All Forum Posts by: J Adams

Depending on your browser settings may see a faint underline of key terms in the posts, that if you were to hover the mouse over them, a tooltip will appear with the un-abbreviated term and a possible link to learn more. For those just browsing with locked down systems you may not see that and so I answer, Contract For Deed.

Instead of buyer getting title at closing, buyer gets title at the end of the purchase agreement (may be several years).

For the uninitiated:

Information Management Network, IMN
https://www.imn.org/

American Assoc. of Private Lenders, AAPL

https://aaplonline.com

Mortgage Bankers Assoc., MBA
https://www.mba.org/

 Joe,

Both-and not either-or. Growth mindset. 

Respectfully,

Jay

Joe,

Speaking from the perspective of a financially-savvy tenant, I absolutely hate that I am giving the landlord an interest-free loan! If I get the money back, I want it back with interest. The time value of money. Otherwise let me hold on to it and give you a promissory note. I hold this same belief with my taxes. I'd rather have to pay money at the end of the year than to get a tax refund. A refund means the gov took more money than they were entitled to. 

Now for the other side of the coin. Can you retain good tenants without this benefit, without gifts, and without issue? Yes. Would they be more appreciative? Absolutely! Will that make them stay longer or not cause any issues? That's up for debate. In my case, it is not required by law so I believe there is a argument, may not be a very good argument, that if I offer this I will attract better tenants away from neighbors. This is the point of contention. If someone has a better idea I can parrot, I am all ears.

At the end of the day I want to provide a benefit to my tenants. Talking to an accountant the formula for interest and filing for a 1099 is less than half an hour. Once you have the system in place I believe it is relatively simple to keep it going. As others have stated, if you decide to charge an admin fee and the fee is greater than their return then you are lead to the possibility of chipping away at the tenants security deposit. This isn't an argument against providing this. It is an argument against providing this at the current rate. If you calculate that your itemized deduction is less than the standard deduction, you can choose to the standard deduction. But if the next year your itemized deduction is greater, you are not stuck with the standard deduction! It's a choice. If you are greedy, you can admin fee the whole interest rate and with it being as apparently simple as it is, that's an easy 15$ for half an hour, or 30$ an hour. If this process scales, you are looking at even greater returns!

Sincerely,

Jay

Justin,

Maybe someone can correct me here, but wouldn't the calculation be relatively simple? Assuming you don't have to furnish monthly statements on their security deposit and the interest rate doesn't change for the length of their tenancy (could be multiple years), you'd only really have to calculate this interest once at year-end. Depending if it is compounding or simple interest determines the formula, but in either case time is a variable for both. If you take the stance that this is a profit motive one could argue that this is the simplest money to earn! Money, rate, term. Boom! 

The way I see it the profit motive lays on a spectrum from altruistic to greed. Either you charge nothing or you charge 100% of interest. I make the distinction here between charging 100% of the interest and keeping it. Depending on the context keeping it may entail theft whereas the latter is a bona fide business fee though subject to usury laws.

Inquisitively,

Jay

Russell,

Whether you claim it as a business expense or as business income wouldn't interest accrued in the account have a 1099 anyway? Unless it depends on the account type such as "FBO tenant" which means tenant could pay tax. Just like a university sending a 1099 saying what you paid in tuition and what would possibly be tax deducted. Either we, the landlord, issue this 1099 or we structure the account in such a way that the bank issues it.

Regards,

Jay

Justin,

You may be right that PA law doesn't require escrow accounts, but I know that Maryland does. Both places are included for diversity of topic. Don't want to pigeonhole myself if I just mention on place as tends to be the case. If only California is mentioned then everybody from CA will chime in to the exclusion of other states when the appeal is to create a broad foundation for all. Also though your state may not require an escrow account I don't want to leave the option out because it may actually be a hidden gem in others! Just like when talking about where to get a home loan we typically hear credit union versus big bank to the exclusion of portfolio lenders. It is not a true dichotomy.

I think there was a misunderstanding. I do not wish to profit off of this! Though you may charge an administration fee, I want to work on the foundation first. What you should charge as admin fee is a separate issue and if you should charge at all. The goal is to provide a benefit to the tenant. As many have stated that bank rates are low and the admin fee charged basically eats the interest; it is non-binding. Forward-thinking says that if rates ever increase, or you offer a vehicle that offers better rates, this could truly benefit the tenant then. Now you could always lock-step your admin fee to the interest rate if you aren't capped by law, but again that's a moral issue separate to the foundation we are building here.

Regards,

Jay

Alan,

Because you hold it in an escrow account is the 1099 on the interest sent to you or to the tenant?

Thank you,

Jay

Eddie,

Thank you for replying. I don't mean to be blunt, but is that what you'd say to someone in Maryland or Pennsylvania where it is legally required to have interest-bearing accounts? I do understand the argument that "it's stupid to do this craziness unless you have to".

If each deposit requires it's own account, then I'd assume the accounting software (eg. Quickbooks or Quicken) has the ability to do a great number of accounts?

I'd also assume owner means landlord. I have never filed to have something 1099'ed. 

Besides storing in a savings account, I was thinking something like a certificate of deposit set to the lease term. That way the savings aren't de minimis. The tenant is getting full percentages! None of this 0.025% crap. The tenant would pay for any early withdrawal penalties if they move early. 

Respectfully,

Jay

So I just remembered a story. While I was going through my real estate courses one was on property management. They had a management company come in and answer questions. Well when I asked about this the man scoffed and said it would be too difficult! Seeing as other states have made this a legal requirement...obviously it can be done. Frankly I am surprised that California hasn't made this a law yet! They love to take money from everything else.