"A" .... how far out should you advertise for rent?

Question

I purchased a rental property, but have been improving it for the past 6 months. (out of state property and I have contractor issues).  However, I hope to rent in April.  Is now to early to advertise for rent?

In addition, any expenses i paid on property over the past 6 months, how are they applied on taxes? I am totally confused.

Thanks

Fred Mejias · Answer

@Ashish Acharya so on the second part to my question, how do I classify my expenses and improvements on the property over the last 6 months, or for last tax season (ending December 2017).  Since I can't necessarily claim it on this tax season, will it have to wait until next year and how will it be classified on my taxes.  BTW thanks for the insight, these are definitely questions I will pose to my tax professional.

Jonathan White · Answer

Fred, the fact it is not occupied makes advertising easy because you can show it without impacting tenants.  Your out of state so you will need someone to show it.  I once paid a realtor 1/2 first month rent to show it for me.  He would have taken less.  Or pay a neighbor.

If it were occupied, you would be bugging the tenant every week or two to show it.  Not cool.  I advertised one place 2.5 months early and there were plenty of people willing or needing to move on or about the two month later time.  Just be clear in your marketing when it is available.  The longer you advertise, the more you need to manage the leads for a longer time.  If you do this yourself as I did and market very aggressively, it is a lot of work.  If you use a mngt company like I have also done, they did not capture all leads, answer calls or emails late a night, they did not return all calls losing leads and that property sat vacant along time due to their passive marketing and follow up.  I even passed them dozens of leads only for the leads to call me back and say the mngt company would not return their calls.  They relied on MLS/Realtor networks only to find tenants.  I used social media, on-line sites and craigslist.  I guess it depends on the market and how big the demand is for housing how soon you can or should get away with marketing to fill vacancies.  If it is a slow market, do it as early as possible.  If a hot market and rentals are in short demand, then wait and save some headache.  If you are using a mngt company, I would definitely say let them market it sooner than later.  Best of Luck

Fred Heller · Answer

There's nothing wrong with advertising it as an upcoming rental to generate advance interest. All the rental sites and MLS have a "date available" feature. And make sure you state clearly at the top of your ad that it will be available on such and such date.I can't tell you the number of people who call me about one of my listings who aren't looking to move until 2-3 months later, or even longer. I had one guy call me a couple of days ago who said he was moving to Houston in July.And April is not that far off. I'm sure there are plenty of people looking around for a place for an April/May move date.

Michael Guzik · Answer

@Fred Mejias Congrats on your purchase and good on you for taking that leap of faith with an out of state property many people are too scared to do so. Don't beat yourself up too much about the contractor, good ones are very hard to find so once you find one TAKE CARE OF HIM! As far as the advertising goes it may be too early to rent BUT that doesn't mean you shouldn't start. If this is your first property I would recommend starting ASAP so that way you can figure out the ropes and understand the game. It is much better to start now and learn instead of waiting till it's ready and you have 1-8 weeks of an empty property if it isn't advertised right or the tenant doesn't work out. When I worked with my management company we would advertise a property 45 days before it was vacant when we got that notice from the tenant. We did this because there are some tenants that qualify that have let's say 1-2 months still left on their old lease and are looking for another apartment/house. One that really surprised me is we got military families call and say they were moving in 3 months and wanted that house and would even pay for the 1st month even though they weren't living there to secure it because it was in a great location and exactly what they needed. Some people including myself like to plan ahead and usually those tenants that do are the best ones to have. Just make sure when screening and speaking to your possible tenants you let them know that they won't be able to move in till whatever date it is. Good luck!

Dave Toelkes · Answer

@Fred Mejias,

I suspect you understand that all your make ready costs are capitalized and you have no deductible expenses for your property until you place the property in service.

If your question is how soon should you start advertising to have a tenant in place on April first, I suggest you take your guidance from your property manager.  You said you have an out of state property, so I assume you have a property management company handling tenant screening and day-to-day operations.  Your property manager has a finger on the pulse of the rental market and should be able to give you some idea about your expected vacancy before putting a tenant in place.

For my properties in Frederick, MD  I usually budget for a one-month vacancy whenever I have a tenant turnover.  Your outcome will depend upon the strength of your rental market.  As a general rule, prospective tenants are either ready to move in tomorrow, or, at the beginning of the next month.  Applicants who are moving from a rental to your rental will have to give 30-60 days notice, and won't be moving until the end of the month.  Applicants who are relocating will want to move in as soon as possible.  If your property manager begins advertising in early March, you might have the property under lease for April if you are in a strong rental market.

Ashish Acharya · Answer

Sorry, I thought I answered your question.

Most likely your tax professional will going to capitalize everything you have spent as of 12/31/17. If so, there is no impact on your income for 2017 unless he/she is comfortable with the safe harbor mentioned above and is willing to expenses some of the cost under de minimis safe harbor all the expense below 2500.

Since you have no rental income, showing just expenses with no rental income scares CPAs to take safe harbor election when you haven't place the property in service.

Ashish Acharya · Answer

@Fred Mejias ,

You can expense repair (not improvements- unless under safe harbor) after you advertise the house. However, you cant just advertise and expensive repairs for the house that is not ready to be lived such as missing windows, or doors, or unfinished bathroom.

So, if the house is liveable, you can advertise the house and start screening the tenants. While doing so, do the repair works ( painting and stuff). This way you can dont have to capitalize the repairs.

So, hold on to the small repairs that can be expensed after you advertise it.  So, once it is ready, available to be rented, you can advertise, even if you have not done some repairs works.

All the improvements to the house have to be capitalized no matter when it is done ( before or after advertisement)

However, there is a safe harbor exception. You can actually expense everything below 2500. I know not all the CPAs are going to agree with me as they will say you cant elect the safe harbor before the asset is placed in service, but after careful analysis of the IRS regulation, we took the stance that you can use safe harbor on the work done before placing the asset in service.

We have taken the same elections on our various RE customers with no issues.

But please talk to your CPA before making an election.

Goodluck.