Goodbye Turbo Tax…hello new baby girl!

Hey yo, about 6 weeks ago we had a baby girl and I celebrated this Mother’s Day as mom to a daughter! Her name is Jonna and she’s unbelievably beautiful and clever (moms aren’t biased at all). That means I’m busy updating wills, insurance, documentation, changing out baby clothes, changing vehicles… basically updating everything in our entire lives. We love it though… and I know someday we’ll look back on these days with fond memories!

Our new baby girl!

So of course, for everyone in the US, tax season came and Ross and I both started stressing about taxes. We always buy TurboTax software and do it ourselves, but the closer we got to selling the rental/fixer (this year!), the more we worried we’re not set up to snag all the savings we can from the government. What if we missed a deduction on which we could have saved hundreds of dollars? We just weren’t sure we were capturing everything within TurboTax. Ross may also have been sick of me sending him Forbes articles about deductions. Maybe. Possibly.

Our situation is unique, because we’ve changed our model from rental to resale since starting the LLC, which changes how you can recognize revenue. Because we won’t have a stream of income, we will recognize a one-time injection of capital at sale, we need to pay close attention to how we’re claiming it on our taxes and how we’re claiming associated expenses.

Long story short, we received a referral from a friend to a tax accountant and she is amazing! Not only did she find crazy HSA over-contributions from years ago that we would be financially penalized for (what the what?!) but she advised we change the structure of our LLC for even more savings come next tax season. She also helped us more accurately and appropriately deduct our current expenses. In other words, she told us things we would never have known, and will continue to advise us through the sale to get the most savings possible.

Yes, paying for a personal tax accountant is about 10x more expensive than TurboTax, but you’re paying for the consulting that Turbo Tax can’t possibly give you. This includes advice like which LLC will be the best vehicle for your business, when exactly it would be most beneficial to claim expenses and revenue and even looking over past years’ filings to find anything you may be penalized for in the future. Well worth it to have confidence in your filing of income taxes if you’ve made a large investment.

It’s kind of like insurance– and I love this analogy. When I was 19 and only looked at cost, I bought car insurance online from Progressive. When in a blizzard (#minnesnowta) my car was hit from behind and I didn’t know how to recover the cost of the damages, I called Progressive (naturally, right?). I think they even told me to call them first if I was ever in an accident. They proceeded to hang up on me and do virtually everything possible to avoid talking to me– to avoid ADVISING me.

It was a total shitshow; it was like being told to fuck off without someone actually saying fuck off. It made me hate the world and I really can’t over-emphasize how horrible they were. Therefore, when they should have just asked about the police report and told me to chase down the idiot who hit me, to force his insurance to pay, I was aggressively told by Progressive that I wouldn’t have any way to fix my vehicle, ever, and that I should just stop calling. The opposite of what I’d call advice, assistance, or even low-level helpfulness. So I drove a wrecked Celica for 5 years and ate my losses. I refused to lose any more money replacing my vehicle.

During the wrecked Celica days. Do I look like I understood insurance? I didn’t even understand how to wear eye makeup.

That was a sweet ride–my wrecked Toyota Celica, urgh. Today I have an actual insurance agent from State Farm (and a non-wrecked car woohoo!) and when me, my husband or my kids (someday) get in a car accident, the first call I make will be to our agent, and instead of telling us to fuck off we’ll get some actual ADVICE! In this world, you really have to pay extra for advocacy, service and helpfulness, and that’s a lesson learned the hard way. Otherwise, the general approach is to take the money and run, don’t look back, and sure as hell don’t answer the phone.

What permits do you need?

So we set up an LLC for our investment property, primarily for keeping ‘the biz’ separate from our personal finances. It also helps at tax time and for keeping liability or damages away from your person if something were to happen at your investment or rental property.

We added some floor supports in the basement early on to level the floor

We added some floor supports in the basement early on to level the floor

Most complex to me is the permit situation. Because we have an LLC, the city is going to treat us like any other outside business improving a property – not as homeowners. Here is a breakdown of all the permits we needed…I highlighted the 3 permits where you must have a licensed tradesman do the work (you cannot work on these yourself):

Taking apart the kitchen

Taking apart the kitchen

  • The first permit you need is a general building permit. You can get this yourself. The LLC purchases this to improve a property and it details the general scope of the project. There are a few different inspections required with the general permit.
    • Framing inspection: Checks all the walls ensuring the structure is secure.
    • Insulation inspection: Checks to make sure the house is properly insulated.
    • Vapor barrier: Keeps the moisture out of the house.
    • Fire block: Stops backdrafts in the event of a fire.
  • You will need a permit for a new roof.
  • You will need a permit for siding, but we were lucky; we did not have to replace any siding.
  • You will need a permit for any new windows you install.
  • You will need a licensed electrical outfit to pull a permit for any electrical work you do.
    • Electricians are expensive, but we are lucky that my brother is an electrician and is able to pull permits and do the work himself.
  • You will need an HVAC permit and you cannot do the work yourself unless you are the homeowner. HVAC is heating, ventilation and air conditioning.
  • You will need a plumbing inspection and a permit from a licensed plumber.
Removing the paneling and underneath that was wallpaper....lots of wallpaper

Removing the paneling and underneath that was wallpaper….lots of wallpaper

This is all null and void, of course, if you are the primary homeowner, As a homeowner you are encouraged to make improvements to your property as needed. As a business, they want to ensure you are not doing shoddy work for a quick buck to the deprecation of a property.

Our One Year Anniversary (of the rental property)

We are kind of excited yet pensive, because TO-DAY is the one year anniversary of purchasing our rental property. At this time last year, I was hugely pregnant, struggling to find clothes that fit over the bump, and we were trotting around with little George, with showings every weekend at dumpy, smokey houses. There were a few that Ross didn’t even want George and I to go into…haha. Also a few weird ones where people would not leave (one house had a quasi-family with five other people there during the showing…and it was like a three-bedroom house). One had a crazy old cat lady living there and was so smokey I felt bad for the cat!

It took about two years to find a property that hit all of our priorities and to not be outbid on it. We ended up purchasing a HUD home (US Department of Housing & Urban Development) – which I liked, because the declarations are all there on the listing (what needs to be fixed, examined, etc.) You still have to work with a licensed realtor and there is zero room to negotiate the price down – but again, that is why I like it. I HATE haggling.

There is really only one house that we bid on that I am still slightly sad about – it was a cool historic home and had some nice features that our lovely little property doesn’t have. We were outbid by less than $1k, and the guy that swooped it up was a realtor, so he definitely scored. The location was right on-campus, like we wanted, yet it was on a busy street so there wouldn’t be security concerns. But as Ross and I have talked about many times, there is a reason we didn’t get that property and did get the property we have now. We’re just not all-knowing and can’t figure out the reason! It’s so frustrating not to know the plan for us – for me at least. Ross can just go with the flow, but if one of my plans doesn’t work out I am already ten steps into my next plan of attack.

So we are one year into fixing up the house, which is not surprising. I estimated about a year fixing up the property in this post. However, as we are considering selling it instead of renting it, we are pulling out all of the stops. #doitrealbig Oh yeah, and we are redoing the plumbing, which was unexpected. But looking back at our journey, we have come a long way, from one baby plus one on the way, and some dough we didn’t want to throw at the stock market. ‘Cuz of this shit: http://www.marketwatch.com/story/stock-market-swoons-send-consumer-sentiment-to-worst-level-in-a-year-2015-09-11

The sitting room had a great old fireplace (we don't have a fireplace...it's still something we consider adding)

The sitting room had a great old fireplace (we don’t have a fireplace…it’s still something we consider adding)

How cool are the bottom stairs with the hex angle? I love the two different types of wood at the landing, too.

How cool are the bottom stairs with the hex angle? I love the two different types of wood at the landing, too.

The trimwork was in great condition and there weren't any pieces missing.

The trimwork was in great condition and there weren’t any pieces missing.

There was some water damage but HUD opens up each home so you can openly view any damage, which is nice.

There was some water damage but HUD opens up each home so you can openly view any damage, which is nice.

The galley kitchen was tiny but there was a cute sitting window-breakfast nook-dining area we could have enhanced.

The galley kitchen was tiny but there was a cute sitting window-breakfast nook-dining area we could have enhanced.

This kitchen would have needed as much, if not more work. We probably would have had to make it bigger.

This kitchen would have needed as much, if not more work. We probably would have had to make it bigger.

As I remember there was only one bathroom, and it was none too big.

As I remember there was only one bathroom, and it was none too big.

The exterior was the epitome of cute, though! #idie

The exterior was the epitome of cute, though! #idie

Setbacks – How far out can we build a front porch?

That is a trick question. The answer is ZERO! Remember how excited I was about all of the possibilities for our front porch? Yah nevermind. We spent a day with a metal detector looking for the property line pins or corner irons and never found them. #womp #butfunforGeorge

George with the metal detector.

George with the metal detector.

Ross looking for property line pins.

Ross looking for property line pins.

There was metal everywhere!

There was metal everywhere!

According to the city’s zoning maps, we don’t have any room to build out anymore than what is original to the home. We need 25 feet of space – I guess it’s called setback – between the property line and the house or porch. We only have about 11 feet as it is, so even if we found the pins, we probably wouldn’t be any better off.

Looking for property line pins with the Tonka Truck!

Looking for property line pins with the Tonka Truck!

George and Julius waiting patiently.

George and Julius waiting patiently.

Ross and Baby Julius after the failed property pin search.

Ross and Baby Julius after the failed property pin search.

So, I’m re-calibrating and thinking about building out our front steps with brick instead of building a porch. This one seems like a good fit for our front stairs or here is a similar one. I love the idea of building a brick structure overhead but it may be too extravagant for the simple little bungalow-type house we have. But regardless, we need to ooze curb appeal at the front door if we are unable to build out a front porch.

Rent and hold or flip and sell?

Ross and I have been going back and forth on this a lot lately. As we start choosing finishes and refinishing hardwoods, we have talked about refinishing this house and selling it instead of holding it and renting it over time. While renting is more profitable, the quick infusion of cash for selling might be appropriate to valuate the high-end finishes Ross is including in the house. It is a more weighty and emotional decision considering it is our own time, effort and money we have spent on every square inch of the house. It pulls at our heartstrings a little to know that some finishes won’t matter to renters. Oh, and I know we are not supposed to become emotionally attached to an investment…but it’s hard when it equates to long hours after work and time away from your family.

This is not a decision we are taking lightly. The rental property forum on Mr. Money Mustache has been helpful as well as The Simple Dollar. The piece de resistance to me was the understanding that flipping properties should be a first step to earn enough money to acquire buy-and-hold properties – rental properties – in which longevity earns more. I guess considering this is our first investment property, it would fall into the flip bucket (even though we paid cash to acquire it straight away). While our long term goal is multiple rental properties, we are thinking of selling this first property instead of renting it for a few reasons:

  • We are putting nice finishes into it. No wall is just painted-over paneling. Refinishing hardwood floors is a bitch. If we knew we were going to rent it out, we might have downgraded a bit on some of the remodel.
  • We are actually being very careful to put historically-accurate finishes in the home. Renters probably won’t care about a butler’s pantry and would probably rather have more cabinets or a larger pantry. Renters would probably rather have a shower than a clawfoot tub.
  • We aren’t near a campus. We did look at properties on campus, but they were either so horrible there wasn’t room for improvement (basically added-on shacks) or the prices were too high (investors eat them up quickly). We are in more of a family neighborhood.
  • Ideally, we would be able to utilize the quick infusion of cash to buy a larger rental property. Ross would like a property with more bedrooms and bathrooms and a larger garage – more obviously a multi-family unit than the current house. We want to specifically attract students.
  • Ross pointed out we can attempt to sell it first, and if we don’t receive any offers we like, then we can turn around and rent it instead.

I’m primarily leaving the decision up to Ross because he is making the improvements. By me placing value only on future earnings of a rental property, I am casting less light on the value of the improvements he makes today. In actuality, the quality of his work matters a lot – it just matters more if we are staging and selling right away. Either way, this property will earn us money, and either way, we will have a rental property in the end. But it is important to know our plan of attack so we can finish it with a buyer in mind versus renters.

Oh, and here’s one more thing Ross does that provides immediate value to our household: he works on cars! (A good reminder for all those times I get snotty about laundry).

George helps daddy fix the car

George helps daddy fix the car

Book Review: How to be the Smartest Renter on the Block

My mom was a librarian so I have a special love for the amazing FREE library resources provided by libraries. When I was little, a fresh pile of books from the library was like hitting the jackpot. I still feel like I won something when I leave the library with a free book.

As per usual, when I want to learn about something, I check the library first! I went online to request library books about rental property ownership and leases. Oh yeah, and I also requested some books about potty training…but that is another post for another day.
The first book I checked out was How to be the Smartest Renter on Your Block: A Minnesota Tenants’ Rights Guide by Homelinemn.org. Although written to serve the renter, not the landlord, I thought it would be helpful to know renters’ rights in every conceivable circumstance so we are not putting ourselves at risk of a lawsuit.

How to be the Smartest Renter on Your Block

Ten years ago, I certainly was not a savvy renter. I learned a lot about tenant rights in this book. I originally requested it on a whim, and thought it might be the most irrelevant out of all of the books I requested. I’m so glad I gave it a shot. There are such obscure laws about fees you can and cannot charge tenants that I never would have found out about otherwise.
Here are a few tidbits I gleaned from this book (from a landlord’s perspective):

  • You can charge $75 for a background check but you have to write the criteria for which a renter could be denied acceptance.
  • You may charge an application fee but must provide criteria for acceptance. You must also include the name, address and phone of any screening company. You must state your reasons for denied acceptance.
  • State parking guidelines and that violators will be towed.
  • You can charge pet rent of $25 per month for cat and $50 per month for dog. Pets must be declared and approved, obviously.
  • Lease must clarify late fees – after a grace period of typically five days. Late fees cannot exceed 8 percent of overdue rent.
  • If it is a shared utility meter the landlord must put the bill in their own name and fairly bill the tenants. The billing formula must be written into the lease and you cannot add fees. The lease must state upon tenant request the landlord will provide the utility bill and/or previous utility bills up to two years earlier. The lease must also state the average utility bill each quarter for the previous year.
  • Bounced check/non-sufficient funds fee is $30 according to the Minnesota laws.
  • You should state that bilateral attorney fees will cover the attorney fees of winning party in the event of a lawsuit.
  • A party fee equal to the fine will be charged in the event of a noise violation.
  • You cannot ask about protected classes such as:
    • skin color
    • creed
    • disability
    • children in household
    • marital status
    • national origin
    • race
    • social program or public assistance
    • religion
    • gender or pregnancies
    • sexual preferences
    • age or ancestry

 

  • Legitimate legal reasons for breaking a lease:
    • Domestic abuse
    • Joining the armed forces
    • Death of tenant
    • Property is condemned
    • Judge’s order
    • Building is unfit (such as burned down)
  • If a tenant wants to end a lease early and does not come to an agreement with the landlord, the tenant owes the remainder of the lease term and can be sued in court to force payment. The landlord can re-rent the lease at any time. List a break-lease fee in the contract, usually the security deposit plus one month’s rent.
  • A landlord must have reasonable business purpose for entering a property as well as give reasonable notice (verbal is suitable). Law does not state 24 hours.
  • You must provide a copy of the written lease to renter.
  • There is no federal law limiting number of occupants in a single dwelling but city ordinances can limit unrelated people living together.
  • Any deposit to reserve a property must be accompanied by a written agreement. It must state the deposit will be returned within 7 days of conditions being met. If tenant is accepted the deposit must go towards rent.
  • A landlord may ask for name, employer, sources of income, social security number, eviction history and date of birth.
  • If it is proven a tenant lied on an application you may sue the tenant for $500.
  • Security deposit is usually a full-month’s rent.
  • Tenants who are being evicted must receive a formal court notice and have a chance to defend themselves in court. Landlords cannot simply change the locks nor threaten eviction verbally.
  • For nonpayment of rent, landlords can file evictions as soon as the day after rent is due.
  • A tenant may arrive at court with all monies due and have redemption and can include the following:
    • Any rent that is due.
    • Lawful late fees.
    • Approximately $320 for court filing fees
    • Approximately $80 for service of process which is fees for court delivering papers to the tenant.
    • A maximum of $5 for attorney’s fees.
  • Minnesota law requires a landlord provide a receipt when rent is paid in cash.
  • You can legally evict for violation of any contract terms, plus four criminal situations:
    • Illegal drugs
    • Possession of illegal weapons
    • Possession of stolen properties
    • Engaging in prostitution
  • Take pictures of the condition of the property before move-in and at move-out.
  • Security deposit due on the first day of the lease.
  • The landlord must return the full deposit, part of the deposit with an explanation, or a letter stating what happened to the deposit within 3 weeks/21 days of move out.
    • The trigger starts when the tenant turns in their keys
    • A forwarding address must be provided to the landlord to send the deposit
    • Landlords can keep the deposit provided one of these reasons:
      • Debt that is owed from tenancy for utilities or rent
      • Damages beyond ordinary wear and tear (must be proven)
  • Minnesota law requires the landlords store any remaining property for 28 days after the tenant vacates the property. They should notify the tenant 14 days in advance of the sale if reachable, and must apply revenue to all monies owed from tenancy.
  • Tenants must receive a Certificate of Rent Paid by Jan. 31 of each year (one for each unmarried tenant). The Certificate must state each tenant paid an equal amount regardless of how the actual rent is split.

I loved learning all of these little-known facts about renting. Many of these rights are completely unknown to the average renter, in my experience. Were your rights ever violated as a renter? I’ve heard horror stories from friends and coworkers about having ongoing leaks and maintenance issues, among others.

Budgeting before buying

We were very deliberate when planning our rental property business. The very first step was to actually run the numbers. It’s my belief you should never invest in a business without running realistic projections – and then also running worst-case-scenario projections. I created a spreadsheet which was probably missing a few expenses but had all of the ongoing (projected) expenses I could think of and revenues broken out quarterly, outside of the initial cost of the property and any renovation or remodel. I have a different sheet for each outcome – 2 bedroom, 3 bedroom, and the best case scenario – 4 bedroom. Of course there will also be months when incidentally no one lives there. Like the whole first year if we are renovating. Boo.

Our 3 bedroom rental scenario

Our 3 bedroom rental scenario

The expenses list includes:

  • Carpet cleaning/replacing
  • Touch up paint
  • Garbage services
  • Inspection fee to renew license
  • Per sleeping room license fee
  • Small repairs (appliances, yard maintenance, etc.)
  • Property insurance

Balancing this out over the projected revenues, I estimate an eventual profit, but only if the property is paid in cash and remodeling is paid in cash, therefore not figured in as expenses. Even then, profits are small (do not come anywhere near replacing even one of our individual incomes). There are years and years of financial losses if you factor in a business loan. That being said, this budget is built for a single-family property, and with a larger property the cash flow would be quite different. With full-time jobs, we did not imagine ourselves running a large rental business and assumed one small property would be enough of a challenge! If we turn a small profit, we will feel like we successfully diversified our funds, with our goal being to simply NOT lose our asses assets.

Assets being the cash we have worked hard to save for years and years. Both of us have a constant headache and heartache over actually spending our hard-earned savings. It feels good to have that money sitting there in a savings account and knowing it is right there if we need it. #slushfund However, it is also doing nothing for us sitting in a savings account with inflation slowly eating up the interest. We know buying a rental property is a risk – a carefully calculated one – but still a risk. We are going to work a lot harder (for hopefully bigger returns) than we are with money sitting in a savings account. Plus, we hope by diy-ing the remodel and improvements we can squeeze the most return from each and every dollar we spend. Free bin on Craigslist, anyone? #gross #haha #spookytoo Keep in mind,  projected budget numbers will vary with cost of living in your area so plan your budget accordingly, if you are following in our [insane] footsteps.

More exciting than the projected expenses are the projected profits. The more research I do into business taxation, I realize one of the biggest benefits the single biggest benefit to owning an LLC could be tax benefits. I need to dedicate a lot more time to researching business accounting and taxation. I understand we could just hire someone to manage our accounting but I enjoy learning, believe in life-long learning, and feel empowered the more I learn. How does the saying go – knowing just enough to be dangerous? That might be me.

We are certainly not expecting to get rich – we really just hope to turn a small profit and try a different investment outside of the stock market. It a decision we made together, and debated for years, so that we would not someday look back with regret. So away we go…#skerd

I talked to another landlord who started out in mobile homes…he said he didn’t recommend that due to shoddy construction, and he also recommended against buying a home built in the 70s or 80s as they were experimenting with new building materials. Luckily our home was built in 1912 so it’s built like a rock. I’ve heard you should never invest in something you know little about…but I’d argue a little research goes a long way. It’s great to ask around…knowledge is power!

George in his tax glasses, trying to eat your face. #totesadorbs

George in his tax glasses, trying to eat your face. #totesadorbs

Starting an LLC…and 5 reasons you might just pay an attorney to do it for you

I once learned enough about dentistry in one month to ghost write on behalf of dentists, so I figured I could manage filing for an LLC. I assumed it would consist of a quick form and probably $50 in administrative costs. I was a bit….optimistic. A lot of people pay attorneys to help them start an LLC. This is not a bad idea…. “You might be an….attorney-payer if:”

  • You don’t feel like reading 8 pages of IRS tax information…per day for a week straight. (I’m one of those people that read all of the fine print before I sign anything). Hell, I just like to read.
  • You are not particularly detail-oriented or you are, shall we say, low-energy. Kids anyone?
  • You are an attorney already.
  • You become so frustrated with this run-on sentence that you vow to track down whoever wrote it (oh no, just me?): For Minnesota sales and use tax purposes, charges to lease or rent a residential dwelling, including a home, cabin, condominium or similar building are taxable for a period of less than 30 days and for periods of 30 days or more if there is no enforceable written lease agreement with the customer that requires the guest to give prior notice of their intention to terminate.
  • You’re addicted to Snapchat and can’t put.the.snaps.down.

    My life in snapchat captions

    All the cute this snap can handle

    All the cute this snap can handle

     

[Thought-cloud here] So that run-on sentence…urgh…it is taxable for only 30 days? Changes to lease or charges to lease…do they mean fee charges? Why are they adding superfluous words here? A home or a house? A house is a structure, a home is a residence, whatever form that takes, right? Sigh.

So the actual paperwork bit was daunting. But I’m a stickler for details so I started making a to-do list. Or, more accurately, a to-look-into-further list. Along the way, I learned a lot of surprising facts about doing business in Minnesota, including the fact that you cannot use a PO Box for most government filings. So while a PO Box is a great option for bills and paperwork, government filings are always sent through a physical office or home address.

I learned you will need a tax ID from the state if you have a multiple member LLC or partnership – a must if you have employees. It comes in handy as an alternative to a social security number on LLC filings. Also, you are supposed to file use tax for any faucets or other goodies we buy online that are not taxed – one of the most overlooked details in filing returns. Detail-oriented for the win!

This is our command center slash home office.

This is our command center slash home office.

Not knowing how long it actually takes to set up an LLC, we didn’t get too far into the property-purchasing process until we had the proper LLC structure in place. We wanted to purchase our rental as the LLC, instead of individuals, for the following reasons:

  • It is clean cut and keeps your business separate from your personal life.
  • You are less likely to be personally sued because the house is owned by the LLC. Insurance policies help too, of course.
  • Your taxes should be more clean, clear and under control because everything is owned by the LLC.
  • We knew we were writing up formal leases, so it made sense for the ownership to be formal too (not renting to family/friends). We knew we were not doing short-term (30 day) rental terms.
  • We are sure there are also benefits to owning it ourselves as a second (personal) home, but we just wanted to keep it separate to add a layer of security between us and the business profit or loss.

Here is the checklist I used when starting the business (yeah for lists!). Do you love checklists too? (Is that strictly a female thing?)