One of the most common questions I get is, “should I be buying properties at auctions? What are its pros and cons?”
What Is a Foreclosure Auction?
At a foreclosure,you must understand that you will be going in, usually bringing a certified check for five or $10,000. They will also expect you to be able to do any type of due diligence.
Furthermore, you are more than likely not going to be able to enter that property. You won’t know what condition it’s going to be like.
But they will typically tell you if there are renters in there or not, and you might have holdovers you have to deal with.
At the end of the day, you must know a few major things when buying a foreclosure property.
Guide to Buying Properties at Auctions
1. The 30-day Deadline
Typically, you will have to come up with all funds to purchase the property within 30 days. They don’t care if your bank is waiting for appraisal or you don’t have the funds.
They will take your deposit and keep it if you cannot close during that time frame.
2. Property Liens
In addition, you will want to double-check that there aren’t any types of liens or taxes owed on the property. Liens represent unpaid debts, and a property cannot be legally sold until these debts are settled.
These liens might be attached to the property because the owner has not paid them. It could also be because a government agency or another entity owns it.
Ensure that none of these properties has unpaid debts associated with them. Should there be any standing liens, you will have to come up with paying them as well.
3. Buyer’s Premium
And many times, auctions will require a buyer’s premium. And that’s very unlike the normal market, where if you are represented by a buyer’s agent in the normal market, that agent is paid by the seller’s agent, and you don’t have to worry about that.
In an auction, the auctioneers will sometimes charge a buyer’s premium. They might not even charge the seller.
And what will end up happening is that you will have to come up with that percentage. So if you are buying a half-a-million-dollar property and it’s 2%, you might have to come up with $10,000 in addition to it.
The Landlord Tutor Promise
If you or anyone else you know is looking to buy a foreclosure property and more guidance with it, 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.
The Landlord Tutor Promise
To know more about buying investment properties and reaping the benefits of taxes and cost segregation, join the Landlord Tutor community and sign up here.
Most landlords find it difficult to increase the rent during lease renewal and by how much.
Here’s a look at my proactive approach, tenant retention rate, and market research to help keep your tenants and grow your rental income.
Increasing Rent During Lease Renewal
In all my years as a property owner and manager, I have done countless lease renewals. During that time, too, I have had to increase rents.
But I am not just going to give you any random amount to add to your rent. The rate increase isn’t the same for all landlords anyway.
In my property management company, for example, we offer every one of our landlords the opportunity to record their expenses for the past couple of years into our system.
Our system allows them to create a budget based on those numbers. By seeing their cash flow, they review how they are doing with their budget versus actual expenses and income.
The Influence of Inflation on Your Rent Increase
The most important benefit of having financial records in our system is seeing how your expenses went up. This can include the costs of utilities such as water, taxes, and insurance.
For example, your expenses can increase by 3% due to inflation.
Inflation is how much value your dollar gives you from year to year. The 3% increase in the example is the average annual inflation rate.
If the inflation increases by 3% and your expenses increase by 3%, you lose 6% of your money if you don’t increase your rent.
How a Property Manager Helps You Increase Rent
Aside from being a property owner, I also manage properties. let me share with you how a property manager helps you increase your rent.
A property manager guides you through the lease renewal and rent increase process.
For one, we present your financial records to you and help you figure out how much to increase to cover your actual expenses, including the inflation rate.
Furthermore, the property manager explains the rent increase to your tenants. Most landlords dread doing this during lease renewal; worse is they do not do it at all. But having a property manager saves you the hassle of dealing with your tenants about the rent increase.
A property manager also ensures that you make more money. We do that by saving money on expenses or, most importantly, increasing rent.
The Landlord Tutor Promise
To know more about lease renewals and how to increase your rents, join the Landlord Tutor community and sign up here.
