Mr. Landlord

[BiggieFries]

We just heard from our agent and as of June 1st, we will officially be slum... er, landlords. I've been reading up on being a landlord for the past 6 months but I'd like to hear from any of you about your pro/con stories. Any words of wisdom, advice, etc. Our HOA (I know HOAs suck) will be doing the credit check and referral check for us so we have that covered.

 

We're collecting the deposit upon signing of the contract, 1st month & pet deposit will be collected on move in day. Last month's will be collected in separate payments. We have a RE lawyer handy in case sh!t hits the fan and we gotta get the deadbeats out, etc. Have I missed anything?

[yo mama]

How dependent are you on the rental income to cover the expenses of the rental?

[fingfootball]

Get a co-signer, you can get a lawyer and take them to court but unless they have a job and you know where they are at all times you may not collect any money.

[MrTed46]

What I do is take pictures of the rental property before anyone moves in and have the tenants sign and date the back of them. This way when its time to return the security deposit u have proof if they damaged anything....been burned here before.

 

Also, make sure you deposit their security deposits into a seperate bank account as the law (here in nyc anyway) states that you must return the sec dep with interest minus any damages. been burned here as well.

 

Tenants are tenants and landlords are landlords. Its hard to find a middleground because both parties think they have supreme rights.

[AtomicCEO]

Can you do background checks? At the very least, check references of previous landlords. If they don't have any, beware.

[BiggieFries]

How dependent are you on the rental income to cover the expenses of the rental?

 

For this house, the rent will be paying for the mortgage. We can handle a few months of vacancy and repairs if needed, however.

 

Get a co-signer, you can get a lawyer and take them to court but unless they have a job and you know where they are at all times you may not collect any money.

 

Not sure too many people would be willing to co-sign on a rental agreement but I'll discuss this with our agent. Thanks!

 

 

What I do is take pictures of the rental property before anyone moves in and have the tenants sign and date the back of them. This way when its time to return the security deposit u have proof if they damaged anything....been burned here before.

 

Also, make sure you deposit their security deposits into a seperate bank account as the law (here in nyc anyway) states that you must return the sec dep with interest minus any damages. been burned here as well.

 

Tenants are tenants and landlords are landlords. Its hard to find a middleground because both parties think they have supreme rights.

 

Good info! I'll be sure to keep this in mind as the renters have a big family (4 kids).

 

Can you do background checks? At the very least, check references of previous landlords. If they don't have any, beware.

 

The HOA does the background/credit checks and can actually turn down the applicant in which case I'm out a renter, which blows and why my next place will not have an HOA with draconian rules like this. Should have known better the first time.

 

Thanks for the info all!

[yo mama]

For this house, the rent will be paying for the mortgage. We can handle a few months of vacancy and repairs if needed, however.

Okay, then you're going to be pretty vulnerable to vacancy or non-paying tenants. My suggestions are to: (1) form a single member LLC to own and operate the rental, which will offer you creditor protection in the event there are lawsuits without adding an extra layer of complication to your tax return; and (2) have the LLC internalize the rental income and save up a reserve account and/or aggressively pay down the mortgage when possible; only distribute enough cash to yourself in order pay any income taxes you have to pay in connection with the rental income. In fact, if you can handle paying your added tax liability without making distributions from the LLC, all the better. The faster you get the mortgage paid off: (1) the less vulnerable you are to losing the property do to a bum tenant; (2) the faster you can either start taking cash out; and (3) the faster you can leverage that property to buy a second one. Avoid the temptation to spend the earnings in the early years of your rental endeavor, assuming you're turning a profit.

 

Also, make sure you adequately insure the property and the policy includes providing you the cost of legal fees in the event that you're sued in connection with the property. Lastly, assuming you don't already have one, get yourself a good CPA to handle your income tax returns for now own.

Edited April 22, 2008 by yo mama

[sundaynfl]

I always like to give tenants an incentive to pay rent on time when writing the lease agreement. Rent shall be $1500 per month due on the 1st of each month unless prior arrangements have been made in writing. Following a payment made later than the 1st of the month, rent shall be $1600 per month every month thereafter.

 

They continue to make payments on time, they get a little discount....

[BiggieFries]

Okay, then you're going to be pretty vulnerable to vacancy or non-paying tenants. My suggestions are to: (1) form a single member LLC to own and operate the rental, which will offer you creditor protection in the event there are lawsuits without adding an extra layer of complication to your tax return; and (2) have the LLC internalize the rental income and save up a reserve account and/or aggressively pay down the mortgage when possible; only distribute enough cash to yourself in order pay any income taxes you have to pay in connection with the rental income. In fact, if you can handle paying your added tax liability without making distributions from the LLC, all the better. The faster you get the mortgage paid off: (1) the less vulnerable you are to losing the property do to a bum tenant; (2) the faster you can either start taking cash out; and (3) the faster you can leverage that property to buy a second one. Avoid the temptation to spend the earnings in the early years of your rental endeavor, assuming you're turning a profit.

 

Also, make sure you adequately insure the property and the policy includes providing you the cost of legal fees in the event that you're sued in connection with the property. Lastly, assuming you don't already have one, get yourself a good CPA to handle your income tax returns for now own.

 

Yo, how would the LLC then "buy" the property from me? I know I can't just "give" it to the LLC? Don't I have to sell it to the LLC for fair market price? I'd just basically be taking out another mortgage in the name of the LLC correct?

[Footballjoe]

I did Home Inspections for 7 years for a Government Program that assisted low income families. I inspected the units belonging to private owners prior to the tenant moving in and every year thereafter. I cannot begin to tell you the nightmares I have seen. From a completely remodeled unit to a dump in 12 months. Most of the tenants were good. There was a nice per cent that were very good but a portion that could have cared less and would trash the unit. I would always tell the owner of the property to pay a visit to where their prospective tenant is currently living now to try to determine what type of house keeper they are. Also, don't wait for a year to go by until you check the unit. Drop by regular until you can determine what type of tenant you have. A good tenant would not mind this all but will appreciate a landlord that cares.

[yo mama]

Yo, how would the LLC then "buy" the property from me? I know I can't just "give" it to the LLC? Don't I have to sell it to the LLC for fair market price? I'd just basically be taking out another mortgage in the name of the LLC correct?

Nope. When forming the LLC you would fund it with the rental property and receive in exchange 100% of the ownership interests in the LLC. This "capital contribution" is a non-taxable event. For federal income tax purposes, the LLC can elect to be treated as a partnership, corporation, or (assuming you're the only owner) a "disregarded entity." So going forward, you can either have the LLC pay its own taxes as a separate taxpayer (generally ill-advised due to the double-layer of tax involved when you actually want to get cash out), or you would report your share of the LLCs income on your personal income tax return sort of like how you would have if you kept the property in your own name. (This is where having a CPA doing your return is very helpful).

 

While you are certainly free to sell the property to an LLC (or other entity) that would (in most cases) be a taxable event. But in your situation making a capital contribution to a new LLC would likely be the most efficient way to get the property into an entity that provides you with some creditor protection. In most states, creditors will only be able to get to the LLCs assets - NOT your other stuff. On the other hand, if you continued to hold the rental property in your individual name, most everything you own is fair game to a successful plaintiff in connection with the rental property.

 

Your overall income tax burden should be about the same either way. The only real added cost is for the CPA to prepare the LLCs tax return (if its treated as a partnership or corporation), and the fact that you must respect the formalities of the LLC under state law. (i.e., you can't use it as your personal piggy bank. It needs to have a separate bank account, leases, insurance policies, property tax records, etc. should be in the name of the LLC, and cash flowing in and out between you and the LLC should be documented). Since you can be the manager of the LLC you'll still have total control over the operations of the rental property. But the opportunity cost for the creditor protection is the extra formalities. (Again, a good CPA is very valuable in helping you respect those formalities).

[BiggieFries]

Nope. When forming the LLC you would fund it with the rental property and receive in exchange 100% of the ownership interests in the LLC. This "capital contribution" is a non-taxable event. For federal income tax purposes, the LLC can elect to be treated as a partnership, corporation, or (assuming you're the only owner) a "disregarded entity." So going forward, you can either have the LLC pay its own taxes as a separate taxpayer (generally ill-advised due to the double-layer of tax involved when you actually want to get cash out), or you would report your share of the LLCs income on your personal income tax return sort of like how you would have if you kept the property in your own name. (This is where having a CPA doing your return is very helpful).

 

While you are certainly free to sell the property to an LLC (or other entity) that would (in most cases) be a taxable event. But in your situation making a capital contribution to a new LLC would likely be the most efficient way to get the property into an entity that provides you with some creditor protection. In most states, creditors will only be able to get to the LLCs assets - NOT your other stuff. On the other hand, if you continued to hold the rental property in your individual name, most everything you own is fair game to a successful plaintiff in connection with the rental property.

 

Your overall income tax burden should be about the same either way. The only real added cost is for the CPA to prepare the LLCs tax return (if its treated as a partnership or corporation), and the fact that you must respect the formalities of the LLC under state law. (i.e., you can't use it as your personal piggy bank. It needs to have a separate bank account, leases, insurance policies, property tax records, etc. should be in the name of the LLC, and cash flowing in and out between you and the LLC should be documented). Since you can be the manager of the LLC you'll still have total control over the operations of the rental property. But the opportunity cost for the creditor protection is the extra formalities. (Again, a good CPA is very valuable in helping you respect those formalities).

 

 

So what happens to the mortgage that is currently in my and my wife's names? Do we need to refinance it once possession transfers to the LLC?

[yo mama]

 

So what happens to the mortgage that is currently in my and my wife's names? Do we need to refinance it once possession transfers to the LLC?

That will depend on the mortgage document itself. Most lenders will allow you to simply "assign" the mortgage to the LLC that you own along with the property itsefl, assuming you remain personally liable on the mortgage. Some will let you assign the mortgage even without a personal guarantee, assuming the mortgage is secured by the property and its value is sufficiently higher than the mortgage debt. Either way, you absolutely have to check with your lender before you transfer the property. But every other term of the mortgage should stay the same: so no, you don't need to (or at least shouldn't have to) do a formal refinancing. Holding rental real estate in an LLC is very common, so your lender should have established procedures and paper work to help accommodate the assignment of the mortgage, assuming the terms of the mortgage allow you do so do.

 

Ideally, you would have formed the LLC and the LLC would have been the purchaser of the rental property. But its no biggie (pun intended).

Edited April 22, 2008 by yo mama

[Kid Cid]

I want to kill my landlord. C-I-L-L my landlord.