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Guide to Successful Real Estate Bookkeeping

by Harold Powell

The goal of bookkeeping is to have an accurate record of all the money going in and out of your business. Also known as “doing the books,” bookkeeping is a vital task in your rental property business and something that is not optional, but required. There are several benefits to being organized in this way, such as freedom, legality, and profitability. When you know exactly how your business is doing at any given time, you are able to make better decisions and sleep more easily at night.

1. Keep things separate.

The first rule of bookkeeping for your real estate business is to make sure you keep your personal expenses 100 percent separate from your business expenses. Not only does this make the bookkeeping easier, but also from a legal standpoint it’s a bad idea to commingle personal and business funds, especially if you are using (or plan to use) an LLC or other legal entity. So set up a separate account for your real estate investments; this includes a separate bank account,

When itemizing the income and expenses, the best to categorize them in the same categories that the IRS lists on Schedule E, the form you’ll need to fill out each year at tax time. The expense categories that the IRS defines are:

  • Advertising
  • Auto and Travel Expenses
  • Cleaning and Maintenance
  • Commissions
  • Insurance
  • Legal and Other Professional Fees
  • Management Fees
  • Mortgage Interest Paid to Banks, etc.
  • Other Interest
  • Repairs
  • Supplies
  • Taxes
  • Utilities
  • Depreciation Expense or Depletion (we call this Capital Improvements)
  • Other

Therefore, we try to place every expense into one of these categories.

Of course, there is the “other” category if something just doesn’t seem to fit, but we seldom use this. It’s just easier to make it fit within one of the other listed categories.

Rental Property Numbers You Can Calculate on a Napkin

by Harold Powell

The numbers. In this industry, you must love the numbers. Love them like they are part of you.

What numbers do you run? Well, what should any investor care most about? Cash flow. What determines cash flow? Income and expenses. Simple. People make running numbers out to be so complicated sometimes it’s a no wonder more people aren’t involved in real estate. In fact, the numbers can be one of the easiest parts of shopping for a property. Unless you are a trained psychic on the crystal ball, then predicting appreciation may be easier for you than estimating cash flow.

1. Figure out the Monthly Income (Gross Income): This will either be rent the current tenants are paying, the asking rent (confirm this number is realistic), or if you have neither of those you can talk to a local property manager or realtor  who can give you a market rent value for the property.

2. Calculate the Monthly Expenses: These include property taxes, insurance, property management fee (if applicable), mortgage or financing (if applicable), homeowner’s association fee (HOA) (if applicable), vacancy and repairs. Don’t forget vacancy and repairs! They are a real part of any property investment and they can drastically affect the cash flow. Yet so many people don’t think to include them in the expenses.

  • Property Taxes– Look on Zillow or another online source for the most recent annual tax amount and divide by 12.
  • Insurance– Get a quote from an insurance provider.
  • Property Management Fee– Usually around 8-9% of the monthly rent.
  • Mortgage -Use an online mortgage calculator to calculate the monthly payment. Confirm with your lender what your down payment and interest on the loan will be to ensure you are using accurate numbers for your calculations.
  • HOA- Don’t skip out on finding out what the actual HOA is! The HOA can absolutely kill a property’s cash flow.
  • Vacancy– I conservatively estimate 5-10% of the monthly rent towards vacancy expenses. In situations where you have a rockstar property manager or your tenants are under a lease option, the actual % should be much less
  • Repairs– Again an estimate but should not be left out. Just like with vacancy, I err on the side of conservative. If a house is a turnkey property or recently rehabbed and gets a good report from the inspector, I use 5% of the monthly rent. If the property is not in top shape, conservative could mean closer to 25%.

3. Subtract the Monthly Expenses from the Monthly Rent (= Net Income): This is your monthly cash flow. Yay! Hopefully it’s positive. If it’s not positive, run.

4. Calculate the Returns: Two numbers I want to see on any property I evaluate are the Cap Rate and the Cash-on-Cash Return.

  • Cap Rate– This gives you an idea if you are buying the property at a good deal. It basically compares the return on investment (ROI) to the purchase price.

The Cap Rate equation:

Net Annual Income / Purchase Price = Cap Rate

NOTE: I don’t include the mortgage payment in this calculation.

  • Cash-on-Cash Return- This number is how much return you are getting on the money you invest. If you pay all cash for a property, this number will be the same as the Cap Rate. If you are financing, this number is the most accurate way to see the actual return you are getting on your cash-in and the leverage. Here is the equation, and remember to include the mortgage payment since this one is totally focused on financing:

Net Annual Income / Total Cash Invested = Cash-on-Cash Return

Understand the difference? One is a measure of how good of a deal you are getting on the purchase price and the other tells you the exact return on your money you are getting. They are the same for an all-cash buy but can be very different for a leveraged purchase.

If you compare the Cash-on-Cash Returns of an all-cash buy versus a financed buy. You may quickly see the benefit of leveraging! Way more bang for your buck! Try it out on a napkin sometime.

2018 Tax Revisions

by Harold Powell

Are you ready for the Selling Season

by Harold Powell

Are you ready for the Selling Season

Since it’s that time of year when sellers are getting their home ready for the Spring market, a lot of clients ask me about what they need to do to get their home ready. To best answer this question it’s important to understand what things affect a  buyer’s decision on whether they want the home and how much to pay.  As a seller it can be money and time well spent that nets you a better price.

Also worth mentioning that over 90%+ of today’s buyers look online which means how your home looks online will have an affect of whether buyers will consider viewing your property.  Watch today’s video for preparing your home for  showings and online exposure.

NAR Generational study

The 2015 National Association of Realtors® Home Buyer and Seller Generational Trends study offers some interesting insights. Despite the economic and financial head winds young adults have faced since the recession, the millennial generation represented the largest share of recent buyers, according to the 2015 National Association of Realtors® Home Buyer and Seller Generational Trends study.

Interestingly, the survey discovered that a strong majority of buyers search for homes online and then buy their home through a real estate agent, with millennials using agents the most. For the second year in a row, NAR’s study found that the most sizable group of recent buyers were millennials, those 34 and younger, who comprised 32 percent of all buyers (31 percent in 2013).

Generation X, those age 35-49, were next with a 27 percent share. Millennial buyers represented more than twice the amount of younger boomers (ages 50-59) and older boomer (60-68) homebuyers at 31 percent. The Silent Generation (ages 69-89) made up 10 percent of buyers in the past year.

Here are a few takeaways from NAR's Generational Trends study:

  • Gen Y comprises the largest share of home buyers at 32 percent, which is larger than all Baby Boomers combined.
  • Gen Y also has the largest share of first-time buyers at 68 percent.
  • At least 80 percent of buyers who are aged 59 and younger bought a detached single- family home; it is increasingly common for buyers over 59 to purchase townhouses and condos.
  • Among all generations of home buyers, the first step in the home buying process is looking online for properties for sale. Younger generations of buyers typically find the home they purchase through the internet, while older generations of buyers first found the home they purchased through their real estate agent.

THE BEST SELLING STRATEGY

Sellers, you have an excellent opportunity to sell your home this season, if you have the right pricing strategy in place from the start! Studies show that the longer a property stays on the market, the less the seller will net upon the sale. It is very important to price your property at a competitive market value at the signing of your listing contract. The market is so competitive that even over-pricing by a few thousand dollars could mean that your house will not sell.

An Overpriced Home:
· Minimizes offers
· Decreases agents response
· Limits qualified buyers
· Decreases showings
· Decreases prospects
· Limits financing
· Nets less for the seller

When you are ready, contact us today for a personal market value analysis of your home. No hassles or obligation - just honest advice on how to get top dollar for your home!

Save $7000 on your Calif. tax via the Homeowner’s exemption

by Harold Powell

What is a homeowner’s exemption?  A homeowner’s exemption is just a property tax exemption.  The California state constitution provides for the exemption of up to $7,000 in assessed value from property tax assessment of any property owned and occupied as the owner’s principal place of residence.  This means that the exemption removes up to $70 from your annual property tax bill.  There’s no reason to forgo the benefit.

Watch today’s video to understand who qualifies for the tax exemption.  It’s important to note that the full exemption for the year is available if the form is filed by Feb 15th after that a date a percentage of the exemption is available for that year.

The value of accurate pricing

by Harold Powell

Selling your home without having to settle for less

One of the easiest mistakes sellers can make is pricing their property too high from the start.  The lure of pricing the property too high can actually cause the seller to loose money in the long run.   The National association of Realtors did a study of market time versus selling price.  They looked at how time on the effected the sales price of the property.  Additionally, we look at when is the property has the greatest interest level.  These 2 factors help shape the best time for the seller to receive the best pricing.  Watch today’s video to see how you can benefit from pricing your property correctly.

Tax Free Sale

by Harold Powell

The homeowner’s principal residence tax exemption is one of the few places in the IRS code that an owner can qualify for tax free sale. Understanding who and when you can qualify for the $250,000 or the $500,000 homeowners exemption is always a part of the selling process.  
Today I interview Don Pyne , CPA from Pyne, Waltrip, Decker & McCoy, to tackle some of todays most common questions from homeowners.  Questions such as who qualifies for the exemption? How does the surviving spouse rule work? How long you can rent your property for before you would lose your exemption?  These are just some of the questions we discuss in today’s video.


 

The Andrew Project

by Harold Powell

A few years ago my partners and I agreed to open a transitional living center at a motel that we own in downtown Ventura.  With the help of local churches, pastors, community leaders and city officials a non-profit entity was formed called The City Center.   The goal was to create hope and a hand-up, rather than a handout, out of homelessness. One of the latest success stories is from Emma. Emma lived in a tent for 94 days in the hillsides of Ventura before eventually living at the City Center.  With the help and support of The City Center staff and volunteers, she is get back on her feet and has an apartment of her own.  Emma’s testimony sums up what is possible for those that come to The City Center.  Listen to her testimony and journey.

 

Currently, there are 14 families living onsite with the ability to expand to 30.

In order to house and support the homeless families that live at The City Center – Transitional Living Community,  The Andrew Project was created.   Simply put, the goal of the Andrew Project is to have 1000+ people giving $19/month.  The former Mayor of the City of Ventura, Mike Tracy, has already pledged his personal financial support to give and is committed to enlisting others that will donate $19/month.

If you are interested in supporting this cause to help others like Emma for $19/month go to http://www.thecitycenter.org/donate-2/

 

Our summer Real Estate Market

by Harold Powell

Now that we are midway through 2014 you can see some subtle changes that have taken place in the real estate market. The median appreciation in Ventura County over the past 2 years has reach 29%.  This past year we have experienced a slow down in the pace of appreciation from the previous year.   It also means that sellers have to be more attentive in their pricing and in some cases require a price improvement to get their home sold.  Watch this month’s video for more information on today’s real estate market.

 

 

 

Transferring your property tax to your next property

by Harold Powell

One of the main reasons that California voters passed Proposition 13 in June 1978 was to protect themselves against escalating property taxes as the value of their property increased. By establishing base year values that could not go up by more than 2% per year, Proposition 13 kept the owner's property tax increase at a manageable level.

One of the unintended effects of Proposition 13 was that it discouraged empty nesters from downsizing into a smaller residence.

To solve this problem California voters passed Proposition 60 in 1986 that permits people over 55 years of age to sell one home and buy another of equal or lesser value in the same county within two years and take their original Proposition 13 base year value with them

There are of course some eligibility requirements in place in order to  take advantage the property tax transfer which I discuss in today's update.

Displaying blog entries 1-10 of 14

Contact Information

Photo of Harold Powell Real Estate
Harold Powell
RE/MAX Gold Coast Realtors
5720 Ralston St. Ste. 100
Ventura CA 93003
(805) 339-3516