strive4credit

A new landlord needs advice.

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I'm in PA. There is state law that tells you what to do with it. :)

Now I'll give you the "99% of the time" rule. If your rental is set up as an LLC or corp., then DO NOT comingle with your personal funds. Open up a separate account titled as such and deposit. Then transfer the first month upon move in and the last month upon 1st of last month into your personal account when it should be considered rental revenue.

If your rental is not set up as a separate entity and you are reducing liability exposure through at least a $1,000,000 blanket liability policy (spend the $25/month to do this!), then comingling isn't really an issue. So whatever bank account you stash it in, just don't spend the funds prior to their application to you as revenue (ie first month before 1st of first month, and last month before 1st month of last month). Do not deal in cash!

Also one little tip- when dealing with move out, you must document itemized specific damages above and beyond ordinary wear and tear if you plan on giving back less than full security deposit. And I believe you only have 30 days to give it back.

Generally, PA law is a bit tilted toward renters so pull up the PA law handbook and read it. It is worth your time. Specifically in Philadelphia, landlords are treated like slumlords from day one, so if that;s your locale make sure to get all your city tax and L&I renter's licenses and pay every last fee on time or you can be fined and are unable to evict a tenant if it ever comes to that (and plan on being fleeced by an insane city tax code).

Also, do yourself a favor and spend a few hours and create an income/expense Excel spreadsheet or a written book dedicated to this purpose. Every single time you use your vehicle to do something rental related, write it down with mileage. Every stamp, write it down. Every single purchase and bill (and there will be many more than you think!), write it down. At the end of the year, you need solid records. Without them, you are leaving cash on the table.

More info than you asked for, but welcome to Landlord 101. It is certainly nice to have renters pay your mortgage for you and to have you receive huge federal tax benefits in the process, but there is a huge investment in time & energy involved. More than I would have ever imagined.

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I own a couple of duplexes...each property is in its own LLC.

My practice is to keep security deposits in a separate account - my bank set it up as an escrow account. I keep careful notes on whose deposit is whose (not hard - it's a total of 4 units).

The rent payments go into the operations account where the mortgage get automatically debited from.

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Thanks Jq26. I am in Philadelphia too. And you are absolutely right about the red tape and the slum lord label. I have a property that I rented to a friend (I know) and his family as a favor. Bad situation. He turned out to be a professional bum tenant.

This new property is only my second property in the city so I must get a license immediately before I get tenants.

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I see, so you have some experience.

Don't you love the constant fleecing of landlords by the city? Let me count the ways:

1) Required tax license (couple hundred bucks one time)

2) required L&I rental license ($50 per unit per year)

3) every time an apartment rents you pay $25 to the city per unit

4) annual landlord trash fee ($300?)

5) two city tax filings and tax bills: business privilege tax & net profits tax

6) you are partially taxed on revenue alone (without regard to expenses), thus a "gross receipts" tax is in effect and you are forced to write the city a check annually even when you lose money in any given year

7) inability to carryforward losses for more than three years to offset gains in future years.

8) 10% real estate tax increase last year

9) 3% real estate transfer tax when you purchase and eventually sell the property (OUCH)

Every single summer I end up on the phone with the city tax lawyers because they screw up one of my city returns and I end up receiving a tax deficiency letter.

I don't live in the city because I refuse to let them jack me for an additional 4% of my gross wages. I live about 30 minuites away. But my three unit rental property is in East Falls.

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You forgot the Business license $350 you have to get before the renter's license. Or is their a way to get around that?

Do you have an tax attorney or accountant to keep track of all this crap for you?:shock:

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I think the tax license I refer to is the business license. It is a one time fee that gives you a # you need for every tax filing. I think it was $150 when I originally applied for it in 2007. And as the city's finances has deteriorated, they keep increasing the fees on landlords because they're viewed as a "deep pocket political minority". So we just have to deal with it. In my opinion, at the end of the day landlords themselves don't pay these fees. They're passed on by the landlords either directly or indirectly to tenants, many of which are in the bottom 50% by income. But enough about bad tax policy....:cool:

Good luck with rental #2. You are on the right track. If you get into great habits from day one, you can handle this yourself. Separate manila file for each original lease that contains copy of driver's license of each tenant, each tenant's credit report, each tenant's federally required lead paint pamphlet receipt notification, and their original rental application. Make record of each rent payment and every single expense during rental. And when you are 90 days from renewal period, send a "thank you" letter to them for being a good tenant and any changes you are proposing for a new annual term and remind them that if they are planning on not renewing then they must notify you in writing 60 days prior to expiration.

At end of year I hand over my VERY DETAILED spreadsheets of income & expenses to my accountant who then prepares my Schedule E and depreciation schedules, which are then used for federal, state, and local tax returns. Depending on your tax bracket, you can get HUGE tax benefits by deducting depreciation, mortgage interest, and actual expenses that exceed your rental income from your W2 income. In 2007 I received an $8,000 tax return thanks to the rental. In 2008 & 2009, the returns became smaller and smaller as I was partially phased out of this "loss" benefit. In 2010 & hopefully every year thereafter, I am now completely phased out of this benefit by MAGI limits (I'm married so it isn't hard to hit the limits that were put in place in 1987 without adjustments for inflation!!!!!). All "losses" are suspended and carried forward indefinitely, except for the city tax purpose and it is only carried forward for three years.

Good luck. Lots to think about. But with a long enough time horizon, it is a no brainer!

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One more thing- do your properties have natural gas (likely in Philly?). If so, BEWARE:

- Tenant PGW accounts are solely between tenant and PGW. They will not provide you with info on the account at all, such as if a tenant has rung up a +$1000 gas bill.

- Deadbeat tenants were not paying bills and then leaving the rental property without payment on the gas bill. In 2006, Philadelphia city council changed the law to allow PGW to lien the landlord's property for any unpaid gas bill by any tenant of the property without need to sue the landlord.

- Even though that landlord's are now de facto cosigners on all tenant PGW accounts thanks to the quick ability to lien, PGW still won't tell you if a tenant is paying on their account, citing privacy laws (nice huh?) :evil:

- So a middle ground was struck: PGW created a "landlord cooperation program" where you sign up, give them some information about the property, tenants, etc. and agree to let PGw into the property to shut off the gas if need be. You also agree to make sure they paid their PGW bill as a condition of receiving security deposit return. In exchange, PGW agrees not to lien your property if a tenant's does not pay their bill.

Note that in order to comply with the PGW program, you need both your rental and tax license. I recommend taking part in it. When I was filing BKs for impoverished families in Philadelphia in 2008 as part of a legal intern, I've seen past due PGW bills that were routinely over $3000. Apparently, deadbeats know just what type of "doctor's note" to pay someone to write that prevents utility shut off. This is yet another way the city has placed their mismanagement of PGW deadbeat accounts on landlord's shoulders.

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PA: good (not excellent).

Philly: bad. though rents have been flat through the "crisis" days and have recently started to really increase, so after all my b*tching things are rather healthy here.

It could be worse. We could be rental owners in a very well managed city that loves landlords but rents have been cut in half! :D

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True...I'd love to raise mine, but the economy here is a little too soft to support it... maybe after a tenant moves out, I'll re-evaluate.

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I'd love to move out west. You get the benefit of beautiful weather, unbelievable scenery, and extraordinary golf courses.

It is 38 degrees here today and dreary. :-(((

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Well the temp is not that much better right now... it's 49 and raining with some nice fog...

But otherwise, it's not too bad.

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Its 71 here now, but it is expected to drop to 66 :(

Also, just to jump in a little, our rents have risen over the past 12 to 18 mths. They fell to a real low in 2008 and 09 and now are rapidly rising due to the demand. Fortunately the acquistion of any rental property is so low right now, most everything is positive cash flow for the first time in a long time.

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I couldn't agree more Denita. The base case for a floor on property value is when ownership cost is below rental cost. We're close in many markets. And when you factor in the low long term financing, this is a once in a generation opportuntity to own a rental that pays for itself from day one. Just like in 2006 when grandma and grandpa turned their bridge club into a home flipping club because "home prices always rise", today's dire situation will not last forever either. By 2015, we'll be looking at today's opportunity as the crazy days when people were giving homes away.

One of the reasons the stock market ratcheted up yesterday was the announcement of HUGE unexpected numbers of multifamily properties (apartments) that broke ground in November 2011. Not only does this show that jobs are appearing, it creates good paying jobs itself, and it shows rental demand is surging and still rising.

In other words, BUY NOW it the math makes sense. And in many markets, the math is showing you that the math is saying SCREAMING BUY. Note that a rental is completely different than a speculative house flip. Those days are gone (fortunately).

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I have open a second new savings account. I deposit all the money coming from the tenant in it. I do this procedure because I like to keep things simple.

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