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Renting Your Florida Apartments
"If you don't have a problem rental, then you don't have
enough rental apartments"
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 that 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 not just flipping.
3. In many situations you have bought into a supply side
market. For example, we often put investors in
pre-construction condos or put them in a first in line
position for a condo conversion. 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 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. So, you put
a tenant in the house or apartment for a year or so.
Taking the Headaches Out of Being a Landlord - Property
Management
Most times are 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:
- Screen prospective tenants (they can do credit checks,
criminal background, eviction screen, identity verification,
employment and reference checks, etc.
- Rental collection
- Tenant relations
- Facilitate evictions when necessary
- Maintenance & repair service
- 24 hour emergency service
- Bill paying/bookkeeping
- Place effective advertising
- Show vacancies to prospects
- Provide comprehensive lease agreement
- Conduct lease signings and pre-lease inspections
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. I know there are a lot of horror
stories out there. However, we are talking about just a few
rentals with highly screened tenants. 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. You are making a
killing on the property through appreciation and you should
not get upset about having to rent it out for a little
while.
I promise that I will help you through it. Lots of people
get a good tenant in a rapidly appreciating property and
hold on to it for many years.
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