There are two most common options when it comes to leases, and each has its pros and cons. Today, we are covering how to decide between a joint or individual lease.
What is a Lease?
In real estate and property management, a lease specifies the conditions under which one party (the tenant) agrees to rent a property that is owned by another party (the landlord).
It ensures that the tenant will reside in the property and make monthly payments to the landlord.
Deciding Between a Joint or an Individual Lease
Choosing the type of lease for your tenants can be tricky. Bu it is one of the first things you need to do as a landlord or property manager.
It makes a big difference in determining how much work you will need to do for your tenants.
Usually, we have our tenants sign a single joint lease. It makes everyone liable for rent, utilities, or other obligations.
With a joint lease, you won’t have to worry about different lease break end dates or having different rules and regulations. A joint lease will maintain uniformity among all of your tenants.
We just ensure that residents pay the complete rent and utilities. A joint lease means that if someone in the group doesn’t pay, everyone else will be accountable for them.
So as a group, everyone on a joint lease collectively wants their obligations as tenants to be settled and paid for.
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To know more about leases and if you should put your tenants on a joint or individual lease, join the Landlord Tutor community and sign up here.
When owning investment properties, one of the best things you can do for yourself is to take advantage of cost segregation.
Learn the taxation benefits of using cost segregation in this article.
The Best Kept Secret in Owning Investment Properties
Cost segregation is when the US government allows you to depreciate your property over 27 1/2 years equally to entice you to buy an investment property
If you are about 100% of that property, divided by 27 1/2 years, that’s 3.63%. Let’s use some basic math for a moment.
You buy a property for $1,000,000. Typically in Massachusetts, the building that the land sits on is worth about 60%, and the land is worth about 40%. So let’s call it a $600,000 building.
That $600,000 building can be depreciated over 27 1/2 years at 3.63%. If you do the math, that is about $18-19,000.
The cool thing is that if you make, let’s say, a net of $1000 a month after the rents come in and all expenses. You can deduct that 18-19,000 from that $12,000 and have a net pay per loss.
That means you still made the money in your pocket.
But the US government will not tax you on that income. Rather, if you are an active investor, they will allow you to write that off on your income which means you lower.
Imagine if you did that times 5, 10, or 15 buildings and you don’t make that much on your salary job and you can write it off and not pay any taxes. It’s pretty crazy. Even if you have a loss during the year with capital improvements or renovations.
Again, I’m not a CPA. So you want to talk to a financial advisor and a CPA about exactly how to do this.
Why Use Cost Segregation
What cost segregation does is that flat line of 27 1/2 years of 3.63%. For example, I pay your company a set amount to do a cost segregation analysis.
You will figure out what parts of my building can be depreciated earlier on in the process. So, maybe cabinets can depreciate in year one and flooring in year two.
And it’s will bump up the amount of depreciation I get at the beginning and lower it at the end. In the end, though, it’s the same amount as that 27 1/2 years.
So for example, I saved over $150,000 with cost segregation in one year because I was able to expedite it. I was able to push it from when I’m perhaps not making as much on my property and making more as a salaried, younger gentleman.
And later on, when I am retired and the property’s not making it, then I might not need as much, right? But at the beginning, I need all the write-offs I can get.
So this is one of the reasons why I buy investment properties. It’s for cost segregation.
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Multi-year leases are becoming more popular, but does that mean they’re better? Today’s article discusses the pros and cons of a multi-year lease so you can decide which is good or bad for your investment property.
What is a Lease?
A lease is an agreement between the landlord or the property manager and the tenant, stating the terms of the tenancy. One of the most important aspects of a lease is its duration.
There are annual leases and multi-year leases. In Massachusetts, we typically have annual or 12-month leases.
But we want to make sure that our leases will always end anywhere between June, July, August, or September. So sometimes, if you’re starting in the middle of the year, you might do a longer or a shorter-term lease to get it on that cycle.
What Makes Multi-Year Leases Good
There are a lot of landlords out there that love two or three-year leases because this allows them the stability to know that they have tenants for the long term.
They don’t have to worry about their renewals and worry about whether their property is going to go vacant. So if tenants have been good residents, we might offer them a multi-year lease.
Having a year-by-year lease allows us to reevaluate, usually at the beginning of the year, what your expenses were like for the previous year. From there, we determine if your expenses went up one or two percent, plus the inflation.
We might go up four or five percent to help you offset that and make you at least the same amount of money. Profits are important; as a landlord, you own property because it’s an investment you want to provide you with returns.
Generally, that’s a good idea to have security and stable profits, but let me tell you about the cons of having a long-term lease and why personally, I don’t do them as a property manager.
What Makes Multi-Year Leases Bad
When you have a tenant in there that might have a two or three-year lease, they start misbehaving. If they are bad tenants, it will be much harder for you to evict them, and you have to deal with them for the lease duration.
The second most important thing is the financial aspect. Many times, landlords do a two-year or three-year lease and keep rent at the same rate. Tenants love that; however, you have to remember that your expenses typically go up.
Your water, taxes, insurance—none of these ever go down for you. In addition, you always have to account for 3% of the inflation rate. All this will slowly eat your profits if you keep rents exactly the same.
The third aspect that makes multi-year leases bad is the fact that you can’t change the lease terms once the agreement is signed.
Sometimes, circumstance change in the lives of landlords as well as tenants. They might get a pet, or maybe you feel something different about a certain rule or regulation with a neighbor.
So you would want to change those lease terms, but a multi-year lease will not let you do that. With an annual lease at least, you can renew the terms with changes and improvements to better help and protect you.
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To know more about leases and ensure that you are protected while maximizing your profit, join the Landlord Tutor community and sign up here.
Your game plan for success in real estate starts with being proactive. In this article, I share how to stay ahead of the game by being a proactive landlord and property manager.
Common Setbacks in Real Estate
When things get bad in real estate, it can mean one of the following:
Tenants trying not to pay rent
An impending vacancy
Property values going down
These are all significant concerns that can negatively affect a landlord or anyone that purchased or owns a property to make a profit.
But by being proactive, you will be able to get ahead of potential issues before they arise and turn a failed situation around.
How to be Proactive
The rest of my team and I spend a lot of time thinking about what could go wrong. We think about these issues and what we can do to avoid them before they happen in the first place.
Here are some ways to be proactive in real estate.
Anticipate vacancies with 3D tours
A screenshot of a 3D tour of one of our properties
We ensure that we have 3D tour videos of every property even before we market it. If a vacancy is coming up, the 3D tour must be finished and prepared.
With the 3D tour videos, we have proper marketing materials that we can also use to make online ads in advance.
It gives us the time to make sure that if and when your vacancy does come up, our team will automatically be ready to have good descriptions and 3D tours of the property. It’s ready to go and up for new tenants with no delay.
Opt for early renewals
Sending out a renewal notice ahead of time has countless benefits. But a major plus side is you can already secure your leases for a more extended period.
If you give renewal notices to your tenants too late, many of them might leave because they have probably found a new place by that time.So my team to send out renewal notices nine months in advance for your property.
No more of those days of 30 or 60 days that might leave you with less time to prepare.
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Being proactive means solving problems by avoiding them in the first place.To know more about being proactive to ensure maximum returns in real estate, join the Landlord Tutor community and sign up here.
Any landlord has a lot to think about. Vacancies to fill, rents to collect, and repairs to make. But there’s one thing you shouldn’t miss: property taxes. To ease off your worries about filing tax forms, here is a brief introduction to the 1040 Schedule E tax form.
What is a 1040 Schedule E?
The 1040 Schedule E is a tax form that lists all your business income and losses. It can include real estate, LLCs, corporations, or trusts.
In other words, it lets you know whether the business made a profit or a loss.
Filing a Schedule E would usually involve a Schedule K-1. It is another tax form where a business partnership’s income, deductions, and credits for the tax year are reported.
For example, I am on a 50-50 partnership deal with someone. My partner gets 50%, and I get the other 50%. Together with my CPA, I will take all my K-1s based on my different corporations, businesses, and real estate holdings. We will add them all up and put them on the 1040 Schedule E.
In order to be able to hand out a K-1 depending on the percentage of ownership, my CPA will go through and calculate how much income and costs we have, as well as our net losses.
Tax forms can be really long and complex. But having accurate calculations will ensure that you don’t end up overpaying taxes.
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In all my years as a landlord and property manager, I can assure you that I know my way around taxes, with the help of my CPAs.
If you or anyone else you know is looking for guidance on tax forms, such as the 1040 Schedule E, join the Landlord Tutor community and sign up here.
