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Being a Landlord

I will tell you right off the bat that I do not like being a landlord. It is just a personal preference. I am not "Mr. Handyman" and I have too many other things to worry about. But, if you are going to be a real estate investor you will have situations where renting out a property is the most sensible thing to do.

When To Rent

There are some very strong arguments for being a landlord:

1. Holding a property for more than 12 months gives you a short term capital gain. If you build a spec house for $200,000 and sell it for $240,000 you have a $40,000 profit to pay taxes on. If you can reduce the tax from say 30% to 15%, you save $6,000. Plus you can write off another five or six thousand dollars in depreciation and save another $1500 to $2000 on taxes.

2. As a long term real estate investor you should take advantage of 1031 exchanges. This is a method of going from property to property and delaying the payment of taxes. To do this you need to hold your property long enough to show the IRS that it is an investment and you are not just flipping. That means renting it out.

3. In many situations you have bought into a supply side market. For example, condo conversions usually require some "seasoning" to capture the full appreciation and tax benefits. It is usually better to rent the apartments for a year or so before putting them up for sale. This way you are taking advantage of the demand side of the curve and are not trying to sell with the pack.

4. Often, a market is continuing to appreciate and holding for awhile will yield you a substantial return. Selling a home in a market that might give you another 10% or more and a tax advantage could be the wrong move.

Taking the Headaches Out of Being a Landlord - Property Management

Most times our investors are buying a new or refurbished property. Logically, you should not be hit with repairs or assessments for a least a few years. You just need to be sure that your tenant is not going to gut the place and leave town in the middle of night.

A property management service can often take a lot of the headaches out of being a landlord. They typically charge 10% of the monthly rental and offer a number of useful services. Services include:

Rent with Lease Purchase or Lease Option

The use of a lease-option or lease-purchase is another way to take some of the headaches out of renting your property. We can provide you with greater detail and the forms necessary to implement either option. Due to quirks in the tenant-landlord law, you should consider writing either of these options as a separate agreement and not include it with the lease. In the case of a difficult tenant, eviction could become problematic otherwise. Your attorney can advise you further on the implications of either choice.

What is a Lease-Option?

A lease-option is a combination real estate rental, sales and finance technique. It is a property lease for a fixed time period, such as 12 or 24 months, with an option for the tenant to buy the property at an agreed option price during the lease term.

Buyers like lease-options because little up-front cash is required. Sellers also like lease-options because they provide necessary cash flow to pay the mortgage and property taxes from a tenant who has a vested interest in treating the property well and who is likely to buy it.

What is a Lease-Purchase?

A lease-purchase is different from a lease-option because it obligates the tenant to purchase the property at the end of the lease. With a lease-option the tenant has the right, but not the obligation, to purchase the property.

With both, however, the tenant usually pays an above-market rent and receives a monthly rent credit toward the down payment. Of course, both a lease-option and a lease-purchase obligate the seller to sell the property on the agreed terms.

Advantages For Sellers

Strong Demand From Prospective Buyers

No matter how slow the local real estate market might be, there is almost always a strong demand from lease-option buyers. Many prospective home buyers can usually afford the monthly payments but they have often have insufficient cash for a down payment. The lease-option solves this problem by giving the tenant-buyer a rent credit toward the down payment. It's like a "forced savings account." In addition, the tenant-buyer usually pays up-front non refundable consideration for the option, typically several thousand dollars.

Top Dollar Option Price

Because of strong buyer demand for lease-options, when done correctly, home sellers can demand and get top dollar for their properties. Usually, the option price is set at the market value when signing the lease-option. If the home's market value goes up during the lease-option term, the buyer benefits. Should the property drop in value, then the tenant usually doesn't complete the purchase.

Top Quality Tenants

During the lease-option, the tenant-buyer usually take good care of the property as if they own it.

Above-Market Rent

Another seller advantage is earning above-market rent. Landlords can charge tenants 10 to 20 percent above market rent.

Seller Keeps the Tax Deductions

During the lease-option period, the seller retains all the property income tax deductions.

Advantages For Buyers

Small Amount of Up-Front Cash Required

The amount of up-front cash required to acquire a home or other property on a lease-option is usually small, often just a few thousand dollars for the first month's rent plus non-refundable option consideration. This option money is in lieu of a security deposit.

Monthly Rent Credit Builds a Down Payment

The unique characteristic of a lease-option is the rent credit toward the buyer's down payment. Typically, the rent credit is 10 to 100 percent of the monthly rent, depending on how motivated the seller is to sell. The higher the rent credit percentage, the greater the probability the tenant will buy.

Try Out the Property Before Buying

Another special lease-option benefit for the tenant is the ability to try out the property before buying. If it is undesirable, the tenant hasn't tied up a large amount of cash in a home that might be difficult to resell.

Control Property With Very Little Cash

The ability to control a property and profit from its market value appreciation with very little cash is called leverage. Lease-option buyers have this unique advantage.

Longer Terms Mean Greater Profitability

Although most residence lease-options are for short terms, such as one or two years, smart investors seek lease-options with the longest possible term. They reason the property is likely to appreciate in market value over the long term.

Summary

Although, you were not planning on doing rentals, it just comes with the territory. The tax advantages and additional appreciation you will get is worth the extra trouble. If you wish, you can always outsource most of the headaches to a property management firm.

I will help you find a mortgage that will keep you in the cash neutral zone as well as a competent property manager.

Martin Unger
Real Estate Investments

- Pre-Construction
- Spec Homes
- Condos
- New Homes
- Land
- Relocation

954 - 255-5056 (office)
954 - 461-0319 (cell)
775-254-2881 (fax)

(an associate of London Realty Corp)

9000 Sheridan Street
Suite 90
Pembroke Pines, FL 33024