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Credit Tips For Buying Investment Property

If you love the idea of being a landlord, and don’t mind being on duty around the clock, buying an investment property may be the wealth-building option for you. Property values have enjoyed a steady increase over the decades. That’s why real estate has earned its reputation as a sound investment that builds wealth and credit. Most people, however, don’t have the quantity of cash on hand to purchase a house or apartment building outright. Still, if becoming a landlord means taking out a 30-year mortgage, the monthly payments from the tenants should be enough to service the loan and build equity for you, while leaving some cash flow so you can maintain the property. If buying investment property sounds like a step you’d like to take, here are some credit considerations every investor needs to know.

1. Be mindful of the inquiry stage

Once you decide to purchase an investment property, it’s important to do everything you can to make sure your credit score stays as high as possible until the loan is approved and signed. Your goal is to land the best possible interest rate, because even half a percentage point can add tens of thousands of dollars of total interest payments to a 30-year loan (and affect your wealth-building abilities).

During this time, things like continuing to make on-time payments on your existing loans can be helpful in maintaining your credit score. However, sometimes people unintentionally lower their credit score when they’re actually trying to be fiscally responsible. For example, when shopping around for the best mortgage rate, keep in mind that multiple inquiries can have a negative effect on your credit score, especially if you don’t have a long credit history. Fortunately, many credit bureaus recognize that you may be comparison shopping, so make sure you do this within a defined time frame of 30-45 days.

2. Keep credit utilization low

When maintaining a property, having access to credit can be helpful because it lets you make repairs and keep things in good living condition for your tenants. One thing that can affect your credit score is the amount of credit you’re using.

Unfortunately, keeping a higher balance could result in a lower credit score. As a rule, keep your credit utilization at 30 percent or less. For example, if your credit card has a $5,000 limit, the balance should not get any higher than $1,500. Throughout the billing cycle, keep an eye on the balance, and pay it down when you can.

3. Keep a cushion of cash

It happens. You get that call about a water leak, and before you know it, you’re spending your Saturday evening pricing plumbers, searching for one whose overtime rate is only in the range of mildly outrageous.

Being a property manager means expecting the unexpected, and one of the best ways to be ready is to have enough cash at the ready to take care of these problems. Build an emergency fund in your savings account, and keep your credit paid down so you always have that cushion to fall back on during any crisis.

4. Beware of low and no-interest financing deals

When it’s time to replace the oven range or a refrigerator, one of those “no payments, no interest for 18 months” deals can seem like a lifesaver. It sounds like a great deal, but these alluring promises are designed to play a psychological trick on you. Because you don’t have to pay yet, it doesn’t really feel like spending money when you’re making the purchase.

However, once the interest-free promotional period is up, a double-digit interest rate often kicks in. If you don’t have the cash to pay off the balance or make payments, you could end up with penalties that can affect your credit score. Before you sign on, always read the fine print.

Before you invest, do your research on credit scores and know your pros and cons. More than 8.5 billion credit scores compiled by VantageScore Solutions were obtained and used in the U.S. between June 2016 and July 2017. Whatever your stage in life, the market offers many options for those who wish to build their wealth through investing in real estate.

Source: BrandPoint Content

 

6 Ways To Reduce Rental Property Costs

Profitability for a rental property is a function of two areas: maximizing rental income and minimizing expenses. Rental rates are often out of an investor’s control since they are a function of the market. On the other hand, controlling rental expenses is something that any investor can do to help maximize profits. Often, handling simple inspections and repairs can save big money in the long run. Find out the six ways you can reduce the costs of your rental property.

Inspect the Roof for Leaks

Many property owners ignore roofs on their buildings until faced with a problem. By then, it’s too late: Sheathing, framing, and perhaps ceilings can be damaged, requiring costly repair. It’s far better to have the roof inspected annually and have small issues handled before they lead to potentially serious and expensive damage.

Maintain the HVAC System

Annual inspection and maintenance of a rental unit’s HVAC system are critical to maximizing the system’s life. Taking care of minor maintenance and fixes can save hundreds of dollars in major repairs later and can possibly save the life of the unit.

Since an HVAC system is among the most costly items in a rental property, proper care can go a long way toward reducing rental property expenses. Teach your tenants about telltale signs of HVAC problems so they know to contact you before small issues become costly.

Change the HVAC System’s Air Filters

One of the simplest maintenance items to prolong the life of an HVAC system is changing the air filters. Unfortunately, many tenants fail to perform this simple task. If you manage your own units, be sure to change the air filters monthly. If you have professional management, have these personnel regularly perform this task.

Inspect and Maintain Appliances

Property owners don’t typically think about maintenance of major appliances. Yet consider the following: Refrigerators need to have the coils cleaned periodically to ensure good air circulation. Exhaust hoses in dryers need lint cleared before it becomes a fire hazard. Dishwashers have gaskets and filters that need occasional cleaning to prevent possible, costly leaks.

Consider Replacing Worn-Out Appliances and HVAC Systems With Newer Units

Spending a large sum of money on a new appliance instead of a small amount to repair an existing one may seem counterintuitive. However, you should always keep a long-term view. If the outdated air conditioning unit needs $600 in annual repairs, that’s $7,200 over a decade — and you still have a deteriorating unit. Installing a new one could make better economic sense.

According to Home Advisor, national averages for a central air conditioning unitrange from about $3,700 to slightly more than $7,000.

Check for Plumbing Leaks

Look around faucets, under sinks, near the water heater, and around toilets for any signs of water leakage. Replacing a gasket is much cheaper than replacing damaged cabinets or flooring.

The six items above, most involving annual inspections, can help reduce rental property costs and increase profits. As a landlord, you’ll find that the adage “an ounce of prevention is worth a pound of cure” is a trustworthy principle.

Real Estate Impact of 2018 Tax Law

Congress has approved sweeping tax cuts and tax reform that have not been tackled by the federal government in over 30 years (since the Tax Reform Act of 1986.). The tax law, formally referred to as “The Tax Cuts and Jobs Act,” will go into effect January 1, 2018. This article has the most up-to-date information along with a summary of how the tax law provisions will affect homeowners and real estate investors who own all types of investment property. Although this article generally does not delve into tax issues not associated with real estate, there are many new tax provisions and this is essential information for anyone that owns real estate to understand.

Primary Residence Homeowners

As a result of doubling the standard deduction to $12,000 for single filers and $24,000 for married filing jointly, according to Moody’s Analytics, as many as 38 million Americans who would otherwise itemize may instead choose the higher standard deduction under the new tax plan. The doubling of the standard interest deduction, in essence, removes a previous tax incentive of moving from renting a residence to home ownership.  A likely unintended outcome will be fewer Americans choosing to become homeowners versus renting a residence solely for the tax advantages.

Any home mortgage interest debt incurred before December 15, 2017, will continue to be eligible for the home mortgage interest deduction up to $1,000,000. Any home mortgage interest debt incurred after this date will be limited to no more than $750,000 qualifying for the home mortgage interest deduction. Beginning 2018, the deduction for interest paid on a home equity line of credit (“HELOC”) will no longer be eligible for the home mortgage interest deduction. However, the tax law preserves the deduction of mortgage debt used to acquire a second home. This should have a positive impact on supporting property values in resort and vacation destinations.

State and local taxes (referred to collectively as “SALT”) can be deducted, but will no longer be unlimited as under previous tax law. The 2018 tax law will allow homeowners to deduct property taxes and either income or sales taxes with a combined limit on these deductions being limited to no more than $10,000. Top earners who live in a state with higher taxes like California, Connecticut,  Oregon, Massachusetts,  New Jersey, New York will be negatively affected the most by no longer having the previous full federal deduction available. There is the potential for home values in high state tax areas on both the West Coast and East Coast to see a reduction in property values partially due to the new capped SALT deduction at $10,000 and partially due to the new maximum $750,000 home mortgage deduction. A National Association of REALTORS™ study found there could be a drop in home prices up to 10 percent in these and other high state tax areas as a result of limitations in the tax law that won’t be as favorable as prior law for some property owners.

Both the House and Senate tax bills had originally proposed increasing the length of time a homeowner would need to live in a primary residence (from five out of eight years versus the current requirement to live in a primary residence two out of five years to qualify for the Section 121 tax exclusion). This proposed change did not become a part of the 2018 tax law. Homeowners will continue to only need to live in their primary residence 24 months in a 60 month time period to be eligible for tax exclusion up to $250,000 if filing single and up to $500,000 if married filing jointly. Property owners will still have the ability to convert a residence into a rental property or convert a rental property into a residence and qualify for tax exclusion benefits under both the primary residence Section 121 rules and also potentially qualify for tax deferral on the rental property under the Section 1031 exchange rules.

Investment Property Owners

Investment property owners will continue to be able to defer capital gains taxes using 1031 tax-deferred exchanges which have been in the tax code since 1921. No new restrictions on 1031 exchanges of real property were made in the tax law. However, the tax law repeals 1031 exchanges for all other types of property that are not real property. This means 1031 exchanges of personal property, collectibles, aircraft, franchise rights, rental cars, trucks, heavy equipment and machinery, etc will no longer be permitted beginning in 2018. There were no changes made to the capital gain tax rates. An investment property owner selling an investment property can potentially owe up to four different taxes: (1) Deprecation recapture at a rate of 25% (2) federal capital gain taxed at either 20% or 15% depending on taxable income (3) 3.8% net investment income tax (“NIIT”) when applicable and (4) the applicable state tax rate (as high as an additional 13.3% in California.)

Some investors and private equity firms will not have to reclassify “carried interest” compensation from the lower-taxed capital gains tax rate to the higher ordinary income tax rates. However, to qualify for the lower capital gains tax rate on “carried interest,” investors will now have to hold these assets for three years instead of the former one-year holding period.

Some property owners, such as farmers and ranchers and other business owners, will receive a new tax advantage with the ability to immediately write off the cost of new investments in personal property, more commonly referred to as full or immediate expensing. This new provision is part of the tax law for five years and then begins to taper off. There are significant concerns these business and property owners will face a “tax cliff” and higher taxes once the immediate expensing provision expires.

Investment property owners can continue to deduct net interest expense, but investment property owners must elect out of the new interest disallowance tax rules. The new interest limit is effective 2018 and applies to existing debt. The interest limit, and the real estate election, applies at the entity level.

The tax law continues the current depreciation rules for real estate. However, property owners opting to use the real estate exception to the interest limit must depreciate real property under slightly longer recovery periods of 40 years for nonresidential property, 30 years for residential rental property, and 20 years for qualified interior improvements.  Longer depreciation schedules can have a negative impact on the return on investment (“ROI”). Property owners will need to take into account the longer depreciation schedules if they elect to use the real estate exception to the interest limit.

The tax law creates a new tax deduction of 20% for pass-through businesses. For taxpayers with incomes above certain thresholds, the 20% deduction is limited to the greater of: 50% of the W-2 wages paid by the business or 25% of the W-2 wages paid by the business, plus 2.5% of the unadjusted basis, immediately after acquisition, of depreciable property (which includes structures, but not land). Estates and trusts are eligible for the pass-through benefit. The 20% pass-through deduction begins to phase-out beginning at $315,000 for married couples filing jointly.

The tax law restricts taxpayers from deducting losses incurred in an active trade or business from wage income or portfolio income. This will apply to existing investments and becomes effective 2018.

State and local taxes paid in respect to carrying on a trade or business, or in an activity related to the production of income, continue to remain deductible. Accordingly, a rental property owner can deduct property taxes associated with a business asset, such as any type of rental property.

This article is only intended to provide a brief overview of some of the tax law changes, which will affect any taxpayer who owns real estate and is not intended to provide an in-depth overview of all the tax law provisions. Every taxpayer should review their specific situation with their own tax advisor.

Why Are Lease Renewals Important

It is common for us to see investors managing their own properties to have an initial one year lease term with a tenant and then continue with a month-to-month agreement versus renewing the lease. While the month-to-month agreement may be a preferred method should the investor plan to liquidate or exchange their holdings in the near term, we believe it is preferable to renew leases upon expiration for another year, possibly more, in cases where you would like to retain the existing tenant. The retention of a quality tenant will eliminate costs such as tenant placement, lost rent and maintenance needed to rent the property to a new tenant.

With a lease renewal, there is additional control over the end date of the lease term. It is preferable not to have a tenant move out during a slower time of year, such as the holiday season. The time to turn a property over is extended when marketing conditions are weaker which results in costly vacancy to the investor. Lease renewals will typically vary from property to property. For example, rent increases probably won’t be the same amount for every property as market conditions vary between areas within the same general area. If maintenance will be needed should a tenant move out, such as painting or carpeting, it would be more favorable to an investor in most cases to keep the property rented, even for the same amount or, possibly, a smaller than normal rent increase.

Most investors prefer that reliable tenants are in place, taking care of the home and paying the rent on time. A lease renewal helps ensure that your property is set to be occupied for the lease term with predictable rental income. The primary goal is to keep you property occupied, reduce turnover and other unnecessary expenses.

 

 

For How Much Will My House Rent??

Of course, this is one of the most commonly asked questions we receive. The amount of rent a property will receive depends on a number of factors and can vary as much as 10% to 25% from one property to the next. Let’s review some of the reasons why this is true:

First, and most important, is the property “rent ready”? Has proper maintenance been completed and has the property been kept up to date? Have all personal property items, either the previous tenant or the property owner’s, been removed? Has the property been adequately cleaned, including all appliances, windows, blinds, ceiling fans? Has the landscaping been maintained and cleaned up to attract prospective tenants?  If applicable, have the carpets been cleaned and has the tile grout been cleaned and sealed? Cutting corners by not having a property rent ready will likely result in a lower rent received for the property and a longer marketing time.

Second, what amenities does your home offer and what community amenities are nearby? Is there shopping, parks or schools close by? Are there recreational amenities residents have access to such as a community pool, fitness facility, walking trails or bike paths?

Third, how is the local economy and what are the market conditions for real estate? If there is an abundance of properties available, as would be the case when market conditions are weak, then rents will likely be flat or falling whereas if there are few properties available then rents are likely rising. However, regardless of market conditions, a primary goal should be to reduce the amount of time a property is vacant. If a property stays vacant an extra month beyond the normal marketing time due to trying to get an increased rental amount, then it is difficult to recoup those losses in the next year.

An experienced, knowledgeable property manager is able to assist you in navigating all of the above issues. If you have any questions regarding property management in the Las Vegas or Henderson areas, please contact Neon Real Estate and Property Management.

 

 

 

 

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