Landlord / Tenant

Landlords: IRS says send a 1099 to vendors

Hat tip to Scottsdale colleague Dru Bloomfield: the IRS is changing their rules for landlords. Not a huge change, but one you absolutely want to know about ahead of time. It always stinks to have to go back and create a paper trail for the IRS!



New IRS 1099 Requirements for Landlords

Starting in 2011, there is a new tax requirements for landlords. All landlords who receive $600 or more in rent for the year must send a 1099 to all service providers that the landlord paid $600 or more during the year, such as plumbers, carpenters, yard services, and repair people.

The new requirement applies to owners of both residential and commercial property. Prior to 2011, this requirement had only applied to those involved in full-time property management, but now the requirement covers all types of landlords. Landlords will need to gather federal tax ID numbers from service providers in order to file the 1099s. Failure to file the 1099s with the IRS can result in fines of $50 per 1099 not filed with the IRS. In 2012, these requirements will expand to cover providers of good to landlords.

You’ll want to ask for a completed W-9 from each of your vendors (when they do the work!) so you can issue the 1099 at the end of the year.

Rental scams still alive and well

We’ve been looking for a small 1 bedroom condo in downtown Phoenix for a very longtime customer of ours. Something in the range of $600.

I found an ad on Craigslist that advertised a two-bedroom condo at the Copper Square condos for $588 per month. Copper Square is one of the premiere upscale hi-rise condo communities in Phoenix, and other 2 bedrooms there go for $1800-$2200 per month.

It sounded too good to be true.  I emailed the landlord through Craiglist with this:

$588/mo for a 2bedroom at Copper Square, seriously? What’s the catch? I’m seeking a studio or 1 bedroom for that price, need to move in Dec 15 to Jan 10. Must have parking for 1 car and must accept cats.  Please advise if you have anything that suits.

The reply…

I've moved to United Kingdom with my job and decided to rent it because the rent is very expensive here.The price is so low because I'm here and is very hard to find a tenant.I can rent you the condo for min. 1 month and max. 6 years(or more).I really want to find a good and responsible tenant for it, and I hope that you can send me some personal information about yourself.The rent for the whole condo for 1 month is $600 including all utilities(water,electricity, internet, cable, parking , air conditioning, fireplace, dishwasher, garbage) and the security deposit is $600(you'll get the deposit back at your departure-or you can use it to pay your last month of rent) and I want to receive the money monthly in my bank account. You can move in the condo in the same day when you receive the keys. The only problem is that I`m the only person who has the keys and I have nobody in United States that could show you the condo. In order to check it, see if you like it(I'm sure that you'll love it), you need to receive the keys and the contract.
If you want to rent the condo, please e-mail me back and I will explain you how the payment and shipping will take place!
Here are a few pictures:

Tips that this is a scam

  • spelling & punctuation errors
  • price not as advertised
  • landlord is out of the country and no one else can show it to me
  • tenant must sign a contract and send money before s/he can see the condo
  • condo unit number is not mentioned
  • emailer asks for personal information about tenant

Landlord gave me her name in the email, “Dawson”.  I checked the tax records. No Dawson owns anything at Summit at Copper Square.

Grrrr!  I hate scammers. They all should die. It’s not bad enough we’re all dealing with a terrible economy. Some people have to make it worse by trying to scam people out of the little money we have left. Die scammers, die!

It’s a jungle out there. Be wary, dear readers.

Thinking about being a landlord?

If you’re thinking about becoming a landlord, The Landlord Protection Agency website is a great resource for you. Besides offering a chat forum, advice and free legal forms, they even have a funny Excuse of The Day feature where website members post their tenants’ most ridiculous excuses for not paying the rent on time.


RentingAuthority.com is another site that was recommended to me by a friend who’s used it over the years to run credit checks on prospective tenants.


Disclaimer: Both LPA.com and RentingAuthority.com offer free legal forms. I don’t and can’t vouch for the accuracy or legality of their forms. Please consult with an attorney or Realtor in your own state.

Landlords, Need Help?

Landlord:  “Why didn’t you pay the rent on time this month?”




Tenant 1: We all had swine flu and we like you so much we didn’t want to give it to you so we didn’t mail the check.




Tenant 2: I don’t have time for this now. We’re all going to see the new Star Trek movie. I’ll worry about the rent another time.




Tenant 3: My dog at it.



Sometimes tenants’ excuses for not paying the rent on time are downright funny. In the way of the internet, I forget how I found the site these quotes came from, but it’s worth looking and bookmarking.


Beyond listing goofy late-rent excuses, the Landlord Protection Agency website can be a great resource for landlords, even those who have ideal tenants. The LPA site offer free forms like a Late Notice, a Key Receipt and even a Security Deposit Refund Receipt.


If you’re a landlord or thinking of becoming one, I recommend you visit this site. Disclaimer: if using forms found online, check with your attorney to make sure the language is valid in your state.

Are Investors Driving the Market?

For four months running, nearly 20% of properties sold in metro Phoenix have been sold to investors.  Is that enough to drive the market? Twenty percent seems like a significant minority but I suppose you could argue the question seven ways till Sunday.


It’s commonly accepted wisdom that “investors created the housing mess by buying homes on speculation.”  True or not? Another question we could argue till we run out of breath. Or beer.


But it's a statistical truth that the number of investor sales in Spring 2009 (20%) exceeded the number of investor sales in Spring 2005 (about 16%). Spring 2005 is generally accepted as the beginning of the boom in metro Phoenix real estate.


investor sales per month as percent of market (click to enlarge, use “back” button to return)


The Cromford Report’s definition of “investor sales” is based on the "intended use" filed with the county recorder. Short of reading people’s minds, that’s the best number you can get.


What’s interesting to me is that, unless investors are lying en masse, 80% of homes sold this past spring went to folks moving into the home.  That’s a lot of people taking a gamble on becoming a homeowner during the worst down market since the 1930’s. Maybe the combination of historically low interest rates and affordable homes really has gotten people off the fence.





The National Association of Realtors, 2009 Network Television Commercial, courtesy of YouTube


Landlords, Do You Owe Rent Tax?

The recession has hit everybody in their wallets, even city governments. The Arizona Republic reported recently that the Valley's cities are getting tougher in tracking down landlords who aren't paying the rental tax they owe the city.


Didn't even know that Arizona landlords pay rent tax? You're not alone. The Arizona Republic reports,


"Laws that vary by city make tax requirements confusing to novices. In Chandler, Tempe and Glendale, an owner's first rental is subject to tax. But in Scottsdale, Phoenix and Gilbert you can own two rentals in Arizona without paying a tax but must pay on the third one."


State law requires landlords to register their rental properties with the tax assesor. You can reach the Maricopa County Tax Assesor online. Use this link to register your rental property online. Use this link to download a printable form you can mail or fax to the Assesor.


While the state government sets the requirements that landlords register rental properties, it's the city governemnts that are responsible for enforcement. Chandler is among several Valley cities that is actively conducting audits of property records to find unreported rental properties.


Here's a few methods cities use to find landlords who "forget" to pay their rent tax. City employees can cross-check the names on utility bills against the owner's names recorded at the County Recorder's office. Interns can conduct research on the property transfer records. The City of Mesa even goes so far as to question relatives living in a family member's home and rules that if you pay rent, the owner is a landlord and liable to the rent tax.


What are the penalties for not paying rent tax when it's owed? Chandler gets really tough, filing liens against the property when they find a landlord flouting the law. Tempe allows a 10-day grace period but after that the errant landlord is liable to a $10,000 fine. The City of Phoenix plans to send employees to Chandler to learn new get-tough methods.


My research into the MLS rental listings show that rent tax is usually about 1% to 2% of the rent collected. Most landlords add it on to the monthly rent amount and, in effect, make their tenant pay the tax.


However you arrange to have rent tax paid landlords, don't neglect to register your rental property with the state! Check out this online publication from the Maricopa County Assessor for more information on the registration requirements and penalties for non-registration of your rental property.

Building Real Wealth

For many fist time buyers, the next 6 to 9 months could be the best possible time to buy a home in the past 25 years or so. Not for everyone. But maybe for you.


If you're pretty sure your job is secure, can emotionally handle the potential of a falling home value for a year or two before you start building equity, can afford to make a downpayment of at least 3.5% and still have some savings left over, and most important, if you plan to own the home for 8 to 10 years plus....


There are tons of homes to choose from, prices are as low as they've been in 3 to 5 years or more, and interest rates have dropped into the mid- to high-5's....


For many first time homeowners, now might be the perfect time to buy your first home.


It might also be the perfect time to begin building some real wealth into your future golden years. See my earlier post about current pricing for a typical starter home. Don't want to click over and read a whole other post? In that case, let's start with some assumptions:


A starter home is 3-4 bedrooms, 2 baths, 1400-1600 square feet with no pool and a 2 car garage. Depending on location within the Valley, this home will cost you about $85,000 to $130,000. Willing to do a little true fix-up work? You can get it for less.


Let's further assume a purchase price of $110,000 with 3.5% down payment, $33 per month in HOA dues, $38 per month in homeowners' insurance premiums, and $100 per month in property taxes, and the seller will pay your closing costs up to 3% of the total price. Your total cash outlay is $3,850 and your monthly payment is $795.


"Hey! That's less than my rent," you're probably saying. Exactly!


But let's say you don't think you can picture yourself living in that starter home for 10 years. You're young. You might get a job transfer or promotion. You might fall in love and get married, have kids and need a bigger house. Here's where the wealth building comes in.


Live in your new house for a couple of 3 to 5 years. Then move on and rent it out. As the years pass, you'll continue making mortgage payments (which will probably be mostly or completely covered by the tenant's rent), paying down the mortgage, and eventually the house will begin paying you back.


Rent rates for this sort of house today are about $850 to $1100 per month, depending on age, location, condition and so forth. Over the long haul, rents will increase. That's just the nature of inflationary pressures on the cost of living. "Average" inflation is about 2% to 4% per year. In 30 years, given an average inflationary rate of about 3%, your tenant will likely be sending you about $2,000 per month. Your living expenses will have increased likewise, but having money coming in every month in addition to your salary is nothing to sneeze at.


Thirty years from now, you'll have paid off the mortgage and all that rent money your tenant pays you will become just another source of income. Who knows? If you can budget carefully over the years and buy a 2nd (or even a 3rd or 4th) investment home...  maybe that tenant "income" will be enough to help fund your early retirement.


Think this sounds far fetched? It's what "Rich Dad, Poor Dad" financial guru Robert Kiyosaki has been preaching for years.  Is building real wealth easy? Of course not. Nothing worth attaining is easy. There are a lot of variables in being a landlord. It's not something you should do without serious thought and planning. But it's not as wildly out of the realm of possibility as you might think.


This scenario is attainable. And you could start down that road to real wealth just by looking at a few starter homes for sale this month.


Contemplating Self-Management of your Rentals? Pt. 3: Rents & Deposits

In this third installment, we'll be looking at rental fees & deposits.  Renting a home is very similar to selling in that there is a market that influences what you can charge for a home.  As in selling, the market for your rental will be largely impacted by location, & currently available rentals. 

The better the location of your rental the more you can charge.  For instance, a 3 bedroom, 2 bath home near Metro Center is not going to secure the same rent that an equally equipped 3 bedroom, 2 bath home near Arrowhead Town Centre would.  And that same 3 bedroom, 2 bath home near Arrowhead, is not going to secure the same rent that an equally equipped home near Desert Ridge could expect.  So, location has a lot to do with what you will be able to reasonably charge. 

The other factor in determining the monthly rent is the number of other rentals currently available in the same area.  Again, this parallels home sales in regards to supply and demand.  If there are 5 apartment buildings with availability, and 25 rental homes available within a 3 mile radius all with similar features... 3 bedrooms/2 baths, then you might have to wait a little longer to find a tenant than if there were only 2 apartment buildings (near capacity) and only 10 rental homes. 

Of course, there are people who will not want the hassles of renting a home even though it means they might have a 2 car garage, and private backyard, where others might not even consider an apartment because of the common walls & smaller living area.  You will need to research the area where your property is located and determine a fair rent.  Be sure to qualify your prospective tenants before they sign the contract, and be sure you are comfortable with them.  You will be dealing with them again when it's time for them to move out... whether it's their choice or not. 

Once you have your monthly rental fee determined, then you'll need to decide what deposits you will charge.  According to Arizona law, the amount of the deposits cannot be more than 1.5 times the monthly rent.  So, if your monthly rent is $1,000.00, then you may not charge more than $1,500 in deposits no matter how many deposits you create.  The total of deposits must be no more than 1.5 times the monthly rent.  With that being said, you can charge a deposit for almost anything you want.  The most common are:  security deposit, cleaning deposit, & pet deposit, but you might request a deposit for yard maintenance, etc.  The amount of the deposits can vary, but in the end, the grand total of all the deposits can be no more than 1.5 times the monthly rent of the unit (whether it's a house or an apartment). 

Finally, when determining what to charge a deposit for, it's wise to remember that whatever you ask the tenant to maintain on his/her own, might have a much larger cost in the end if it's not kept up than if you had maintained the responsibility of it yourself.  For example, the rental you have includes a pool.  If you have the tenant maintain the pool, you might get off cheaper (if they actually maintain the pool).  However, if the tenant becomes irresponsible or unable to maintain the cost of the pool upkeep, you may have a much larger expense on your hands when the tenants move out or realize that they were supposed to continue treating the pool even during the off-season, than what it would have cost for you to hire a pool service.  

In the next installment, we'll look at the unfortunate case of a non-paying tenant.  If you have experience with this and would like to share, please do!

More on Selling your Rental Property

It's amazing every time I head out with buyers to look at properties, how many rental properties are on the market and what condition they are in!  This last weekend proved yet another adventure in house shopping as well as an eye-opener to what some seller's are asking considering the condition of their properties and the (lack of) ease in showing it.

Here's a few more suggestions when selling a rental property:

1. Make sure the tentants will allow buyer's to see all the rooms.  We looked at two houses this weekend in which a teenager occupied the room and had locked the door (and no-one had a key), so we couldn't even see inside that particular room.  You can't really expect buyers to purchase a property without seeing it (unless they are other investors who don't really care what the property looks like).

2. If you have a pool that you're not willing to take care of, at least drain it before showing the property.  We saw three houses with pool that ranged from murky to nearly black.  You would think pools would be a great selling point with summer coming along, but if they pool looks contaminated with bacteria and algae, you can bet those buyers are going to look at buying a different property!

3. The term "fenced pool" in my opinion, usually refers to a pool that has a child-proof, self-locking fence around it.  We saw a house this weekend, that listed a "fenced pool", however, when we reached the backyard, we laughed that the seller decided that they could tack up chicken wire around the pool, and list it as "fenced".  Yes, I did say chicken wire!  I was amazed that the Real Estate Agent listing the house would also put in the MLS that this was a fenced pool! 

Sellers and Realtors, it would do you good to be honest about the condition of the properties when listing them in the MLS!  Nothing turns a buyer off more than an exalted description of a run-down property.  Right off the bat, the buyers are reluctant to do business with you, because you come off as not honest.  If buyers know they are getting a fixer-upper, they are much more likely to take a serious look at the property, rather than discounting it due to their perception of false advertising by the seller and Realtor.  �

Contemplating Self-Management of your Rentals? Pt. 2: Finding Tenants

As a self-managing landlord you have the responsibility of locating your own tenants, and the more credible they are, the better.  So, how do you go about locating such tenants?   

  1. You might want to start with referrals from your closest friends/relatives.  Sometimes they generate the best leads.  However, you also have to consider your ability to manage your property when you personally know the tenants.  If you have any reluctancy, you may find yourself more comfortable limiting your tenants to other sources.

  2. Advertise through the internet, newspaper, and/or via a sign at the property.

  3. Possibly have an Open House to draw prospective tenants in.


Once you've located possible tenants, you need to qualify them or determine their credibility.  Nothing's worse than placing tenants only to find out a month or 2 down the line that they were never capable of making the payment in the first place.  So now that you have some possible tenants, you need to know how to qualify their ability to pay monthly rent.

  1. Get the full name, social security number, and birthdate of the financially responsible tenants. 

  2. Previous residential address and payment history 

  3. Employment history including phone numbers for supervisors

  4. Enlist the services of a credit screening agency such as TransUnion, and make sure you have the prospect sign a disclosure allowing you to check their credit.

  5. Request credit references from the tenant's electricity, water, or phone service providers 

  6. Request banking references

  7. Request personal references


Helpful Resources:

Many people have found these books to be handy reference tools for managing their own properties:

Next time, I'll take a look at rents & deposits.

Contemplating Self-Management of your Rentals? PART 1

As more and more properties are listed for sale, homeowners are finding it increasingly difficult to sell.  When a home doesn't seem to be selling, sometimes the owner contemplates renting out the home instead.  Perhaps you have toyed with the idea of renting out your place in case your home doesn't sell just to make sure you don't lose the new home you're having built.  If you have thought about renting out your home, there are many things to consider.  The most important question to answer first is:  Do I want to manage the property myself, or have a property management company do it? 

If you decide to manage your property yourself, you'll want to have answers regarding the following:  a) how are you going to locate credible tenants, b) what term of lease agreement are you willing to accept (3 month, 6 month, 12 months?), c) will you allow pets, and if so, will there be a pet deposit? (have you considered any other deposits... security, cleaning, etc.), d) what utilities, if any, are going to be included in the rent, e) who will be responsible for the yard (is an HOA involved that will fine you for allowing it to get overgrown), f) are you willing to purchase appliances (washer/dryer/refrigerator) for the tenant if necessary, g) what is the going-rate for rentals in your area (a recent report stated the average apartment now rents for $800/month), h) how will you deal with non-payment or late payments? i) do you know the necessary steps to serve an eviction notice, and j) have you registered your property as a rental property with the county assessor?

Recently, I was asked for information on serving an eviction notice, and it dawned on me that due to the tremendous amount of homes for sale right now, many sellers are considering renting their property instead.  So, over the next couple of weeks, I will be posting several additional articles regarding different aspects of self-managing your property.  As you read up on these articles, you should be able to determine whether or not self-management is for you. 

If you have any personal experience with self-management of rental properties, feel free to comment with any other information/tips you believe should be considered in this series of posts.

Rent vs Buy

Even though the market has been slow and home prices are off 10 - 20% from their market highs, it still costs less each month to rent than it does to buy a similar home. This has some buyers asking whether they should consider renting instead.

I think the majority of the "renting advantages" are seen in short-term scenarios.. less than two years.

Once you're in a home for a couple of years, you've probably broken even in most rent vs buy scenarios. And the longer you stay in the home, the more advantageous buying becomes.

Imagine renting a place because the monthly payment is lower. Well, prices tend to increase each year, making it even harder to justify buying, so you continue to rent. 30 years later, you could have had the home paid off, but instead you're paying a much higher monthly rent. That would be depressing for anyone.

I recommend taking advantage of today's "buyer's market", and finding a good home in a good neighborhood before prices start their upward climb once again.

-Chris

Rental Properties in College Towns

I read an article a few weeks ago regarding a extreme discrepancies between available college housing in comparison to the amount of students attending that college each year. I apologize that I cannot completely cite my source, as I cannot seem to locate the article at the moment. I believe it was in "Money" magazine for November, 2006.
In any case, the article noted that one of the best places to invest in rental properties is the college housing market, and specifically pointed out ASU as one of the worst locations for having enough housing for the students.
What are your thoughts on investing in rental properties in College markets? Can rents be higher in College towns than in the suburbs? Are vacancies lower because there is always a demand? Are you concerned about how college students will take care of (or not) your property?
I have some thoughts on this, and would love to hear yours!