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Monthly Archives: January 2016

What Else Can You Do to Make Money from a Property?

Lakeland house

We have a contract on this lovely home!

More good news for us! We’ve have a contract on another house, which will close in April. This one’s much different from what we usually buy to remodel and resell. It’s BIG, and it’s out by Lake Travis, not the usual north Austin and suburbs we concentrate on. It’s also beautifully decorated and not in need of much remodeling, at all (as you can see from the pictures at the end of the post, which were shared on a real estate site). We usually buy homes we can fix up. What motivated us to jump on this deal?

Why else? Because we can make money off it! Here are some facts:

  • The house has 4 bedrooms and 3 baths–that holds a lot of people. There’s a four-car garage! It’s nicer than any of the homes any of us currently live in.
  • It’s in a resort area. There is a lakefront park less than a mile away, and there’s a golf course in the community.
  • It has a lake view…or will once we make the beautiful planned deck off the second story!
  • There are TWO lots. That’s right, we could build another house to also make money from.
  • Best of all, this area is a huge market for vacation rentals! Just take a look at some of the homes and the prices folks get to rent them out!

Two of the Hermit Haus team have experience renting out a house as an executive rental (for example, when people are new to the area and waiting for their dream house to finish being built), so we have an awareness of the pros and cons of this kind of undertaking already. So, the current plan is to make the few necessary modifications to this beautiful home, and then contribute to our income stream by renting it out (using a service, of course). Best of all, we can use it ourselves if we want to go hang out by the lake and bask in the beauty.

Now, Point Venture, the community the house is located in,  is not an easy commute to Austin. It’s on the far side of the lake (for Austinites, it’s what you see when you look out from Lakeway). So it would not fetch as high a price as the same house on the other side of Lake Travis, where a home this size would go for many, many more dollars. On the other hand, the drive over there from Austin is scenic and breathtaking. And there’s no traffic noise. That’s perfect for folks wanting a secluded vacation spot within easy reach of Austin and the Hill Country. That completes our case for a vacation rental income property. Ah, when can we all go?

So, here’s yet another possible thing to consider doing if you own a house in the right kind of area. Many people have homes in Austin that they rent out during the big festivals and to people attending the many conventions held all year round. Maybe you have a house that’s a candidate for such a rental. Of course, you’d need to be sure it’s legal where your house is located. Austin is just a regular hotbed of rules and regulations, as we’ve mentioned before. Still, it’s good to have this option in your arsenal of ways to cash in on an income property!

As promised, here are a couple of photos of the house from when it was on the market a while back. When it’s a rental it won’t be QUITE this fancy.

The beautiful kitchen island.

The beautiful kitchen island.

Kitchen appliances

Appliances!

Cooktop

Cooktop! Wow!

sink

Extremely cute laundry sink

 

 

 

 

 

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Since it’s time to think about taxes…

The other day, a colleague asked me an interesting question about mortgage interest deductions. “If two people living together are filing taxes separately, and one has a significantly higher salary, which one should claim the mortgage interest deduction? The one with the higher salary or the other one?” 
They essentially wanted to maximize the possible tax return benefit for one of them.

At first I thought that might something one could run scenarios on and let the numbers dictate the choice. It turns out that the law is actually clear enough on this point that you don’t have to.

From Five Traps To Avoid When Deducting Mortgage Interest

As a general rule, you must satisfy certain requirements –which can best be phrased as questions — before deducting mortgage interest. The requirements that applied to my colleague’s situation are as follows:

  • Who paid the mortgage? – only the taxpayer who actually pays the mortgage is entitled to a deduction.
  • Who is listed as the borrower? – taxpayers can only deduct interest on debt for which they are legally obligated.

Scenario 3: You and your roommate own a house together, pay the mortgage out of joint or separate bank accounts

Where two or more persons are jointly and severally liable for a debt, each is primarily liable for that debt, and each is entitled to a deduction for the interest on that debt that he or she pays.

  • Funds paid from a joint account with two equal owners are presumed to be paid equally by each owner.
  • If the mortgage interest is paid from separate (rather than joint) funds, each taxpayer may claim the mortgage interest deduction paid from each one’s separate funds.

 

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Paying Contractors

We have paint and texture on all drywall at Blue Ridge, but we seem to have lost a week in the process somewhere.

The Blue Ridge project is taking longer than expected. Don’t they all? But the texture is on the walls and painting has commenced.

As best I can tell, we are about a week behind schedule without having encountered any serious delays, just a series of small ones. But, as with pennies, small delays add up.

This situation is an example of why you should pay your contractors on completion of tasks, not on a time-based schedule—no matter how good they are or how much you trust them. Unfortunately, we agreed to weekly payments on this project, mainly because we had too much going on, had our primary contractor back out of bidding because of too much work already booked, and urgent relief at having found a recommended GC who was willing to start two weeks earlier than anyone else. Not to mention the distractions of the Christmas season.

All of that now leaves us in a situation where we have to renegotiate the payment schedule at the end of the project.

When you pay on task completion, you risk having your project become a lower priority than “more lucrative” projects. On the other hand, paying on completion guarantees you won’t be paying for undone work, but it doesnt guarantee timely completion. Either way, delays increase your holding costs during a project.

Here are some lessons we’ve learned over time:

  • Have your contract written so you pay on completion of a task rather than on a schedule.
  • If the contractor is furnishing the materials, keep the upfront payments minimal, but reasonable.
  • Keep tabs on the work as it progresses, and don’t be shy about asking questions.
  • Always plan on paying at least 10% more than the bid. There will always be things you didn’t know about when the project went out for bid.
  • Plan for at least six weeks of holding costs beyond the scope of the project. There are almost always delays in the renovation and sale processes.
  • If you plan for a longer, more expensive project, you’re in good shape if it comes in on time and on schedule. The inverse is not true.
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Streams of Income from Rental Properties: Equity Growth—Infinity and Beyond

Buzz Lightyear

Buzz Lightyear should be every real estate investor’s hero. He had the right motto.

So far, we’ve talked about the most obvious stream of rental income (cash flow) and the less obvious concept of viewing depreciation as income through tax reduction. Today, I want to talk about equity growth.

As you continue to make monthly mortgage payments, your equity in the property grows.  But remember, you are not making the payments. Your renter is. So that equity growth represents a very real increase in your wealth, and you don’t have to do anything to get it except keep your rental property in rentable condition and rented.

Before we get started today, I want to be clear that I am making some unreasonable assumptions in this discussion. I make these assumptions because I want to talk about making money on borrowed money, and clouding that concept with other issues makes that concept much more difficult to understand. We’ve all been taught for years that debt is bad, but Robert Kiyosaki points out that there is good debt and bad debt. I’m talking about good debt. So here are my assumptions: Continue reading →

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Construction Update: The Value of a Dumpster

Without a dumpster, Villa Park is a mess.

The nanny suite has been skinned with hardiplank, but its emerging beauty is hidden by debris.

Blue Ridge looks much cleaner. Thanks to the dumpster, Blue Ridge looks inviting, even in the middle of the renovation.

This post started out to be a quick update on the two renovation projects we currently have running, but you know me: I can’t resist wagging my tongue when something finally sinks in. So, I’m going to preach (probably to the choir) about dumpsters first, and give a short update at the end.

Many rehabbers use dumpsters at their projects—certainly all of the ones you see on television. But others let the refuse pile up or pile it onto trailers to take to the dump when they are ready. The GC I have used for the last eight years falls into the later camp. “Why pay the money for a dumpster when I can haul stuff away much cheaper?” he asked the first time I suggested getting one. Not being intimate with that part of the business, his logic swayed me. He is handling the Villa Park project.

We decided to use a dumpster at the Blue Ridge project as we brought on a new GC who actually preferred renting a dumpster. The photos at the right show the difference between the two projects, both run by professional contractors who are very good at what they do.

I won’t compare overall costs, because the two projects are radically different and have produce dramatically differing qualities of debris. But priced by the yard, the dumpster method seems to win out, even in cost. Thirty yards of debris cost roughly $500 to dispose of at Blue Ridge. The same amount of debris cost about $450 to dispose of at Villa Park. So I saved $50 by having my GC haul off the waste. But take another look at the two pictures.

Now here are some hidden costs of having your GC dispose of the construction debris: Continue reading →

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