real estate agent (Realtor), you should watermark your photos with the address or company name or statement “Not For Rent”. Post a sign near the entrance of the property “Not For Rent” or agent contact info.
How can you protect yourself as a FSBO/FRBO of a property that is currently for sale or for rent? Owners should post on reputable websites. All photos should have a watermark with your phone number or other contact information.
If you have been scammed, contact the local police department and the FBI Internet Crimes unit.
Many homes in Colorado have a natural gas-fired furnace. In the middle of cold Colorado nights, when the furnace starts and stops many times, the “igniter or ignition” or glow-plug may quit working. This is one of the most common reason for no heat from a furnace.
When the igniter stops working, the furnace electronics usually flash an error code…. short and long flashes. Interpreting this code requires you take off the cover (like changing the air filter) and read the instructions on the door cover.
If the igniter is defective, simply replacing this part may keep you out of trouble (and significant expense) on those cold Colorado nights.
The cost for the igniter is about $30 to $50 depending on your model. Many local furnace supply locations (Appliance Factory Outlet, Lowe’s Mail Order, Carrier Dealer, Trane Dealer, etc.) can get you the exact replacement to keep as emergency backup. Make sure you have the correct parts BEFORE you need them (usually in the middle of the coldest night).
If you’re unsure or unable to perform these repairs, make sure you contact your favorite HVAC or furnace repair company.
If you need to sell your property, and you owe more than the property is worth, you may be a candidate for a short sale (or other solution).
Whatever the reason:
- Loss of Job
- Business Failure
- Damage to Property
- Death of Spouse
- Death of Family Member
- Severe Illness
- Inheritance
- Divorce
- Separation
- Relocation
- Military Service (SCRA relief may be available for active duty personnel)
- Insurance or Tax Increase
- Reduced Income
- Too Much Debt
- Incarceration
You need to talk with a Certified Distressed Property Expert. Follow this link to find a CDPE in Colorado. http://www.CDPEofColorado.com
Other solutions to a Short Sale include:
- REINSTATEMENT: Bring the loan current and restore the loan per the original terms.
- FORBEARANCE: Temporary repayment plan until the property is sold or missed payments are payed in full.
- REFINANCE: New loan with reduction in monthly payments.
- LOAN MODIFICATION: Modify original loan terms to make the loan affordable.
- SELL THE PROPERTY: Use equity to payoff or pay difference.
- RENT THE PROPERTY: Make the loan current and then convert the property into a rental property. You can turn the property over to a local property management company like: RentalWorks
- DEED IN LIEU OF FORECLOSURE: “friendly foreclosure”. This is when the homeowner returns the keys and “deed” the property back to the lender.
- BANKRUPTCY: Will stall foreclosure but not prevent it.
- SELL TO AN INVESTOR: Sell or deed your property to an investor or 3rd party can cause bigger problems.
Visit the CDPEofColorado.com site for more information about these solutions.
Join the latest trend in housing – Go Green!
Installing a “photocell or dusk-to-dawn lights” on your exterior lighting can cut your electricity bill by over $100! A photocell will automatically control the lights so that they turn-on at dusk, and turn-off at dawn. This provides safety and security as well as eliminates the waste caused by leaving lights on.
The process to install a photocell is simple and takes about an hour or two. Here are the basic instructions:
WARNING: If you are unsure about this project, consult a qualified contractor or electrician. We disclaim any and all liability should you suffer any loss or injury. Perform at your own risk! Do not use a photocell with a dimmer switch.
1. Start by turning off the power to the light fixture.
light switch
2. Next, remove the existing light fixture from the wall. Mount the electric box to the wall (you may have to “punch” out some holes in the electric box). Ensure that the mounting holes for the light aligns with the mounting holes on the electric box.
Note: The existing house wiring should have 2 or 3 wires – ONE Black, ONE White, and ONE Ground/Green/Bare wire (may not be present on older homes).
- The black wire is usually the “hot” wire and will “shock” you if the power is not off.
- The white wire is usually the “neutral” wire and should not have any voltage.
- The green or bare copper is the ground (if present) and should not have any voltage.
3. Now mount the photocell in the electric box. Make sure that the photocell points toward the sunlight, not toward a dark area. Otherwise, the light(s) may come on too early and stay on too long. Read the instructions that came with your particular photocell.
Photocell in electrical mounting box
4. In this example, the black wire on the photocell connects to the existing black wire coming from the house. Strip, connect, wire nut, and tape these wires together.
5. The white wire on the photocell connects to the existing white wire from the house AND the white wire on the light fixture. Strip, connect, wire nut, and tape these wires together.
6. The red wire on the photocell connects to the existing BLACK WIRE FROM THE LIGHT FIXTURE. Strip, connect, wire nut and tape these wires together.
7. The ground wire (if present) should be “grounded” to the electrical box, and then connected to the light fixture (if the light fixture has a “ground” wire/connection). Wire nut and tape.
8. Bunch up all the wires and push them into the electric box. Mount the light fixture over the electric box and secure with the mounting screws you removed in step 2. Be careful not to “nick” or damage the wiring.
Operating photocell mounted in electrical box
9. Turn the power back on. If the circuit breaker activates, check your wiring. If all is fine, the photocell will now act as an automatic daylight switch.
Note: To test the photocell during the day, place a piece of black tape over the photocell. After a couple of minutes the light should turn on. Remove the tape and the light should turn off. Now you’re ready for the evening to arrive.
You can also download PDF instructions (approx 2 megabytes) how to install a photocell to control lighting for your property. (installing_photocell)
Enjoy the piece of mind knowing that you’re doing your part to save money and reducing your energy use.
“No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment. ” IRS, IRC Section 1031 (a)(1)
When selling investment property (non-owner occupied or not-principle residence) the seller may realize a hefty federal and state capital gains tax. One way to defer the tax is through the use of a 1031 Tax Deferred Exchange (1031 Exchange).
Currently, the gain is 15% of the “profit” (or 5% or 0% depending on tax bracket). In addition, the depreciation is also “recaptured” and payable upon the sale. The recapture is 25% of the depreciation (whether taken or not!). (There is a 15% rate for 10% or 15% bracket). (Note: These rates will probably increase in the coming years as the US Government looks for more ways to increase tax revenue to the US Treasury.)
To defer the capital gain, a seller of a property subject to capital gains can purchase another property and defer the tax. The basic 1031 rules are:
- Take title the same way you sold property
- Reinvest all cash proceeds (no “boot” allowed-otherwise “boot” taxed)
- Replace equal or greater debt
- 45 day identification period (can identify up to 3 properties)
- 180 days to complete exchange
- Qualified Intermediary must handle money
For real estate exchanges, if there is “dirt” underneath, then the exchange will probably qualify. (Sample exchanges include: condo for land, land for single family home, land for apartment building, single family home for shopping center, etc.)
Some examples that don’t qualify include: Personal/Primary residence, fix and flips, condo-conversions, vacation homes, land developments, etc.
For the investor wondering how the 1031 Exchange helps build wealth, consider this example:
Pay Tax : Investor sells a $200,000 property that he bought for $100,000 ten years (10) ago. The depreciation taken was $2,909 per year (house=$75,000, land=$20,000, closing cost=$5,000) or $29,090. If the investor pays the tax on his profit of $100,000, he would be left with $100,000 – $15,000 (15% tax) – $7,272 (25% depreciation recapture) = $77,728 (remember to subtract your states capital gains tax).
Using 1031 Exchange : Investor sells a $200,000 property that he bought for $100,000 ten years (10) ago. The depreciation taken was $2,909 per year (house=$75,000, land=$20,000, closing cost=$5,000) or $29,090. If the investor defers the tax on his profit of $100,000 and defers the depreciation recapture, he would be left with $100,000 to invest. (there is no state capital gains!)
Basically, you’ll save 15%+depreciation recapture (plus your states capital gain tax) of the profit by utilizing the 1031 Exchange. A great tax reducing strategy is to sell your investment properties in high tax states, buy replacement properties in a low/no tax state and then sell when your personal federal tax bracket is reduced or eliminated due to investment write-offs. Utilizing these tools, you can significantly reduce or eliminate your tax burden.
Many local municipalities (ie Takoma Park, College Park, Maryland, New York City, San Francisco, Fort Collins, CO, etc.) put laws, policies or restrictions on property owners (investors are homeowners/property owners too) that require (under penalty of law) owners to restrict the use of their property-usually in the name of “community building” or “for the betterment of the community” or some such nonsense (Did we mention the Taking Clause of the U.S. Constitution?) Some other “policies” include Affordable Housing and Rent Control.
Many of the restrictions ultimately hurt the community in the long run. For example, rent control restrictions in NYC artificially keep the rents low for a certain group (or area), while causing overpriced rents for others. Buildings never get the upgrades that market forces would demand thereby NOT employing more people (carpenters, plumbers, electricians) and ultimately putting more money in everyone’s hands (owners, contractors and YES-GOVERNMENT!) Tenants end up living in “barely-standard” housing because the owner has no incentive to update or improve the property.
Another example is occupancy limits (Fort Collins, CO) where “no more than three (3) unrelated persons may occupy a single residence”. If property owners CAN NOT rent a 4 (four) bedroom house to more than 3 (three) unrelated people, the maximum rent to be expected is the same amount a 3 bedroom house would fetch (about $400 per room in Fort Collins, CO).
What this means is that if you (a homeowner wanting to sell & move-up/out) have a four-bedroom house For-Sale and an investor wants to buy it, the most the investor would want to pay is somewhere about $200,000! At today’s low interest rates and expected rents of $1,200/month (add $150/month for taxes/insurance) to avoid negative cash flow, the numbers come out to be about $200,000 (30 year note at 5% + $150/mo = $200,000…assuming 100% financing…HA!) If the property is likely to appreciate above the cost of money (in this case 5%), the investor may be willing to pay above this price. This is one of the reason many properties are not selling in today’s market where investors are willing to purchase, but sellers are unrealistic about price.
If property owners or investors have properties that are out of compliance with health and safety, they should be brought into compliance. But passing laws that distort supply and demand or try to “level-the-playing-field”, ultimately cause more harm than good.
As you can see, many do-good-politicians don’t understand basic economics. By putting bad laws into place, they really hurt everyone including those they intended to protect.
There are many methods and tools to help analyze a particular property to determine if it is a good/bad property to pursue. A good spreadsheet (CRS 204 or the CCIM 101 by Todd Thorpe) is critical. I use the CRS 204 spreadsheet to do a quick analysis (it assumes you only pay interest on the mortgage loan) and if it gives me a positive return, I turn to the CCIM spreadsheet for a detailed analysis. The CCIM spreadsheet will give you a very detailed analysis including internal rate of return (how your invested money is performing), depreciation, tax liability and other advanced information for the “sophisticated” investor.
Using both tools helps to convince yourself and your team (banker/lender, insurance agent, investors, syndication group, etc.) that the investment is worth the risk.
For more information on these tools, contact your CRS Agent or CCIM Realtor. I am a CRS and a CCIM Candidate (production requirement pending) and can help you with your real estate needs in Colorado a well as other locations.
Question: How does real estate ownership reduce my income taxes or my income tax burden?
Answer: Uncle Sam (ie the US Treasury) allows you to deduct from your income, certain expenses. The following real estate investment expenses are deductible on your Schedule C or Schedule E Forms:
- Mortgage Interest (the amount of interest you paid to an investor, bank or mortgage company on the loan secured by real estate)
- Depreciation (the amount that the building "deteriorates" or wears-out each year; spread over 27.5 years for residential or 39 years for commercial, don’t count the value of the land, common areas, etc.)
- Management fees (property manager, leasing fees)
- Improvements (not repairs… replacement windows, replacement furnace, landscaping, new roof, etc.) can increase the "basis" or depreciable amount each year over the life of the replacement.
- Repairs (ie glass replacement, furnace repair, roof repairs, etc.)
- Travel to visit the property for inspections, oversee repairs, check-in/out tenants, etc.
- Expenses (phone call, advertising, condo fees, utilities, landscaping, investment real estate magazines-Fortune, Money, etc… This category is HUGE and nearly unlimited in what can be considered an expense.)
- Home office expenses (portion of your personal residence that you use EXCLUSIVELY to manage the investments, otherwise a portion of expenses may be permitted.)
- Lender fees, closing costs, loan points, inspections, etc.
As you can see, the total yearly costs to "maintain" your investment real estate can result in a substantial "PAPER LOSS" that can be used to offset other income (your spouses job….)
For example, suppose your spouse makes $50,000 from a job at the local high-technology company. The tax on your spouse’s salary is 30% (or $15,000). And your salary of $60,000 was taxed at 30% (or $18,000). Your total tax bill without "deductions" is $33,000 out of total income of $110,000.
Now assume your investment real estate was rented out and "breaking even" or even a small negative of $300 per month, the loss would amount to $3,600 per year. Also assume you have a $250,000 rental property that has a depreciation value of $200,000 ($250,000 – $50,000 for the value of the land = $200,000). The yearly depreciation is $200,000 / 27.5 = $7,272. With depreciation, mortgage interest and other expenses, you could easily have a paper loss of $16,000 (or more if you are really active in the property management and oversight).
The paper loss will lower your actual taxable amount ($110,000 – $16,000 = $94,000). The 30% tax on $94,000 = $28,200. The difference between your OLD and NEW tax is: $33,000 – $28,200 = $4,800 and the amount you "saved" by holding investment real estate.
Imagine having multiple properties that gives you a "paper loss" equal to your regular job salary….. You offset your income with losses and you reduce your tax to $0.00……imagine that!
The CCIM (Certified Commercial Investment Member Course 101, 102, 103, 104) and the CRS (Certified Residential Specialist) courses are great for learning about investment real estate. My favorite is the CRS 204 Class-Creating Wealth through Residential Real Estate Investments. The class is best summarized with the I.D.E.A.L. acronym. Each letter represents HOW a particular investment real estate property will contribute to your wealth building.
- I=Income generated by the rental property (ie Rents, laundry/vending machines, parking lot fees, etc.)
- D=Depreciation (see above)
- E=Equity build up as the mortgage is paid down
- A=Appreciation as the property goes up in value over the holding period (some periods of negative appreciation can occur…these are the best times to buy!)
- L=Leverage (you borrow 70% to 100% of the purchase price, but only invest 0% to 30% of your own money)
With the new year brings new opportunities. After a month and a half with little-to-no activity, the floodgates appear to be open. Showings are up, buyers are inquiring about homes and people are out looking.
Maybe it is the LOW interest rates (4.375% for 30 year fixed….WOW!), the large inventory, or the need to find a deal…but buyers are out and about looking for homes. A few of my properties have had multiple inquiries and showings. An offer should be presented soon.
House values have dropped about 10% to 20% from a year ago….With low interest rates, large selection and lowered proces, NOW is a great time to buy.
For first time buyers, available incentives can get you into a home for little (less than $5,000) to NO MONEY DOWN! (FHA coupled with federal/state/county/city programs) can get you into a home with as little as $500 (that’s FIVE HUNDRED DOLLARS!)
New Homes are a steal too. Some builders are begging for buyers and willing to throw in $10,000 to $50,000 in upgrades just to get the home sold. If you’re looking for a new home, the bargains are out there-just ask!