All Forum Posts by: Account Closed

@Susan M. 

Now that you mention it I do recall that being a "business" was a requirement.  For what it's worth, I applied as an individual and they accepted it.  Where they asked for company/organization on their application, I put in my name and my wifes.  I recall now wondering if they would accept me.  They did.

I think Square Cash sounds good too.  The only thing I didn't care for with it was that you had to have a debit card to play the game.  I don't have a debit card personally.  But it's hard to beat that price.  Let us know how it works out.

 Shannon:

First, let's talk about your applicant. They obviously don't have great credit, but that's who ends up being interested in lease options. They're either going to have poor credit, or they will be self-employed and unable to prove income. Think about it. Someone with good credit can get a loan. And there are plenty of fairly cheap entries like FHA. People with good credit that are renters aren't going to be interested either. So you end up working usually with people with poor credit.

After doing dozens and dozens of these over the years, I quit doing them probably 6-7 years ago.  What I found is that a zebra can't change his stripes.  If they have bad credit, they have habits that caused them bad credit.  That's problematic in one of these deals.  They all start off with good intent, they're buying a house, they're excited.  In the end their habit patterns come to the fore.  If you think about it, that's the whole basis for the idea of credit reports to begin with....people do what they have always done.

All that said, I was able to work with people with poor credit.  That option money they put up helps.  Even if they get off track, the option money goes a long ways to helping while you get them out and then re-market the house.  As it turned out however, that wasn't my biggest problem with lease options.  The biggest problem had to do with repairs.  Without going into alot of detail, I consistently got houses back that had not been taken care of.  Either they didn't do the repairs at all, or the did substandard or completely incorrect repairs.  I finally decided that I would rather do the repairs myself and just rent the house.

If you're going to do them, you want to be careful about the terms you use.  It's not "down payment" or "down".  It's option money.  "Down" makes it sound like a sale.  $100 per month "toward the mortgage".  I don't know what you're talking about here, but typically you apply a monthly credit toward the purchase price, IF, and only IF, they exercise the option.  It's non-refundable.  Otherwise you're potentially creating some type of equitable sale which might need to be foreclosed.  Your paperwork is important.

What I used to do was have the tenant/buyer put up a security deposit with the lease, and then a separate option money with the option agreement.  This way, if they exercise you can just apply the security deposit to the purchase.  If they don't, you can give some of their deposit back to the extent you don't have to spent it repairing things.  And, it helps to create the idea that it is a lease with a separate option.  It also helps in case the IRS questions whether you have sold.

In recent years some states have passed legislation that would apply to lease options, so definitely check with a lawyer to find out what, if any, the rules are in your state and/or Dodd Frank.  Some states a lease option would be considered a sale, and therefore you would have to do a non-judicial foreclosure rather than an eviction.  Again, check it with a real estate lawyer.  You don't want to be foreclosing non-judicially.  In my state I can evict, and have done so more times than I care to remember without issue.

You need to have paystubs or tax returns.  2.5X isn't enough.  But that may well be net as you said.  Prior rental history is very important to check.  Do they have evictions?  Criminal background? Are their jobs stable?  As far as credit goes, I like to look at the report, not just the credit score.  I try to understand what their priorities are in terms of credit.  In other words, do they make rent a priority, and miss a credit card payment?  I'd rather see that than the other way around.

Let us know what you decide to do.

I agree with you in terms of your financing plans.

Another factor though is that a higher purchase price for taxes means you'll be depreciating more, assuming you're holding the house.  You depreciate the house over 27.5 years.

On the other hand, if you pay the repair after you have purchased it will be a deduction against your rental income, assuming it's a repair versus a capital expenditure.

Now that I think about it though, maybe you can specify the repair in your contract somewhere, which may well then be permitted as a repair on your taxes...ask your CPA.

The issue is whether you deduct the repair now, or it's depreciated over 27.5 years because it was part of the purchase price.

BTW, I'm not a CPA, so take everything I say with that in mind.

I have a 3 unit building that has a single furnace.  Forced air gas.  The thermostat is located in one unit, who is instructed to leave the heat set at one temperature.  That's always worked for us.

We also have the bill on the gas companies level pay plan.  We prorate that bill on square footage between the 3 units.  The tenants pay their prorata share every month.  The gas company reevaluates the level pay twice a year, so the bill goes up (or down) depending on usage.  Each tenant signs an addendum to their lease in which they agree to this plan.

We've owned the building now for around 18 years, never had an issue at all.

I have to agree with the others....sell it.

I see heirs all the time that try to squeeze their inherited property at first.  Then they lower the price, lower it some more, then lower it still more.  I'd say just get rid of it, that $15K in the scheme things is not going to hurt you at all.  You have other places to go with the money that can create more income for you.

And yes, you can definitely thank Dad for all those free and clear properties.  A wise man indeed.

@Wade G. 

Here's the problem with this exercise:  lets say you start off with one house, then you trade it for a bigger house.  Everythings going good so you trade the big house for 3 smaller ones, then up to 5 houses, etc etc.....always doing 1031s so that you don't pay tax, and always leveraging because thats how you get the biggest bang for buck and that's how the numbers work out best on paper.  Now just for fun, lets say we enter into a tough period perhaps like 2008.  Prices start to drop.  Rents start to drop.  People get laid off.  Your rents are under pressure.  And here you are, you have maximum leverage and maximum exposure.  So, with this scenario I saw alot of landlords go broke in 2008.

Now, you can get to the same dire ending, by starting with one house, borrowing the equity, plowing that into another house, always borrowing and buying the max amount you can.  So when that bad market scenario comes, you're fully leveraged again.  And in 2008 we saw alot of landlords in my area walk away from houses.

And of course, let me compliment you on having thought this through.  There are significant costs to sell as you pointed out.  Commissions and closing costs are large.  Just negotiating to sell will cost you something at times.

I've been through several declines of magnitude, California in the 90s.  And of course 2008.  And most people don't remember this one, but we had a very tough market back in late 70s early 80s.    And in each one of these periods we saw investors go broke.  Most of them we never saw again.

Now, I want to tell you about Harry Helmsley.  I saw him interviewed on 60 minutes a number of years ago.  He was the biggest real estate investor in the US at the time (married to Leona Helmsley, remember her?).  Anyway, he said he had never sold a piece of real estate.  He owned the Empire State building at the time.

So the key is figuring out how you're going to continue if you never sell a house.  Because in the end what happens is you run out of cash.  What Helmsley did way back then was get partners.  There's really nothing new in this business.

And what partners will mean is that you can continue to do deals, and you create the same type of leverage.  Helmsley had equty partners.  You can do it with debt partners as well.  And once you've used your own money to test the waters, created a track record, then you can start building your empire, with other people's money.  Just like it's always been done.

I think where you need to get to is where you own some houses free and clear.  Yes, it's not the highest return way.  But a free and clear house is a huge cash cow.  And, they reduce your risk.  I rode through the 2008 debacle watching my fellow landlords around me losing their houses, without a single issue, other than I had to reduce my rents for a while.  That was no problem though, because I had very little leverage in my properties.

Just remember this.  Don't only focus on how you get the highest return.  You also have to focus on what your risk is.  That's how you do this long term, figure out what your risks are.

I have to say, this is a real high price.  Was the tenant authorized to repair the window? Our lease prohibits the tenant having work done unless we authorize it.  In our case, it costs us $60-$70 to repair one of those double-paned energy efficient windows.  We remove them, take them to a glass place, who sends them somewhere.  He cuts us a piece of plywood to size, which we put back in our window until the window is ready.  If the glass company sent someone out, they're expensive.  We would have a problem with that bill.  Unless of course you authorized the repair.

When you send an email request (either monthly or as a recurring request), it specifies the amount.  So far I haven't had anyone try to make a partial payment, but my belief is that the system won't accept it.

What I've found is that my best tenants almost all are using this.  I'm getting most of their rent payments either on the first, or a couple of days early.  The other tenants (the ones that might make a partial payment) have not signed up.  I've only been using IPN now for about 4 months.  Prior to this I used Paypal.  It worked OK, but when they paid, then I had to go into Paypal and transfer the money to my bank account, which took another 4 days usually.

Back to the partial payment thing:  even if I were to receive a partial payment I can still file an eviction in the county I'm in without problem.

@Kirk R. 

You'll get alot more detail if you go to their website, which I believe is ipn.intuit.com.

The basics though, you link your bank account to your username/password on their site.  You can have a link sent to the tenant by email.  He clicks on the link, basically enters his email and his bank account and the amount.  When he pays you'll get an email saying he paid.  Two days later the money is in your account.  The tenant can set up a recurring payment if he wishes, or he can do it one month at a time.  If you have a website, you can put their button on your website, and someone could click the button and pay rent.  You could also insert a payment link on your invoice which you email.  This all syncs with QuickBooks.  I'm just doing the basics on it right now.

For what it's worth, you can also pay your own stuff via this site.  The only thing is the recipient pays a $.50 fee.  

You can also receive credit cards...they charge charge 3.25% for that which makes it unattractive to me.

There's no set-up fee or cancellation fee, or any monthly fee other than $.50 per transaction.  I've had no trouble at all.  And the tenants like it, think it's easy.  I don't have to take the money to the bank anymore....it works for me.  

I haven't tried Sparkrent.  I do use Intuit IPN.  I pay $.50 for each transfer, rather than $1 at Sparkrent.  IPN works well.  I read some reviews on the internet, people having problems with Sparkrent.