Current Landlord for my family's rental home trying to maximize profit, need guidance

12 Replies

Hello new to the forums here, first off I'm loving the site and plan to use it to it's full potential.I have alot of questions but I figured I'd start out with something that is relevant to my current situation. I currently manage my Father's rental home because he is unable to. I will eventually inherit this property but that wont be hopefully for a long time. I have a ton of property management experience with Student Housing so finding a tenant and screening them along with getting the property ready wasn't an issue. The issue I have now is calculating my true profits after taxes.  I'm pretty clueless as to what to do after I collect rent lol. My tenants pay $1100.00 a month and the property tax on our property is $1800.00 for the year. The home is payed off so there is no mortgage payments. I have my separate bank account and all of that but I am clueless on what taxes will have to be paid and what money I can actually spend at the end of the month from the income. After deducting the property tax from the monthly rent ($1100.00 - $150.00 = $950.00) what else is there to deduct? I am completely clueless. Should I just save all the income and pay an accountant to do this for me at the end of the year? I also plan on investing in my own property before I graduate College and will be looking for guidance on that as well. Any help is greatly appreciated! 

I do not want to end up paying the IRS!

Do you have insurance on the property? If so, that is another expense you can deduct. Any repairs and/or maintenance? Utilities you pay (not the tenant)? HOA fees (if applicable)?

I'm sure there are a list of other things, but those are the most typical expenses that popped into my head.

I've been doing my own taxes for my rental for the last few years, but I only have one.  I am purchasing more rental property this year and plan to bite the bullet and hire an accountant for next year.  I did use H&R Block software and it was pretty handy in guiding me through the process.

It may behoove you, for at least the first year, to have an accountant do the taxes for the rental.  Unless you are fairly savvy and feel comfortable with preparing tax returns.

You can deduct any actual expenditure for the property. i.e. If you pay a plumber $150 to fix the toilet, that can be deducted. Your insurance on the property can be deducted as a business expense. Any advertising you do to attract tenants can be deducted as an expense. Typically, you would set aside a % of the monthly rent for Vacancy, OpEx (regular maintenance & repairs), CapEx (big stuff like a new roof, A/C or water heater), and Property Management. Placing these monies in reserve prevents you from getting caught flat footed, when the tax bill comes due or the A/C blows up. The fixed cost type of reserves would - theoretically - get zeroed out by the end of each year. The CapEx reserve would continue to build up. You could set a threshold at 1.5 times the amount to fix the most expensive thing that could go wrong, then turn off the reserve switch, until it needs to be replenished. You should also be able to pay yourself a salary for managing the property. There are a ton of deductions available to real estate investors. In order to maximize them, i recommend an accountant who has experience with REI.

At the end of the year, all deductions (property taxes, insurance, utilities, maintenance, management, repairs, depreciation, etc) will be deducted from the gross rents.  Have you been managing for your dad long?  Ask him to give you a copy of a previous year's schedule E tax form he filed.  If nothing else, to get an idea of what expenses have been deducted in the past. Maybe even use the same tax person.  

I'm a little confused as to why you get all the cashflow as a manager, but that's for a different discussion.  Sounds like you need real tax advice, so definitely consult with a tax pro @Account Closed !

First off I'm not an accountant, but I'll tell you how I think through my rental income. I use Quicken rental property manager btw and have my tenants use online payments using intuit Payment network (IPN) which charges 50 cents per transaction for that service. All expenses and income are associated with that rental is logged in the software or downloaded from the bank account/ credit cards and I spend once a month categorizing each of the downloaded transactions. At the end of the year, I generate a schedule-E form for rental income in the quicken software and hand that to my accountant, who prepares my return and then tells me how much tax I need to pay. This helps me track all of the expenses I incur throughout the year for repairs. Just because you have x income and no mortgage interest to deduct from your income, doesn't mean your taxes equal your tax bracket based on your total income (i.e. 30% for example). You get to subtract from your gross income all home depot expenses, supplies, unplanned contractor repairs, legal and accountant fees from your income to determine how much taxable income you will be responsible for at year end. The accountant cant also apply property depreciation to reduce your taxable income further that I for the life of me cannot compute on my own.

If you don't use software, hold onto all receipts related to rental property and calculate at end of year, but really you would benefit from implementing a system early like quicken that you can grow to help you track multiple properties when you get to that point and categorize everything and assign the expense to each property so your end of year organization becomes something simple like handing over the schedule-E forms to your accountant. If rental income is all you earn or will be in the future, you're best off interfacing with your accountant to develop a plan on how to pay taxes on a regular basis, but most people their full time job deducts most of the taxes throughout the year and settle up at the end. Lots of great forums on BP about taxes and favorite accounting software from all of the landlords. I recommend reading up more and decide for yourself.

Couple things. 

First, you should seriously consider putting the house in an LLC to protect all the equity in the house.

Next, invest in your education.  I'm in a similar spot as a relative "newby" and getting the proper education is vital as I'm finding out.

I highly recommend the book (I prefer Audible)

Loopholes of Real Estate: Secrets of Successful Real Estate Investing (Rich Dad Advisors)

It's by Garrett Sutton and will cover your questions as well as info on LLC's.

Best of Success!

Wow thanks everyone for the quick responses. Yes I do have insurance for the property that I should have mentioned and currently am not calculating maintenance because the house was in excellent condition from the previous tenants so there was none to be done(they bought their own home) so far but I will of course calculate that in if I ever come across anything. I'm taking in all of this knowledge and am very grateful. I have just started managing for my Father because he did not possess the knowledge of how to manage his property and ended up with some problems with the IRS. I do know the basics of deductions like advertising, maintenance and insurance etc. Since I have experience with property management and have a huge interest in real estate investing I decided to take over in return for 10% management fee and freedom of running the property to my discretion to maximize profit. I am simply doing everything for him to help him out personally and manage the income/ budgeting while gaining knowledge so he doesn't get into a hole again. I'm not getting all the cashflow @Steve Vaughan  lol but that would be nice indeed! I increased the rent successfully from $750 to $1100, opened up a separate bank account to easily manage all funds from the property, set up direct deposit and credit report for the tenants and etc. So from what I'm getting from everyone I should get an accountant and let them figure all of this out then follow their guidance after that to maximize profit? Let's just say I clear $950 a month after property tax. How much of that $950 will be taxed that I need to put aside per month? Isn't there income tax? So even if my rent is $1100 a month with no mortgage I still might only clear a few hundred dollars? A rental home is alot just for a couple hundred bucks a month?  @Jennifer T.

@Jeff Bridges

 Is that software pretty much all you use for your rental properties? That software has the income form generator as well? The software is quicken? It has handled all of your business fairly well with multiple rental properties?

@Account Closed thanks for clearing some things up.  Personally I do not use an accountant, so I don't suggest just running to the 1st Joe and handing it over.  I suggest consulting with quality one that deals with RE after reviewing some previous years' schedule E's.  Get advice from a good accountant.  Too many questions up in the air for you not to.

The NOI is what you will report for taxes. In general that is 50%-55% of the gross rents. Just as a guide, depending whether utilities are tenant-paid or not. Estimate 45% of gross and you should be close, on the conservative side. Hope this helps. No legal or tax advice intended.

Even though it is your parent's house, it's not yours.  So the 10% property management fee you pay to yourself would also be an expense against the rental income.

Just don't forget to include that income in your own personal taxes.

Originally posted by @Account Closed :

@Jeff Bridges

 Is that software pretty much all you use for your rental properties? That software has the income form generator as well? The software is quicken? It has handled all of your business fairly well with multiple rental properties?

 I use the Quicken Rental Property manager (PC desktop software). This has worked well for the 2 properties I manage with the software and I only spend a few minutes each month to categorize/ label and check transactions. There are plenty of online based finance tracking software but many charge a monthly fee whereas this one is a one time software price and it will interface to all of your online accounts at banks/ credit cards etc and download transactions. The software cost also gets listed as a business expense:) 

http://www.amazon.com/Quicken-Rental-Property-Manager-2015/dp/B00M9GTJLY

https://ipn.intuit.com/ -this is the service that my tenants all use to pay rent with bank accounts.

You'll have to issue yourself a check from the rental property operating account for the 10% operating fee and categorize it as a property management expense in your software. Then yes, the quicken software has a report generating feature that creates your Schedule-E report that you will email to the accountant that does your fathers taxes at the end of the year. This is recommended given the IRS troubles he has had in the past. You'll just pay personal taxes on the property management income you earn. If you get sick of doing management at any point, a property manager would end up doing the income/expense tracking for you for his 10% fee and issue you a schedule-E at the end of the year. You have the flexibility to choose who does this. Good luck!