A DUE DILIGENCE GUIDE FOR REAL ESTATE INVESTORS
As with most businesses, starting your real estate investment empire begins with developing a strategy and researching those investments that most closely align. While you might end up finding the deal first and basing your strategy around that transaction’s success (for instance, purchasing buy-and-hold rental properties in high rental demand markets that can be bought for the price of a car), in the best-case scenario, you’ll want to outline your strategy first, and then select properties based on that strategy (with refinements along the way, of course). The research that you conduct, both on the strategy and property ends, is known as due diligence. Due diligence is the process of performing a systematic and detailed analysis of a given opportunity. Due diligence is particularly important when you’re buying a house for the price of a car, as the return on the investment during the early years rests entirely on your ability to renovate the house quickly and efficiently and make it move-in-ready. In addition to due diligence being an activity— that is, the process of analyzing, digging in, and discovering the pros and cons of a property— it is a period of time. The time is not absolute, it is subjective and defined by the investor and seller. For instance, the investor and seller may determine that the seller can take up to two weeks to complete a property inspection and submit a firm offer. That two-week period is called the due diligence period. During this time, the investor will also request all disclosures on the property. If the investor finds any issues with the house, either because it turned up in the property inspection or it was revealed in the disclosures, the investor can back out of the deal and be refunded their earnest money, with no further obligation. THE PROCESS OF DUE DILIGENCE Due diligence is beneficial for you as the buyer in minimizing the role of emotion in your decisions and reducing decisions down to numbers and facts. But should you find yourself as the seller, for instance, of a property that you are flipping, you will want to undertake these same steps in determining a sales price? The due diligence checklist comprises the following components: Evaluate the neighborhood Assess the physical condition of the property Estimate the renovation costs Determine your potential returns on the investment Review the contract The Neighborhood Location, location, location is the guiding star for real estate agents, as they know the true value of a home lies in its neighborhood. All things being equal, real estate agents will tell you that you’ll get more bang for your buck buying the worst house on the best block than you will buying the best house on the worst block. This holds true with real estate investments as well, though with a bit more gray. In the case of a buy and hold, value accrues both from the appreciation of the property, usually realized over the long-term, and the rent from the property, realized as soon as the home is renovated and occupied. While there will be some indications of whether a neighborhood’s fortunes are on the way up (check the minutes of Planning Board meetings and the master plan for your city or town of interest), the steady-eddy indicators will be crime rates, school performance and employment opportunities. The Physical Condition of the Property Conducting due diligence on the physical condition of the property is best-accomplished through a property inspection. The purpose of a property inspection is to highlight the good, the bad and the ugly of a house. The Smart Cousin Definitive Checklist on Property Inspection offers a checklist of items specific to real estate investment properties. Key areas to evaluate include: House infrastructure: the foundation, roof and basement Major systems: HVAC, plumbing, well, septic and electrical system Exterior areas: drainage system, driveway, and sidewalk. Renovation Expenses One of the largest maintenance expenses that should be considered when evaluating a property investment is the cost of materials. Materials include everything from lumber and drywall to paint and flooring. Another significant expense is the cost of labor. This can include both skilled and unskilled labor, such as electricians, plumbers, carpenters, and painters. Depending on the work that the electrician, plumber and/or HVAC technician will have to do, permits will need to be pulled, so factor permit costs into your renovation estimate as well. The Financials Once you have your arms around whether the location of the property can attract buyers (for the buy and flip crowd) or renters (buy and hold investors), and can be renovated quickly (aim for no more than two months) and cost-effectively, next it’s time to get out your calculator to begin determining what your return is on the property. Your return means how much money you earn on your investment. Returns are usually framed as percentages. Thus, if you purchased an investment property and collect $10,000 a year in rental income, then your return is $10,000 / $100,000, or 10%. The saying, ‘it’s not what you earn, but what you keep’, holds doubly so when considering your return on real estate investments. So when calculating your return, base it on your net rental income, meaning the rental income that’s left over after financing expenses, property taxes, property insurance, property management expenses and property maintenance expenses are backed out. While there are additional expenses that your accountant or tax preparer will take into consideration (for instance, amortization and depreciation), the above expenses capture those items that stand between what you start with and what you finish with each month. LEGAL DOCUMENTS If you hire an attorney to draft or review documents related to the purchase or sale of an investment property, you may well feel that you don’t need to read these documents as this is what you pay your lawyer for. Nothing could be further from the truth. Yes, your lawyer is paid to make sure that the agreement is legally enforceable and won’t be thrown
A GUIDE TO 1099 AND OTHER CRITICAL TAX FORMS FOR REAL ESTATE INVESTORS
Real estate investment is one of the most common ways to build wealth. And one of its main draws is that it is a passive activity, meaning that once you’ve made your investment (say, a rental property), the investment makes money for you— while you sleep, while you vacation, and even once you pass it on to loved ones— forever. While the glitz and glam is in finding, buying and collecting income from investment properties (either through flips or through rental income), as many an entertainer and regular-Joe alike will tell you, troubles aplenty can flow from getting the tax-side wrong. Which leads me to the following: My Smart Cousin is NOT a certified public accountant (CPA), tax specialist or tax preparer, and NOTHING in this blog should be considered tax advice or accounting advice. That said, there are some high-level do’s and don’ts we can offer when it comes to the three most commons forms that you will encounter as a real estate investor: form 1099, Schedule E and Schedule C WHAT IS FORM 1099? A 1099 is not one IRS form but rather a collection of forms that report various kinds of payments. The three most common 1099s that you will encounter as a property investor are a 1099-C, a 1099-K and a 1099-NEC. 1099-C If you are buying your first house for the price of a car, and are planning on renovating it and renting it out to someone who receives a housing choice voucher, then the Housing Authority will report the voucher payments, also called Section 8 payments, that were made to you on a 1099-C form. The Housing Authority will send a copy of the 1099-C to you as well as to the IRS, in the same way that your employer sends a W-2 wage both to you and to the IRS. Your tenants will not report the rental payments that they make to you via a 1099-C or on any other tax form. But of course, that makes it no less real— you must self report this income, along with your 1099-C income, as rental income. 1099-K To facilitate the above reporting, effective January 2022, Venmo, Zelle, CashApp and other electronic payment processors, will begin issuing a 1099-K to anyone who receives payments of $600 or more in a calendar year. Thus, if your rental payments are made by your tenants through one of these payment channels, you will need to maintain good records to pinpoint those payments listed on the 1099-K that are rent-related versus those that are not. Payments that your tenants made to you via money or or personal check will not be reported via a 1099-K, though certainly stay-tuned as rules may change in the future. beylikdüzü escort bayan, gaziantep escort, ataköy escort, esenyurt escort, seks hikayesi, kayseri escort, şişli escort, beylikdüzü escort, beylikdüzü escort 1099-NEC As a real estate investor, you undoubtedly will make payments to a property manager, handyman, electrician, plumber, HVAC technician or other service professional that you hire to manage, renovate or repair your property. If these professionals are independent contractors, then you may want to issue them a 1099-NEC form, which will state the amount of money that you paid them, and help ensure that you are able to claim these expenses on your income taxes. Likewise, if you provide property management, general contractor or other professional services to clients, perhaps as a component of your real estate investment business for instance, then you will be issued a 1099-NEC documenting the payments that were made to you. The Schedule E For real estate investors who are also landlords, the most common tax schedule that you will use is the Schedule E. Schedule E is the IRS’s form to report passive income, or income that is not derived from business operations. Schedule E income is generated from activities such as rental properties, royalties (say, from a song, movie or book) or interest in a trust. The Schedule E reports financial information from your rental properties that is part balance sheet and part income statement. On it you will report the properties you own and how much you paid for them (balance sheet type items) and your rental income and maintenance expenses for the property (income statement type items). If you own a property that wasn’t rented out at all (for instance, because it was vacant and in-between tenants, or because it was being renovated), you will still report it on your Schedule E. Likewise, if the property is a multifamily property but only one of the units was rented out during the calendar year, you will report rental income for the one unit. Your accountant or tax preparer can walk you through the ins and outs of what expenses you can deduct and the deductibility limits, but generally, if you’re at least a 10% owner in the rental properties and you call the shots on any big decisions with the property, then you can deduct up to $25,000 of the losses from the rental income. Importantly, Schedule E losses (say, large maintenance expenses from prettying up a new property investment) generally cannot be deducted against 1040 income (say, income from your job or a Schedule C business). Schedule C and Form 1120-S If you establish an ancillary business to your real estate investment business— for instance, property management, lawn care, roof repair, general contractor or other venture— should you choose, you can form a company separate from your real estate investment company. If that separate company is a limited liability company (LLC), you will report the income and expenses for that company on a Schedule C return. If instead the company is formed as a sub chapter S firm, then you will report the income and expenses on form 1120-S. THE BOTTOM LINE Numerous tax forms can potentially apply to real estate investor. Hiring a CPA or tax professional should be job number one to help ensure that you properly report all items, avoid any
Why Real Estate Investors Love Housing Choice Vouchers
Is it good business to rent to Section 8 tenants? At a federal level, the Fair Housing Act does not bar landlords from discriminating based on Section 8– I know, incredible— isn’t fair housing in the very name of the law? But I digress, even if discriminating against Section 8 were not legally permissible (as is the case in several states and municipalities), does renting to Section 8 pencil? Well, let’s follow the money. Corporate America The Housing and Urban Development agency (HUD) conducted a nationwide residential housing finance survey in 2018. HUD found that less than 10% of small landlords (those owning rental houses that have 1-4 units) rent their units to tenants receiving Section 8 while 25% to 30% of large landlords (read, Corporate America— those owning apartment buildings with 100 or more units) rent to Section 8 tenants. Call me cynical, but my money is on corporations and real estate investment trusts having a better understanding of the financial benefits of renting to Section 8 tenants than small-fry landlords. Underserved Communities Tenants who receive housing choice vouchers (Section 8) are concentrated in poor neighborhoods (a problem for another article). The average income of a family receiving a voucher is approximately $15,000. However, families who don’t receive Section 8 often have the same income as their Section 8 neighbors (given a waiting list of as long as 8 years for some communities). Since there is no meaningful difference in the financial stability of the two households, a voucher inherently lessens a tenant’s risk profile. High Income Communities If your investment property is in a tight rental market or high-priced community, HUD takes particular pains (as it should) to enable voucher holders to live and prosper there. As a for instance, in the county of Santa Barbara, CA one of the wealthiest counties in CA, HUD offers first time Section 8 landlords and property managers a signing bonus of $5,000, a bonus of $2,500 for lease renewals, $5,000 in insurance against damage to the unit, $2,000 towards the security deposit, and 24-hour hotline for landlords to call if needed. Answering the question, is it good business to rent to Section 8 tenants? Decidedly so. Recommended Read: How to Pick the Best Mortgage Loan Follow us @mysmartcousin
WHEN SHOULD I CONSIDER HIRING A PROPERTY MANAGEMENT COMPANY?
Whether you are an investor to-be cozying up to the idea of taking the plunge and buying your first house for the price of a car, or you’re a seasoned investor with many owned and flipped properties under your belt, property management is a key element that can’t be overlooked. In short, property management has the capacity to make or break the value of your investment portfolio as well as your success as a landlord. Taking time to dig into the ins and outs of effective property management can save you headaches, not to mention money, down the road. Which raises the question: what exactly does a property manager do, and when should you consider hiring one? Let’s dive in to learn more. WHAT IS A PROPERTY MANAGEMENT COMPANY? A property management firm is a company, a partnership, or sometimes just a single individual, who shoulders the responsibility, via a contract that you, the owner, signs with them, to ensure proper maintenance of your investment home. In the initial flush and excitement of buying a property, it’s easy to minimize the time and flat out inconvenience of maintenance. Until, that is, you get your first middle-of-the-night call or have to drop everything to find a plumber (have both of these scenarios happened to me?— yes and yes). A third party maintenance company serves as the chief point of contact and middleman between you and your tenant on such issues, as well as the the first-responder in addressing your maintenance issues. A second role that the property manager plays is finding tenants, collecting rent, and when required, taking a tenant to court who has not paid rent, for instance, or damaged the unit. Because property managers are often directly or indirectly affiliated with real estate companies, they have significant experience interpreting and applying estate regulations and conducting tenant screening. PROPERTY MANAGEMENT COST In exchange for performing the above roles, property managers are normally paid at least two fees: TASKS PERFORMED BY A PROPERTY MANAGEMENT COMPANY As illustrated above, two of the biggest values that a property management company provides is 1) peace of mind that your investment is managed professionally, and 2) distance between you and your tenant on day-to-day maintenance matters and court disputes. Skilled property managers can save you valuable time and increase your returns by providing the following services: WHEN SHOULD YOU HIRE A PROPERTY MANAGEMENT COMPANY? Hiring a property manager comes with benefit of someone else standing in the shoes of the landlord and the cost of having to pay them to do so. The following scenarios, in particular, are tailor-made for securing property management services post haste: Follow us @mysmartcousinsin
A GUIDE TO SHORT-TERM RENTAL OPTIONS FOR YOUR INVESTMENT PROPERTY
If you have one or several investment properties that you’ve bought for the price of a car and want added income without building a bathroom, bedroom or finished basement, read on for insights on growing your cashflow in the short-term rental market. WHAT IS A SHORT-TERM RENTAL PROPERTY? A short-term rental property is a property that is rented out for an evening or a couple of days to a few weeks or months. In short, anything rented out for less than a year under an annual lease is viewed as short-term. The types of properties that can be rented out short term come in many flavors including: your home sweet home a tiny house or cottage that you place, either temporarily or permanently, in your backyard or a side lot next to your home a single family investment property a small multifamily investment property of 2-4 units an entire apartment building bought solely for the purpose of short-term rentals ADVANTAGES OF A SHORT TERM RENTAL INVESTMENT PROPERTY Short term rentals can provide you with increased cashflow on the revenue, expense and personal budget fronts, giving your pockets a wonderful case of the mumps. Your Own Vacation Getaway: If your investment property is located in a city that you frequent for vacations, family reunions or get-togethers, then a short-term rental can save you money by avoiding hotel costs, and generate income when you’re not using it. Also, having a vacation rental that you own makes it easier to block off vacation timeframes that work for you. Fewer maintenance headaches: Short term rentals are subject to less wear and tear than year-round rentals because: 1) they’re occupied in only short bursts of time (for instance, an evening or weekend), 2) the unit is furnished so there’s no wear and tear from furniture or other large belonging being moved to and from, and 3) the damage deposit for a short-term rental of a couple of hundred dollars usually invites a greater level of precaution from visitors than a long-term rental might. Additionally, because of the gaps between guests visits, repairs and minor cosmetic work can be done quickly before any issues turn into a more expensive problem. Higher overall monthly rental income: The daily rate for a short term rental is higher than the equivalent daily rate for a monthly rental. As an example, the average monthly rent for a 3-bedroom, 1-bathroom house in New Jersey is $1,800, which translates into an equivalent daily rent rate of $60 over a 30-day period. The average short-term rental rate for a 3-bedroom, 1-bath house in New Jersey is more than twice this amount, or $130-$150 a day. Although your investment property will certainly have some level of vacancy, over the long-term, your short-term rental will out-earn its long-term peers. Real-time Price Adjustments: A long-term rental under an annual lease offers the ability to adjust prices only once per year. Additionally, depending on the state and tenant population, the annual increase amount might be capped. In contrast, short-term rental investors can adjust their prices after each and every occupant, based on market conditions and opportunities. Thus, if a concert or sporting event is coming to your area on a particular weekend, you can raise the price for your rental unit based on the increased demand. DISADVANTAGES OF SHORT TERM RENTAL INVESTMENT PROPERTY Of course, as with most investments, there are always downsides that should be discussed. Short-term rentals will require more day-to-day involvement than annual rentals in terms of marketing and communicating with the revolving door of guests you will have. As such, before diving headfirst into short-term rentals the moment your annual leases expire, consider the challenges that come with this territory: Edging out Competition: In order to minimize vacancies and negative reviews, short-term rental landlords will need to consider as competition both short-term rental properties as well as commercial properties like inns, long-term stay hotels and conventional hotels. Investing both money and time on well-appointed furnishings will pay dividends in the short-term market more so than for long-term, unfurnished annual leases. Likewise, promotional discounts and other marketing sizzle will be required to keep your property top-of-mind with potential guests. Maintenance and Repairs: While renting out your property or a room in your house to a new guest each week may result in less overall wear and tear versus an annual rental, the frequent in and outs mean lots of mini and ongoing housekeeping on your end. If you are serving as the head handyman and housekeeper for your short-term rental business, this translates into a never-ending list of chores, honey-do’s and home repair purchases. Off-Peak Vacancies: Just as you factor in a vacancy rate for a traditional real estate investment property, you will need to price in the cost of vacancies for a short-term rental property. Do your homework to find out when vacation travel is down in your area and adjust your pricing and offerings accordingly. Alternatively, schedule large maintenance and capital improvement projects during off-season. Property Management: In many ways a short-term rental is like a traditional rental property that is located out of state. Both will require the use of a capable property manager to screen and choose tenants, address repairs and collect rent. Because of the added work, however, a short-term rental will attract property management fees that are significantly higher, from a low of 10% of the rent to a high of 50%, vs. a long-term rental where property management fees range from a low of 5% to a high of 15%. This added cost will need to be priced into the value of the short-term rental opportunity. HOW TO MAXIMIZE YOUR PROFITS WITH SHORT-TERM RENTAL PROPERTIES Short-term rental properties will provide returns throughout the year, but as discussed above, a more active engagement strategy is required. LOCATION AND CONDITION OF THE PROPERTY – The largest driver of profitability, more so than with long-term rentals, will be the location of the property because of it serving as a vacation residence for guests. Inspecting your property from the vantage point of guest will help ensure that
What’s the Difference Between Fix & Flip Hard-Money Loan and a Conventional Loan?
Whether you’ve bought your house for the price of a car or paid several hundred thousand dollars for it, becoming a brand new homeowner makes you feel like a million bucks. Becoming a real estate investor, once the province of the rich and famous, has opened up to the every-man, with dozens of avenues for getting a toehold as a buy-and-hold or buy-and-flip property owner. But first, a few definitions. What Exactly is a Fix & Flip Investment? The term ‘Fix& Flip’ real estate gained traction in everyday vocabulary beginning in the late 1980s. In the grip of an economic recession and surging home foreclosures (repeated 20 years later with the Great Recession), investors bought, rehabbed, and sold foreclosed properties, thus birthing the notion of ‘flipping’ or improving and selling a property quickly as a normal business practice. Properties ripe for fix & flip are those that offer a large and quick payoff potential. For instance, a house that is structurally sound but several years past its prime on the paint, flooring, appliance, and overall maintenance fronts. Such a house that requires a maintenance overhaul but isn’t a complete gut-job offers two key benefits. First is that the house can be improved quickly— a quick turnaround minimizes the risk that as weeks turn to months, the housing market suddenly sours. Second is that a maintenance overhaul, while expensive, costs tens of thousands of dollars less than a gut job, as major overhauls almost always involve a brand new roof and heating/ventilation system along with significant wiring and plumbing upgrades. Best Sources for Fix & Flips One strategy that is growing in popularity is purchasing a property that is old, under-maintained, or abandoned, followed by renovating it and then renting it out, either as a long-term rental or as a short-term Airbnb. Four Big Differences Between Hard Money Loans and Conventional Loans One way to differentiate hard money loans from conventional loans is to think about their purpose. Conventional loans are taken out to finance the residence that you will live in a long time— your primary residence. As such, the duration of a conventional loan is typically 15 years or 30 years, and the interest rate is relatively low as lenders believe that you are likely to prioritize payment of bills relating to your home-sweet home. Conversely, Fix & Flip loans are short-term in nature, funded by investors who expect a quick profit realized within months or a handful of years. Likewise, particularly for fix & flip investments, the ownership horizon itself will only be months or a year or so until the property is sold at its now higher, rehabbed value. beylikdüzü escort bayan, gaziantep escort, ataköy escort, esenyurt escort, seks hikayesi, kayseri escort, şişli escort, beylikdüzü escort, beylikdüzü escort A second difference is who the lender is. Conventional loans are generally provided or guaranteed by government-backed mortgage lenders such as Fannie Mae and Freddie Mac. Fix & Flip or hard money loans, however, receive no such cushion and are backed strictly by individuals or private sector entities. And each lender provides its unique set of benefits and trade-offs. Conventional mortgages are long-term and low-priced but require reasonably strong personal credit. Hard money loans can be provided quickly with no credit check but must be repaid quickly and at a relatively high-interest rate. A third difference is the eligibility requirement. All financial good deeds and skeletons alike come tumbling out when a conventional loan is provided, due to the stringent regulations and requirements that banks must abide by. Private money lenders face few restrictions and thus are not required to validate your creditworthiness. Their chief concern will be the value of the property that is securing the loan. Lastly is the time to complete the loan process. Conventional loans may take one to three months to complete, while fix & flip loans can be wrapped up in a few days. Read our other blogs: Click Here Follow us: MySmartCousin