Rentec Direct - Property Management Software

The IRS recently did an audit of previous years tax returns and found out that landlords are cheating their taxes, whether they know it or not.  This audit was conducted because in August 2008, the Government Accountability Office stated that “at least 53 percent of individual taxpayers with rental real estate activity for Tax Year 2001 misreported their rental real estate activity, resulting in an estimated $12.4 billion of net misreported income.”

The Treasury Inspector General for Tax Administration issued a report in December 2010 recommending increased scrutiny of tax returns with rental real estate activity, estimating that the change could recover over $27 million in lost revenue over 5 years.

No matter how honest you are on your taxes, owning rental property is an audit trigger since these reports were issued.  Another area of high scrutiny by the IRS this year is landlords who are claiming to be a "real estate professional", which allows one to take the maximum passive activity losses.  This type of classification requires more than 50% of a landlord's working hours and 750 or more hours each year materially participating in real estate as developers, brokers, landlords or the like.  Look for the IRS to begin verifying these hours.

The federal government is starving, and they are looking for new income sources anywhere they can.  Increasing IRS audits has proven to be highly lucrative for the IRS in the past, and this year and future years it's extremely likely they will continue to expand the scope of what they are auditing.  If you do your taxes yourself and it doesn't appear to be crystal clear, I'd recommend consulting an experienced CPA.  If your CPA seems OK with "grey areas", be very cautious.  Don't risk it, audits are expensive even if you've done everything right.

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Nathan is a member of Rentec Direct who provides property management software, tenant ach payment processing, and tenant screening for property managers and landlords nationwide.

California has passed a bill (SB 150) now disallows HOA's from changing the rules mid-game on a landlord by restricting rentals within the HOA.  This bill took effect January 1st.

An association which previously has no restrictions on rentals, that attempts to amend the HOA to then restrict the amount or percentage of rentals is now prohibited from doing so.  Such a change in bylaws will have no impact on existing owners unless the existing owners specifically provide their authorization.  The existing owner by default will get grandfathered into the pre-restriction rules.

It however does not protect the next owner of a home in the same association.  If a home is sold, the new HOA rules related to rentals will apply to the new owner and the previous owner must disclose the fact of the restrictions.

I have mixed feeling about this.  My first impression (as a Landlord) makes me think this is great!  If I bought a property in an association as an investment property, and later the association changed the rules which prevented me from renting my investment property that could be catestrophic to my cash flow.  On the other hand, I prefer smaller government and less government interference in my affairs.  An association is a mini-government in itself, and I generally trend towards wanting decisions to be at the smallest and most local form of government possible.  In this particular topic, I think property rights might trump my preference for local government though.

Thoughts?

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Nathan is a member of Rentec Direct who provides property management software, tenant ach payment processing, and tenant screening for property managers and landlords nationwide.

I was pleased to read about Wisconsin proposing new rules which are actually in favor of landlords.  It's an increasing problem across the country where cities and counties are passing laws which could harm the very fabric that landlords rely upon to run their business.

Some examples of laws some localities have passed or plan to pass:

1. Prohibits or limits the landlord from obtaining or using various types of information about a tenant or prospective tenant, such as household income, occupation, court records, rental history, and credit information;
2. Limits how far back in time a prospective tenant’s credit information, conviction record, or previous housing may be considered by the landlord; or
3. Prohibits the landlord from showing a rental property to a prospective tenant, or from entering into a rental agreement for a rental property with a prospective tenant, while the current tenant is living there.

These laws proposed in Wisconsin prevents cities, towns, villages and counties within the state from passing their own local ordinances which restrict landlords in the above manners.

Obviously the local governments are attempting to protect tenants; however, it's entirely at the cost of landlords being able to run a business.  Somewhat akin to taking away the ability of a car buyer to be allowed to read reviews on the car before purchasing it.  Requiring them to purchase the car sight unseen, thereby just guessing if it's going to work well for them.

Taking away the very necessary screening tools that landlords need to rely on is a very very bad idea IMHO.  I hope these pro-landlord laws are a trend that continues and is adopted by more states.  I'm not thrilled about my city changing the rules mid-stream on me or my clients which prevent them from being able to run their business effectively.

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Nathan is a member of Rentec Direct who provides rental software, tenant ach payment processing, and tenant screening for property managers and landlords nationwide.

To a landlord or property manager, vacancies are generally the worst possible thing since a vacancy is catastrophic to cash flow.  It’s important that when a property becomes vacant the term until the next tenant moving in is as short as possible.

Aggregating information from many landlords, I’ve put together a solid list of tips which works well for most property managers.

Start Early – Some markets handle this better than others; however, when you get your 30 day notice from the existing tenant that is the time to start thinking about marketing your soon to be vacant home.  Write (or refresh) your classified ad, make sure you have up to date pictures, and begin your online marketing efforts.  If you don’t mind getting calls early to create a list or applicants, go ahead and publish your listings as soon as 30 days before it is available.

Get the Word Out – You want as many potential renters seeing your listing as possible.  Be sure to use as many possible advertising methods as you can to get the widest audience.  Here are examples of solutions that always work for landlords and property managers alike:

• Craigslist – It’s free to list and is often one of the most productive places to list rentals available.  Be sure your listing stands out by creating stunning craigslist property listings right from your property management software or other solution like postlets.
• Rental Search Sites – Some popular real-estate sites now accept rental listings.  Sites such as Zillow, Trulia, Hotpads, and dozens others.  These sites are often one of the first places tenants will be looking for rentals as they offer comparables, and nice graphical map displays which help tenants find homes faster.  Be sure your listings are up there or you’re losing out.  You can either post these manually on each site which is time consuming, or ideally your property management software will automatically post your listings to all of them for you.
• Conventional Sources - Don’t forget about conventional sources like the newspaper classifieds and putting a For Rent sign in a visible location from the street on the property.  Also be sure to tell your friends and colleagues.

Be Honest – Is it an older house, then don’t list it as a “newer home” or “like new”, and likewise if parking is poor don’t highlight the “great on-street parking”.  The more honest and accurate your ad is the more qualified applicants you are going to receive and you won’t be wasting time processing applications, showing the property, and fielding phone calls for tenants who are turned off by a misleading fact when they visit the property.  Your time is much better spent focused on the tenants who are looking for exactly what you have available.  Lots of current pictures available for tenants to peruse online will help you out a lot.

Provide Your Criteria in the Listing – If you require credit or criminal background checks, put that in the listing.  That alone will eliminate anyone who feels they may not pass a credit or criminal scan thereby saving you time, money, and hassle.  Be sure not to put anything discriminating in the ad however as that can land a landlord in a bucket of trouble.

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The author is a founder and user of Rentec Direct.  Rentec Direct provides property management software that includes ach for landlords and tenant screening.

Earlier this year, a bill named H.R. 5297: Small Business Jobs Act of 2010 amended tax reporting rules for landlords.  Section 2101 establishes that, “a person receiving rental income from real estate shall be considered to be engaged in a trade or business of renting property”.  Previously unincorporated landlords were not considered a “business” and therefore complicated tax reporting rules that generally only applied to corporations did not apply; however now they do!

While this bill expands government (the IRS specifically) and increases administrative costs to taxpayers to the tune of 3.3 billion dollars per year, its stated intent was to help small businesses.  Unfortunately landlords have got caught in a political crossfire and now have a significant new tax reporting burden.

Here’s how to comply.  This law takes effect for all payments made after December 31, 2010.  Be prepared by following these steps.

1. Before hiring anyone who may bill for services greater than $600 during the year for their service, have them fill out and provide you with a W9 form.  Do not do business with them until they return the form otherwise the IRS has heavy new penalties they will be imposing next year.  Retain these forms, or best yet, scan and upload them to your file library for safe keeping.

2. Retain complete records of all expenses from each service provider (vendor).  You are required for 2011 taxes to file a 1099 for any vendor whom you have paid greater than $600 through the year.  The easiest way to maintain these records is with good property management software.  With Rentec Direct you simply go to the Properties tab, and click Post Expense.

3. Prior to January 31, 2012 you are required to send a 1099-MISC to the vendor, and by February 28th a copy must be sent to the IRS and State.  This is made easy with Rentec Direct’s 1099 assistance.  During January 2012 provided all vendor expenses were entered throughout the year, simply click to print your 1099s with no further work to do.

Remember, these rules are for tax year 2011.  This means any transaction after December 31st, 2010.  CPAs, accountants, and tax preparation firms typically charge from $50 – $100 per form, plus hourly for research to compile information which can cost landlords thousands, possibly tens of thousands in tax preparation costs if you have them do this task on your behalf.  By being prepared and following the simple steps above you can eliminate this potentially massive cost in your 2011 tax return.

HR5297 information obtained from: http://www.govtrack.us/congress/bill.xpd?bill=h111-5297

So there's a bit of a misconception out there for landlords, especially, private landlords who aren't incorporated that it is difficult to do a proper tenant screen.  I've heard not just from my friends in the industry but from countless customers things like:  "I'm not allowed to get credit reports", "criminal data is only available to PIs and police", and "it's too expensive".  I must say I can debunk all those myths in about 30 seconds!

Simple fact is, all these reports are available TODAY to landlords, as well as property managers.

• Credit Reports
• Criminal Reports (nationwide, state, or county)
• Eviction Reports
• Judgments, Liens, Bankruptcy Reports
• many more..

The cost is often completely paid for in a $25-35 application fee which virtually all states allow for.  To do a good background check you would do at minimum Credit and Criminal, and expect to pay about $17.00 for this.  A $25 application fee covers your cost plus some.

Another thing I've heard is "it's too hard to get setup", or "it requires a site inspection".  False, and True; however, the site inspection can be easier than you may think.  I'm not sure how all other companies do it, but Rentec Direct provides a single page form you can have a neighbor or friend fill out on your behalf which replaces the typical expensive and long wait a typical site inspection carries.  There's no costs, and the entire application/setup process takes no longer than an hour.  Literally it's not unreasonable to get setup and operational the same day ordering credit & criminal reports just a few hours later.

I think I just debunked the myths.  Rentec Direct isn't the only tenant screening outfit out there; however, it's the only one I have access to, so I created a video using our system on just how quick and easy it is to order background reports.  Better quality tenants = better quality income.  Better quality tenants = fewer legal expenses.  Better quality tenants = better property care.  Better quality tenants = Huge Benefit!

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The author is a founding member of Rentec Direct, an property managers, and a business owner.  Rentec Direct provides property management software which includes ach for landlords, tenant screening, and online documentation and file storage.

This topic applies to every property manager in the room, private landlords, and brokers who manage properties.  It's a serious step taken by Uncle Sam to increase regulations and requirements on an industry which is already FAR too regulated and taxed.  I for one am not excited about even more paperwork to run my simple property management business.  I encourage any affected to call, write, or email your local representative and ask for their support in repealing this unnecessary law.  There are many organizations out there, such as NARPM, which are already taking the fight to congress and could use help.

There are two separate 1099 issues that should be repealed

1. New 1099 requirements going into effect in 2011 for any person who receives rental income
2. Expansion of 1099 requirements going into effect in 2012 for all businesses who make payments of $600 or more to any payee

2011 Change for Landlords
Earlier this year Congress passed H.R.5297 which expanded reporting requirements for owners receiving rental income beginning in 2011. Specifically, Section 2101 establishes that, “a person receiving rental income from real estate shall be considered to be engaged in a trade or business of renting property.” This change will now require any person who receives rental income to file a Form 1099 for payments of $600 or more in a given year for each service provider. The new requirement does not include purchases of goods. Prior to this legislation, only real estate professionals such as those working in property management were considered to be in the “trade or business of renting property,” and thus required to file 1099 forms with the IRS for these types of payments.

Exemptions were included in the legislation for military/intelligence personnel, those whose rental income is no more than a “minimal amount”, and for those who would experience a “hardship”. The second two exceptions have yet to be properly defined by the IRS.

Reasons to Repeal this Provision:

1. Creates an unnecessary paperwork burden for homeowners
2. Increases the paperwork that service providers must now handle
3. Further complicates the Federal tax system which will inevitably lead to reporting mistakes and subsequent fines on homeowners who are already struggling with a difficult economy

2012 Change for Property Managers
Earlier this year Congress passed H.R.3590 which is a health care bill that has nothing to do with property managers and business, other than the fact that they sneaked in requirements for small businesses.  This bill expanded reporting requirements for all businesses beginning in 2012. Specifically, it requires the filing of Form 1099 for any business (including independent contractors and those who are self-employed) that makes a payment of $600 or more in a given year to any payee for goods and services. A separate Form 1099 will need to be filed for each payee. Payments to tax-exempt organizations are not included in this new requirement.

There have been several attempts to repeal this 1099 requirement but so far none have been successful. It’s unclear if there will be any further repeal attempts before the end of 2010. Click here for more information from Bloomberg Businessweek on recent repeal attempts.

Reasons to Repeal this Provision:

1. Creates an unnecessary paperwork burden for property managers
2. Increases the paperwork that goods and service providers must now handle
3. Will force small businesses and independent contractors to spend a large percentage of time and money simply to track payment amounts and submit 1099 requests
4. Further complicates the Federal tax system which will inevitably lead to reporting mistakes and subsequent fines on small business owners who are already struggling with a difficult economy
5. The housing industry is going through a difficult period, this is not the time to modify tax reporting requirements and further exacerbate the situation

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The author is a founding member of Rentec Direct, an property managers, and a business owner.  Rentec Direct provides property management software which includes ach for landlords, tenant screening, and online documentation and file storage.

Given the current fragile state of the economy I participate in a lot of conversations about "what if".  What if the economy collapses?   What if it turns around and begins it's path upward?  So then for us landlords and property investors is it best to have our properties paid off free and clear, or should we have them mortgaged to the hilt? 

The answer really depends on what is going to happen with the US Dollar.  If you take a look at the last few years, obviously the USD has not fared well.  The USD is no longer money and hasn't been for a long time, it's currency backed by nothing.  The same goes for the world currency.  History has proven over and over that fiat currency has a 100% failure rate.  It typically fails in the form of moderate inflation, followed by hyper-inflation, until the currently is completely worthless.

In Zimbabwe for instance their fiat currency just recently inflated well over 200 MILLION percent.  Can you imagine it costing trillions of dollars to buy a loaf of bread?  This example has repeated itself with many countries throughout history who adopted a fiat currency.  This is the fate of every fiat currency in the world, including the USD.  The only question remains is: when?

When that day comes, be it next year, or 10 years from now, will it be best to have all your debts paid off or have a ton owing?  I'm really open to AR members ideas here.

My own opinion is it's going to be best to have everything leveraged.  If moderate inflation continues, as each year passes you literally owe less on your properties.  A $200,000 loan today will be like a $100,000 loan in 5 years if inflation presses on.  If (or when) the USD goes into hyperinflation, a $200,000 loan will cost a mere couple cents to pay off in the future.

However the flip side to the coin.  What if the USD started deflating?  The exact opposite would happen.  It would be much harder to pay off a loan because we would be earning less.  Rents would go down along with other commodities.  This would be very bad, and likely the best place to be in this situation is in a free and clear position with properties.

So how likely is deflation to occur?  There might be momentary blips; however, the entire arc of power in DC and Wall Street do not want deflation to occur.  It's bad for government and it's bad for banks.  Since the government and the banks have complete control over money supply, and therefore complete control over inflation/deflation it seems unlikely. 

Inflation on the other hand seems extremely likely.  Each dollar the Fed prints, and each new loan creates more fiat currency.  Every dollar printed (or in reality, created from thin air), slightly devalues all existing dollars.  Since the government is running a huge deficit (the largest in history) now in the trillions, they have to print money faster than they are spending it to remain in business.  So they are creating money faster than ever before and inflation will adjust to compensate with some of the highest inflation we've ever seen in the USD.

I'm not a betting man necessarily; however, if I had to place wagers I would certainly go with the odds.  What would you do?

--- about the author ---

Nathan is a landlord and property investor who founded Rentec Direct which provides free software for landlords.  Because of the importance of thorough screening for prospective tenants, we have integrated tenant screening directly into the software so in just a few clicks a complete and comprehensive background check including previous evictions can be done on any new tenants.

I'm somewhat confused by our government's choices in stimulus money.  The last homebuyer $8000 tax credit was for first time home-buyers only.  Obviously any property investor is out of luck on this one.   This new one is a $6500 for a repeat home buyer, as long as it is for their primary residence.  Again, unless your willing to move, and your current primary residence would make a good rental, this procludes property investors.

Meanwhile..

• A huge quantity of vacant forclosed homes continue to sit on the market.  Quite literally rotting.
• Some banks are renting out these foreclosed homes, driving down the rental market.
• Contractors who still hold onto some of these developments do the same, rent them since they aren't selling, further bringing down rental rates.
• The dollar continues to inflate at all time highs (the other tax)

So I do get that Uncle Sam wants to prioritize first time homebuyers to get people into their own home.  That is great.  Now homeowners that want to upgrade are incented, great too!  But the point is to get these vacant homes off the market and in turn get property values back on their way up.  I would submit that many property investors who buy homes to rent are far better equipped than most first time home buyers to complete property purchases.  The $8000 or $6500 cash incentive would go a LONG ways in making a huge number of properties currently on the market profitable when converted to a rental.  I believe if this credit were opened up to investors as well, housing inventory would go down at least 100% faster, for the betterment of all.

So why does the government exclude property investors?  I've been told it's because it was property investors that caused a lot of the problem in the first place.  And to correct that, I was told it was actually builders who purchased investment loans to overbuild in so many areas and then of course they defaulted on their investment/building loans.  The banks grouped all the builders as "investors", and said that was the cause of their collapse.  Yet actual property investors who do things right are paying their monthly mortgage payment like clockwork and definitely are NOT the problem that caused the banks lending issues.

So all I can really say is that I don't understand what our government is thinking, but their line of thinking is not aimed to fix the problem is all I can tell.  I think we're in for continued inflation and continued real-estate devaluation, and despite a few sporadic mentions of housing pricing improving here and there, overall I don't believe it's happening.  Any increases in home values are FAR less than the 300% inflation our dollar has seen over the past 6 years.  Point of fact, compared to 2003, $1.00 today is worth about $0.30.

--- about the author ---

Rentec Direct provides property management software free to landlords and property managers and it includes full deduction and depreciation tracking and reporting. Because of the importance of thorough screening for prospective tenants, we have integrated tenant screening directly into the software so in just a few clicks a complete and comprehensive background check including previous evictions can be done on any new tenants.

This comes as routine for many home owners and landlords, but I find when I ask various other landlords I know they often aren't taking all their deductions.  Usually in the form of depreciable improvements, or in wild cases, depreciation on the house itself!

There's a book out there I got off Amazon a while back called 'Every Landlord's Tax Deduction Guide'.  It has a lot of great ideas and is well worth it if your a landlord needing any assistance figuring out what is deductable, what is depreciable, and what might be illegal to decuct on your taxes.  Granted my version is from 2007 and I bet there is a newer one; however, most of the items are still very current.  Here's some examples to my fellow landlords to pay attention to.

Common Depreciations - Depreciable items are items which Uncle Sam doesn't let you take up front.  You get to take a tax break over the improvement's useful life which can be anywhere from 2-30 years.

1. Most investment property owners depreciate the value of the dwelling itself.  This is usually a very large depreciable deduction.  Using the 80/20 rule (80% dwelling, 20% land) is a common way to factor it, or using the local assessed values for percentages are another way.  The typical investor gets to depreciate the dwelling's cost over 27.5 years.

2. New Roof, Add-on, remodel, deck, garage, outbuilding.  All depreciable over 27.5 years.

3. Landscaping, plants, fences, sidewalks, driveways, or swimming pools.  Depreciable over 15 years.

4. Carpeting, vinyl and non-permanent flooring, drapes & blindes.  Depreciable over 7 years.

Common Deductions

1. Repairs - If you are repairing part of the dwelling, land, or an improvement (even if your already depreciation the improvement), repairs to these items are typically always deductable during the year they are done.

2. Operating Expenses - So long as the expense was ordinary and necessary it typically is deductable.  This might include: advertising, auto and travel, cleaning, maintenance, commissions, insurance, professional fees, management fees, and mortgage interest.  Keep receipts!

Trust me, aside the massive self-inflicted national debt, Uncle Sam has plenty of money and he doesn't need any handouts.  When you are managing your own properties, or managing for someone else, please keep all that you should and don't let Uncle Sam take anything more than they are due.  Every state has different rules, and tax law changes all the time.  Do consult with a tax professional to make sure these deductions apply to you.

Keeping track of all this is usually the problem most landlords face.  If you have a property management company handle your affairs, they probably provide you a report at then end of the year with most common deductions itemized.  It's still up to you to keep track of all improvements and depreciable items.  If you manage your own property, use a property management software package which has deducation and depreciation tracking support.

--- about the author ---

Rentec Direct provides property management software free to landlords and property managers and it includes full deducation and depreciation tracking and reporting. Because of the importance of thorough screening for prospective tenants, we have integrated tenant screening directly into the software so in just a few clicks a complete and comprehensive background check including previous evictions can be done on any new tenants.