Now you have the property. The next step is to decide if you want to manage the property yourself or hire a property management company. If you want to manage the property yourself, you should get training from your local apartment association. They have classes to help you. Also, it would be best if you read about property management. Don’t just jump in and start being a landlord and not know what you are getting yourself into and what demands/requirements are needed.
If you decide, you would like to get property management, and they will take 5-10% leasing commission of annual rents. I suggest that you go to http://www.irem.org and find a property management company in your area. Once you have selected a group to call, ask them the following questions (or you can go to their website and find answers to the questions below):
o How long have you been in business?
o What professional designations do you hold?
o What continuing education programs do you offer your employees?
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o What software do you use for managing property and why?
o Can you get a sample management agreement to review?
o What costs are included in the agreement, and what is extra?
o How many employees?
o Who will be the main contact? How long have they been with the company?
o What cost-saving techniques do you use?
Once you find a property management company, sign them for a 120-day contract to see how they perform. Assign maintenance issue on one of three levels of importance:
1. things that have to be done
2. things that should be done
3. those things that would be nice to have done
Once you find property management, have the both of you brainstorm and ask figure out, “If someone were to buy your property today, what changes do we think they would make in the first 60 days”?
As soon as you control the property, try to get a Cost Segregation Study.
The IRS has a ruling that allows commercial property owners to increase accelerated depreciation allowed in a tax year. These savings extend back to property acquired after 1986, and they apply to new or future construction. They also extend to existing buildings under renovation, expansion, and leasehold improvements, as well as to property about to be acquired. It can also be used for financial accounting, insurance, and property tax purposes. The primary goal of a cost segregation study is to identify all construction-related costs that qualify for accelerated income tax depreciation. Cost segregation is not a tax shelter, and it is not tax evasion.
To get the benefits, you must get a “study.”
A cost-segregation study analyzes taxes and costs incurred to acquire, build or renovate commercial real estate. Experts/CPAs conduct these services. They break down the cost for the accelerated income-tax schedules. To qualify for a cost segregation study, property-owners must be taxpayers or must intend to pay taxes. They must also operate as a for-profit entity.
Study costs can range from $10,000 to $100,000, depending on the property’s size and complexity. In many cases, however, the benefits outweigh the fees.
These benefits of a Cost Segregation Study can free up money used for other investments, paying down debt, or making capital improvements. If you are interested in this study, contact me, and I will put you in touch with a credible company that can analyze your situation.
o Considerable return on an investment property that does not need to be insured.
o Increased tax deductions for depreciation and reduces taxable income.
o Opportunity to correct misclassified assets and claim “catch-up” tax deductions.
o Ability to achieve faster building and acquisition cost write-offs.
o Reduction in insurance costs by identifying the components of the property that do not need to be insured.
o, Determine personal property versus real property for write-off versus capitalization before construction. This allows you to write off these items as opposed to capitalizing the assets. This can provide you with huge tax benefits.
o Defers taxes on capital gain amounts until the property is sold.
o Reduces real estate property taxes.
o Reduces federal income tax and increases depreciation.
Running the show
Owning and operating an apartment is no easy task. There are a lot of procedures for analyzing the property’s functionality. When investing in apartments, your priority may be one of the three: cash flow, appreciation, or tax benefits. The great thing about apartments is that you can have “forced appreciation” by making changes to the property. Having an apartment is owning a business. So with any business, a way to increase revenue is to decrease expenses and find more ways to earn more income. I have included some tips to benefit you as you attempt to maximize your investment in the building.
Expenses you can expect while owning an apartment:
o Legal services
o Tax preparation
o Office equipment and supplies
o Property management
o Credit checks
o City business tax
o Property tax
o Capital improvements (big expenses)
o Eviction services
Having proper management in place is key to running a successful apartment property. Depending on your level of time, experience, and energy, having a property management company oversee the operations may be ideal, especially if the complex is big. Smaller apartments tend to be managed by the owner (along with an on-site manager). Regardless of who does the actual work on the property, I have included a variety of tips to get the maximum return out of your investment.
Fair Housing Rules prohibit discrimination on various things from race, gender, age, disabilities (including mental and physical), marital status, sexual orientation, etc. Anybody who deals with potential tenants must follow fair housing laws. This includes owners and property managers.
Be consistent when dealing with potential tenants. Set the same standards across the board, such as giving someone a pass, lowering their security payment, or what you charge for late rent compared to other tenants.
Your rental/lease agreement sets the tone with your tenants. It is best to obtain a contract that a lawyer has written out because it is a legal document. The rental/lease agreement should have the names of all adult tenants, and they should all sign the rental/lease agreement. This makes each tenant legally responsible for all the terms and conditions. Should someone bailout without paying rent, or someone violates a term, you can cancel their agreement and have them move.
Your agreement should clearly specify that the rental unit is the residence of only the tenants who have signed the lease and their minor children. This will probably not stop people from moving in without your screening process, but what it will do, is keep people aware and cautious. They will know if you found out folks lived there without your screening, they could be asked to move. Every rental document should state whether it is a rental agreement (month to month) or a fixed-term lease (usually yearly).
Your lease or rental agreement should specify the amount of rent, when it is due, where to send it, and how it’s to be paid (check, cashier check, etc.). For late fees, have when it is considered late and the amount of the fee. Also, have a fee for bounced checks.
The return of security deposits can generate problems. To avoid mistakes, your agreement should have the dollar amount of the security deposit. In California, the maximum deposit allowed on an unfurnished property is not more than two months’ rent. The maximum deposit allowed on a furnished property is not more than three months’ rent. You may use the deposit for possible repairs. The contract with the tenant should state that they may not use it to apply for their last month’s rent. When they do move, you have to return their deposit 21 days after moving (in California). I they decide to take money out of their deposit when they leave, you will need a report showing the deductions on why.