How to Earn Realty Profits Today
QUESTION: I manage a bank branch where I earn a nice income. But I’ll never get rich working for a bank. I “dabble” in real estate and usually buy or sell two or three houses each year. But lately, I’ve had trouble making any profits buying houses and renting them to tenants. I’m lucky if I can get enough rent to pay the mortgage. What am I doing wrong and how can I make some big real estate profits in 1990?
ANSWER: I share your frustration at trying to earn real estate profits in today’s environment where home prices are not appreciating as rapidly as they did in the past (except in certain hot markets such as Seattle) and rents are too low to cover the mortgage payments.
For the last few years my solution has been to upgrade houses to raise their market value by more than the improvements cost. My goal, stolen from William Nickerson, who wrote the book “How I Turned $1,000 Into $5 Million in My Spare Time in Real Estate,” is to raise the market value by at least $2 for every $1 spent on improvements.
In my opinion, acquiring and renovating fixer properties offers the best real estate opportunities today. You will be creating value when you upgrade them and you will be improving housing conditions in your community, too.
Tenant’s Lease Is Over When It Is Over
Q: I rent my apartments on one-year leases. Most of my tenants stay for many years, but I have one troublesome tenant whose lease ends this month. What is the best way to get rid of her so she doesn’t hold over?
A: Although you are not required to do so, when the lease is about to expire, send the tenant a written letter explaining you will not be renewing the lease and you expect the tenant to move out when the lease expires at the end of the month. Should the tenant not move out, then you should serve her with a notice to move. If she remains, hire an attorney to bring an unlawful detainer eviction lawsuit.
Deduct Depreciation on Money-Loser
Q: I own an older office building which is about 50% vacant, due mostly to my inability to pay for upgrading the property to attract good tenants. My question is, can I continue to deduct depreciation on these vacant offices?
A: Yes, you can continue to depreciate the building, including the vacant offices. As long as the property is rented or available for rent, Uncle Sam says the structure must be depreciated each year on your income tax returns.
What Is Correct Basis for Depreciation?
Q: I recently bought a four-unit apartment building. My CPA set up my depreciation schedule by using the local tax assessor’s ratio of building to land value. However, the problem is that this ratio is very unfair to me because the land is about 60% of the tax assessment and it bears no relationship to the real world. Is there any other way to make this allocation?
A: Yes. The IRS does not require you to use the land-to-building value ratio contained in the local property tax assessor’s records. You are entitled to use any reasonable method. Personally, I prefer using the replacement cost of the structure, based on my insurance agent’s estimate.
Property Depreciation Even During Vacancy
Q: We own a rental house that has been vacant for about two months. The rental market in our town is glutted, so it has been hard to find a tenant. But we found a tenant who will move in the first of next month. My question is, can I continue to depreciate the house on my income tax returns during the more than two months it was vacant?
A: Yes. A property held for investment or for use in a trade or business must be depreciated on your income tax returns. As long as you had the house available for rent, it is considered trade or business property which must be depreciated. Ask your tax adviser for further details.
‘Time of Essence’ Clause in Contract
Q: I agreed to sell my lot to a suede-shoe real estate speculator who I knew was taking advantage of me. My property adjoins a busy commercial street. In his purchase offer, he specified it was contingent on his being able to obtain rezoning for my lot to commercial from apartment district. I fully cooperated and the rezoning was approved after about nine months of bureaucratic delays.
We agreed in writing the sale was to close Nov. 1. But my buyer didn’t have his mortgage ready. About Nov. 16, he said he was ready to close the sale. But by the 20th he still hadn’t closed so I canceled the sale because our contract says “time is of the essence.” Now this sharpie threatens to sue me. What should I do?
A: Consult a real estate attorney. A time is of the essence clause used to mean deadlines in realty sales contracts must be strictly met. However, in recent years many judges have ruled a slight delay in performing a real estate purchase contract should not require total forfeiture. Although I agree with you that a 20-day delay in closing the sale should be sufficient to allow you to cancel the sale, please be aware that anything can and does happen in trial courts if your buyer sues you for specific performance of the sales contract.
