All Forum Posts by: Landon Elscott

My assumption (and that's all it should be taken as) is that you as the landlord are responsible for actually removing the water from the basement and furthermore getting the property back into a healthy state or habitability.  I would assume that a flood (whether you're insured for it occurring or not) would rank right there alongside the damage caused by a tornado or other natural disaster where the landlord would be responsible for restoring the property.

However, I wouldn't think you'd be responsible for any of the tenants belongings they may have had in the basement that would have gotten wet.  Rarely is the landlord actually responsible for the tenant's belongings unless the landlord actually did something purposely to those belongings. 

That said, my next assumption would be that you might (that being the key word) have to consider treating this in the same manner as a "fire clause" in that the tenant if the property is uninhabitable the tenant may be able to terminate the lease or at least temporarily terminate it until necessary repairs have been made, or depending upon if the space was rentable space, I'm wondering if you might be obligated to lessen rent due by a prorated percentage of what is considered damaged by the flood until repairs have been made.

Again, I'm not sure the specifics or if what I'm saying is true, but these are the assumptions I would make based upon other similar natural disasters.

I think another great thing to add to a lease is to make sure that you say that all existing due balances will be settled by received funds prior to being applied to the rent due.

Example:  If someone has a late fee of $30 due on next months rent and they only pay the amount of rent normally due, you'd first apply $30 to their outstanding balance.  The result is that tenants are basically forced into ensuring they cover all balances due or face an eviction notice.

Currently, with only one rental property, I'm putting a huge emphasis on just getting sufficient cash reserves for both known and unknown repairs, vacancies, etc.  I have my eyes set on a second property in the "near" future, but I'm not necessarily in a huge rush.  I, personally, am trying to stay pretty conservative and not get over leveraged - I want to feel comfortable in knowing that if for whatever reason I hit a streak of bad luck, I'll still be able to make my payment obligations.  So as of right now, cash reserves is really my main concern.

That said, there are some other options out there where your cash can work for you and not make you feel like it's just sitting there in a bank account doing nothing.  Although the stock market can be pretty speculative, Real Estate Investment Trusts (REITs) are a way to get involved in additional real estate investing without necessitating additional loans and down payments, of course it is important to save up enough to buy in a lump sum that keeps your cost basis low even with the addition of a commission.  I find most of the REITs pay anywhere from 5-9% dividend yield, but again there's no guarantees as to capital appreciation.

Just bought my first rental property at 25  a few months ago and my wife is 22.  We bought our first personal residence about a year after getting married, I was 23 and she was 20. 

Long story short on the financing.  I was pretty fortunate after graduating from a 2-year tech school to land an awesome job and ended up living with my parents for a few years prior to getting married (I met my wife in high school and she was going to college).  I was able to save up a lot of money, but then I - in all my youthful intelligence - decided to indulge myself in the hobby of motorsports and Ford Mustangs. 

I spent a huge chunk of my savings buying a 600HP Cobra Mustang. Anyways, then a few months ago, realizing that this dream Mustang of mine was really the only thing separating me from real estate investing, I sold it to gain the 25% down payment on a $36000 house and paid down some other debt. Currently getting a 28% ROI not including some of the major expenses I'll have such as a new roof in a few years.

Is it in an area with vacationer appeal and steady tourism - you mentioned a beach was close by.  Granted, going the vacation property direction is a slightly different ball game than long term, residential properties but it might be justifiable.

I have absolutely zero experience with vacation rental properties and zero experience in the mentioned locale, but I'd at least analyze it from that perspective, too.

With sites like Homeaway.com, I know a lot of vacationers are transitioning into finding short term apartments or homes for their trips rather than hotels. Again, the details of property management in vacation realty is beyond me, but typically from my readings, vacation properties like this tend to attract better demographics rather than those looking for cheap motels and also, dependent upon the area might pull in better returns - and might just justify a pool.

Thanks.  That sort of makes sense about the property tax liability.  So essentially, they gave me cash at closing with the intentions I apply it to next years taxes.

The prepayment of property taxes is not shown on the closing statement anywhere.  They were fully satisfied outside of the closing and the seller never requested/mentioned any sort of reimbursement for them.

I guess what it comes down to "is the money we received at closing taxable income - even though its technically denoted for use toward property taxes".  

And secondly, since the seller has prepaid our taxes for this year, is that also considered taxable income even though its not mentioned on the closing sheet.  But then, if surely the seller couldn't claim a tax deduction for an amount prorated for which they didn't own the property I would think.

Those are some pretty vague questions.  Without knowing much about New Jersey, I'm not in a great position to answer in terms of finding a good area, but assessing the property is well explained throughout the site using a variety of different tools and calculations.  That said, I'm with Arlan, in that those seem like pretty big numbers to set a price range on at this point.

Agreed.  You're going to need either a lot of capital to invest in a big apartment complex or you're going to need a partner or group of partners to generate enough capital. 

Chances are, even if you can come up with necessary capital to invest in a larger, multifamily complex, you're going to be piling a lot on your plate all at once.  Secondly, if you go the partner route, I'm willing to bet the partners are going to strongly appreciate if you have some prior business experience to bring to the table. 

Hopefully I explain this in a way that is easy to understand.  This is my first rental property purchase and also the first time I've really had to deal with any accounting of this nature, so I would appreciate any guidance.

Over the weekend, I decided to go ahead and do a reconciliation of our financials and bank statements when I thought something didn't quite look right.

On May 16th, 2014, we purchased a rental property.  At the time of purchase, the seller had already paid property taxes for the year, so everything was paid and current and there wouldn't be another property tax payment until the upcoming September.  Because of this, our expectation was that we would be reimbursing the seller for prorated amount of property taxes from our point of purchase.

However, when we reviewed the closing statement and the balance sheet, we realized that no where on the closing statement were we reimbursing the seller for prepaid property taxes for after we took possession.  In fact, not only did we not have to reimburse them for prepaid property taxes, but they also provided us with a pro-rated amount for property taxes from 7-1-13 to 5-16-14 (a period of time several months prior to our ownership) - which ultimately lowered our closing costs by $1000.  We went into the deal expecting to pay all closing costs and yet the seller basically gave us a year's worth of taxes back.

On my financial statement, it shows I paid all the typical closing costs (attorneys, appraisal, insurance, origination fees, etc) but that I did not pay ANY property taxes during closing.  And then on top of that, I have this sum of money I received from the seller that just so happens to be an amount both designated as property tax reimbursement and pro-rated as such.

So here's my question:
How do I classify these numbers on my general ledger?

The error I noticed is that back when I initially inserted the numbers into my software, I entered the $1000 as both a credit (since it was essentially cash we received off our closing costs) as well as classified it as a property tax (since it was pro-rated property tax). The result was that since I've yet to actually cut a check to pay any property taxes and because there weren't any reimbursements to the seller for pro-rated property taxes now that I own the property, it currently appears as though my current property tax expenses are negative $1000.

So, now I'm trying to reconsider how I need to really insert this into my system so I can accurately reconcile the account.

My initial thought now is to still consider that as a credit (since I did in fact receive those funds off my closing costs from the seller), but to instead classify that as Misc. Income - but then, is that really considered income or is it really classified prepaid taxes - thus essentially lowering my property tax deduction by $1000?

Secondly, the seller has nearly prepaid 4 1/2 months worth of property taxes for me (since they're paid up until September and I never reimbursed them on them closing statement) in addition to the $1000 I've already mentioned that they paid me for July 2013 to May 16th, 2014 when we took possession. Since the seller has paid those 4 1/2 months worth of taxes for me, do I need to report that as income? And if so, can I turn around and also take that same amount and offset it as a property tax payment.

Hopefully this makes sense and thanks for any help you can give. I have a tax professional I use on occasion, but I prefer learning and understanding these things myself and I can't seem to find the answer elsewhere.

Well, I hope I understand your question correctly and it appears you are very new to this - we all were at one point. I think you mean ARV (assessed retail value or after repair value) instead of "AVR".

Are you looking to flip properties, focus on appreciation long term, or rent them out.  Regardless, you're going to need to estimate the up front costs, estimate the costs to keep the property for "x" amount of time, and then figure out what your "out" is.

So, for starters, whether you're flipping or renting, you're going to need to know the amount of money you have available to work with - realistically - and then from there form an opinion on if you can move forward with your goals and where those goals should be aligned or if you need to have more patience and save a bit more money.

Once you have an idea of the type of properties you're going to be buying and what you can realistically afford, it's time to start crunching the numbers.  Attempting to flip a property can be relatively speculative for an absolute newbie, and you'll be at the mercy of contractors (or your own skills) at figuring out the rehab costs.  All too often these rehab costs get estimated too low, so definitely keep a buffer there. 

In addition to that, you're also going to need to have a time line of how long those goals are going to take to reach and don't count on the contractor meeting their dead lines, again have a buffer.  These time lines become important, because you're going to be holding onto the property for a few months perhaps (or longer) and you're going to be responsible for utilities, insurance, taxes, etc - each day you own a property is essentially costing you money.  If you live in the area, you should have a good idea of what utilities might run, assessors pages can give you an idea of taxes (be sure to account for any deductions existing you won't receive), and your insurance agent can estimate insurance.

Lastly, to get the Assessed Retail Value or After Repair Value, you'll need to check out and see what similar homes in the area are selling for and talk to real estate agents.  You can maybe use county records to see what the assessors report has for the tax value of the property, but keep in mind it may not be absolutely in line with the current demand.

So essentially, what you need to know when analyzing each deal is what the home can realistically sell for in your area based upon similar, recent sales and then you subtract from that what it is going to cost you to actually purchase the property up front and what it is going to take to rehab it and then further more subtract the total costs of ownership (utilities, insurance, loan, etc) for the period of how long it will take to sell the house - and obviously that can be tricky.  Make sure the reward well outweighs the risk.