Road to Financial Freedom: September 2016

Sunday, September 11, 2016

Several notes

· Housing Inspection

· Landlord better to be present for any raised problems

· Join local landlord association for more resources

· Book: real estate loophole

· Become a RE agent or with the traning

· Local building codes

Tricks to avoid auditing

· Avoid e-filing

· If there is loophole, saying, “Per IRS tax code so on so, etc”

· Avoid tax filling red flags – most common one is home office

Success in rental business

· Business is business. Nothing more, nothing less

· Be legal and professional. Be nice and firm to tenants

· Tenants:

· Honest

· Reliable and responsible

· Steady and good income

· Good credits

· Potential troublesome tenants

· Eviction history

· Criminal history

· Lots of lawsuits

· Cannot afford the rent

· No stable income

LLC and Tax

· Single Member LLC: Form 1040

· Multi-member LLC -> Form 1065 -> Schedule K-1 -> 1040 Schedule E

· Diane Kennedy CPA said the chances that got audited for Schedule C is 400 times of Schedule E

Tenant lawsuits?

1. Bring Apartment up to code and/or pass inspections (BOH and/or building department)

2. Quick responses to tenant’s requests.

3. Landlord insurance + Umbrella Insurance

4. Asset Protection

· Own nothing but control everything

· Living Trust?

Tax Geek Tuesday(?): The IRS Finally Figures Out The Real Estate Professional Rules

http://www.forbes.com/sites/anthonynitti/2014/07/09/tax-geek-tuesday-the-irs-finally-figures-out-the-real-estate-professional-rules/#75fd73274760

Natural Gas vs. Electric appliances

http://michaelbluejay.com/electricity/gas.html

Last update: February 2015

Gas is almost always cheaper than electricity. Your situation might be different depending upon local and current prices, though. To do an accurate comparison, you'll need to check your bills to find the rates for electric and gas that you're paying to your particular providers. There's no way around this; you can't get meaningful results if you skip that step.

Also, if you don't already have gas service, then signing up for it means that you'll pay ~$12/mo. or so to the gas company for the privilege of being their customer. You're also looking at the cost of having the gas lines run if your home doesn't already have them. These things can quickly erase the savings of gas appliances over electric in many to most situations.
While gas is generally cheaper, it does have a couple of downsides. With gas your house is more likely to explode. And the byproducts of gas combustion from ovens and heating are unhealthy to breathe, and can actually kill pet birds. For these reasons, I use electric instead of gas in my own home. Of course, my energy use is so small that the extra cost of electricity is minimal for me. Likewise, I hope to help my readers reduce their energy consumption so that the difference between electric and gas costs for them is insignificant.

Laundry Costs Calculator

Case A Case B

Your machines

Washer Type

% of washes in
Hot/Warm/Cold  ?

"Cold" wash temp  ?

Incoming water temp.
(see map)

Water heater type

Dryer Type

Utility rates

Cost of electricity
(per kWh)

Cost of gas ($/therm)

Cost of water
   ($/1000 gallons)

Cost of Detergent
  make your own for 2¢/load

Loads per week

Cost per load, washer 0.85 0.32

Cost per load, dryer 0.50 0.46

Total cost per load $1.34 $0.78

Cost per month $44 $25

Cost per year $523 $304

Google picks the ads, not me. I don't endorse the advertisers.

Some assumptions: 106°F hot, 88°F warm, regulated by washer.
Washers are U.S. style (w/both hot & cold supply lines). See other assumptions & sources.

Electric vs. gas ovens/stoves

See the calculator above. More info is available in full report on energy used by cooking.

Electric vs. gas clothes dryers

See the calculator at right. More info is available in my full report on energy used by clothes dryers.

Electric vs. gas heat

I don't have comparison tables for electric vs. gas heat specifically yet, but I do have quite a bit of info aboutsaving energy on heating.

Chart from DoE. Divide price by 10 to get price per therm or per CCF.

Cost of Natural Gas

Natural gas prices are all over the map, literaly. First of all, prices vary greatly by region. The price in Florida is double the price in California. Prices have also jumped wildly in short periods of time. The average U.S. price doubled from 2005 to 2008, and then fell by half from 2008 to 2011. (The chart at right shows prices for the last few decades.) Still, even when gas prices are at their highest, it's generally cheaper to run appliances on natural gas instead of electricity.

The national average price of residential gas was $1.29/Ccf in 2014. (source) (Ccf and therms are roughly the same, more on this later.) But average prices are useless for calculating your own costs and savings potential since costs vary widely by area and because they can change quickly. That goes for state-by-state averages too, because the price from your own provider likely differs at least somewhat from the state average.(prices by state)

On this site I have to use something for calculations and defaults, so I often use $1.30/therm or Ccf, which is close to the 2014 average.
Natural gas is measured in Ccf or therms. For calculation purposes, they're essentially the same (1 ccf = 1 therm). There's no direct conversion because ccf measures the volume of gas, while therms measures the energy in the gas, and the amount of energy varies by the quality of gas. It's like trying to state how many calories are in a loaf of bread—it depends on the bread. In the U.S. in 2013, the average was 1 therm = 1.025 ccf. (source) That's so close that for most purposes, therms and ccf are essentially interchangeable. Based on the above:

Ccf = hundred cubic feet. The "C" is roman for one hundred. Ccf ÷ 1.025 = therms.

Mcf = thousand cubic feet. The "M" is roman for one thousand, not an abbreviation for million. Mcf ÷ 10 = Ccf. Mcf ÷ 10.25 = therms.

Therm = 100,000 Btu. therms x 1.025 = ccf. therms ÷ 100,000 = Btu.

Btu = British thermal unit. Btus x 100,000 = therms.

Some gas bills measure the gas in cubic meters instead of therms. One therm is 2.75 cubic meters, and 1 cubic meter is 0.36 therms.

Cost of Electricity

The average cost of residential electricity was 13¢/kWh in the U.S. in 2014, though as I explain elsewhere, average rates are all but uselessfor figuring how much you pay for electricity. The average U.S. household used 909 kWh/mo. in 2013 and would pay $118.17 for it at the 13¢/kWh average rate. (Dept. of Energy) Like gas, the cost of electricity varies by location. Don't assume the state rates are accurate for you, because rates vary even within a state.

I have more info about electric costs on our cost of electricity page.

Appliance	Therms	kWh per hour
Furnace pilot light	7.3/mo.	n/a
Water Heater pilot light	3.3-4.2/mo.	n/a
Range pilot light	2.6/mo.	n/a
Range burner, small	0.05/hr.	0.6
Range burner, large	0.09/hr.	1.0
Oven	0.25/hr.	2.0
Clothes Dryer	0.19-0.35/hr.	5.0
Furnace & water heater pilots from Murphy and from the discussion on this page. Others from: Wisconsin Public Service, Okaloosa Gas, Sears catalog, and my laundry calculations page. 1 therm = 100,000 BTU = 1.023 Ccf

Comparing the operating cost of electric vs. gas appliances

Above I provide calculators for comparing the cost of gas and electric appliances. For those who prefer to crunch the numbers themselves, here's what you'll need to know:

The price of electricity in kWh.

The amount of electricity used in kWh.

The price of gas in therms.

The amount of gas used in therms.

#1 and #3 are easy to find, just look at your bill. For electricity, make sure you add all the kWh costs for electricity, since some utility companies have separate charges for delivery and fuel. (More on electrical charges.)
#2 is also pretty easy, using the tables and methods described on this site. For starters, here's our page of electricity used by typical appliances, and how to measure electrical use.
#4 is usually the hardest, because the amount of gas used by appliances for a given task or amount of time is usually not so easy to find. But I'll make it easy by listing those figures for you now, and throw in the electric version for comparison, in the table at right.

Gas used by the pilot light

The gas used by pilot lights is substantial. At $1.40/therm, you're looking at $183/yr. to run the pilots in a furnace and a water heater, not even counting a stove. Pilots could easily account for over 70% of summer gas usage, and 40% of total usage. (Murphy)

If your furnace has a pilot, turn it off during the non-heating months. (You can't just blow it out, because gas will still flow, and soon your house will blow up.) For your stove, turn off the burner pilots and use a click-lighter to light them. And the next time you replace your appliances, get the ones that have electric ignition.

In the winter, the energy from the pilot lights isn't wasted since it adds heat to your home. But when you're not running a heater, then pilot lights are 100% wasteful.

While Murphy's pilot light article gives 3.3 therms/mo. for a water heater pilot light, his water heating page suggests 4.2 therms, as follows:

510 Btu per meter revolution, with ten revolutions in 11.2 hours. That's one revolution every 10÷11.2 = 0.893h.
At 30.4375 days in a month times 24 hours/d, that's 730.5 h/mo. So 730.5 h/mo. ÷ 0.893 h/rev = 818 revs/mo.
That's 818 revs./mo. x 510 Btu/rev = 417,180 Btu/mo..
At 1 therm = 100,000 BTU, 417,180 Btu ÷ 100,000 = 4.17 therms.

Pros and Cons of popular roofing materials

http://roofgenius.com/roofmaterialchoices.htm

Popular Roofing Materials

Popular Roof Materials

What most homeowners desire is a roof that's not too expensive, requires no maintenance, and lasts forever. But most roofs are replaced - or at least repaired - every ten years. By carefully choosing your home's roofing material, you can reduce the cost of replacement. In the long run, you'll use less building material, fill up less landfill space with discarded material, and put less demand on our natural resources.

Composition shingles

Composition shingles are a good choice for a clean look at an affordable price. Higher-quality versions made from asphalt or fiberglass shingles offer a more durable option and may be available with recycled content. Composition shingles come in a large selection of types, brands and colors. Versatile, they adapt easily to different applications. They are relatively easy to install, and in some applications can be nailed in place over an existing roof. They require low maintenance and can be walked on without damaging the material. Most brands offer Class A fire protection.
On the negative side, they can blow off in high winds. Material is easy to scar if hot. Does not have the dimensional look of tile or shake.

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Wood Shakes

Wood shakes offer a natural look with a lot of character. Because of variations like color, width, thickness, or cut of the wood, no two shake roofs will ever be the same. Wood offers some energy benefits, too: it helps to insulate the attic, and it allows the house to breathe, circulating air through the small openings under the felt rows on which wooden shingles are laid.
A wood shake roof, however demands proper maintenance and repair, or it will not last as long as other products. Mold, rot, and insects can be a problem. The lifecycle cost of a shake roof may be high, and old shakes can't be recycled.
Most wood shakes are unrated by fire safety codes. Many use wipe or spray-on fire retardants which offer less protection and are only effective for a few years. There are pressure-treated shakes, however, that are impregnated with fire retardant and meet national fire safety standards. Made by companies like Chemco, this pressure treating extends the life of wood shingles and provides better fire safety performance. Installing wood shakes is more complicated than roofing with composite shingles, and the quality of finished roof depends on the experience of the contractor as well as the caliber of the shakes you use.
The best shakes come from the heartwood of large old cedar trees. Care should be taken when selecting shakes as the quality varies greatly from different shake mills.

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Clay Tile

Clay roofing tile is a good choice for homes with a southwestern, Italian, or Spanish Mission design, or even for homes with a modern, clean look.
Tile lasts a long time - its expected lifespan is greater than the lifespan of the material on which the roofing rests. Tile won't rot or burn, and it can't be harmed by insects. It requires little maintenance, and comes in a variety of colors, types, styles and brands. The biggest drawback to clay tile can be its weight. Depending on the material used to make it, tile can be very heavy - so heavy that extra roof support can be required. With some new materials, however, color is added only on the surface of the tile, and they can fade over time. Although most modern tile is kiln-fired into the tile making the color permanent.
Tiles are fragile, so walking on them can break them. That makes it more difficult to accomplish maintenance like painting or cleaning rain gutters or fireplaces. Initial installation can be more complicated than other roofing materials.

Finally, tile can cost more than other roofing materials.

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Slate Roofing

Slate - actual shingle-like slivers of rock - is another roofing material that shows up on more upscale homes. Although slate is an expensive choice, it offers a very natural look and can be laid out in a variety of patterns.
The benefits of slate are identical to those of tile: a very long lifespan, good fire protection, low maintenance, and an invulnerably to rot and insects. It comes in a good selection of sizes and colors, although colors are limited to those found in nature.
Like tile, slate can be very heavy, sometimes requiring expensive extra support. It, to, is breakable enough that walking on it is difficult for a non-professional, complicating such tasks as rooftop maintenance, gutter cleaning and painting.

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Concrete Tile

Concrete Tile is now a roofing material. Shingles, simulated wood shakes, lighter-weight tiles and concrete panels are being manufactured from a variety of fiber-reinforced cement products. Some are coated with plastics, enamels, or thin metals, and some contain recycled material. Although the products themselves are not yet recyclable, they are a good choice for durability and resource efficiency. The advantages of concrete roofing vary from product to product, but generally they all have a long lifespan, require low maintenance, offer good fire protection and are resistant to rot and insects. Many tiles mimic the appearance of wood shakes, while improving on the durability and fire protection that real wood affords. It can approximate the look of clay tile or slate while mitigating the structural problems caused by the weight of the real material.

Concrete is more expensive than some roofing materials, and early types of concrete roofing had problems with the material curling, breaking and changing color. Technology has improved, however, and these problems have mostly been overcome. Style and color choices are expanding, and by mixing the cement with additives, manufacturers and making lighter and lighter products.

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Metal Roofing

Metal Roofs are coming back into vogue. In the late 1700s, zinc, copper, and lead were the most popular materials used for roofing - such famous historic buildings as the Washington Monument and Thomas Jefferson's Monticello have metal roofs.
Standing-seam steel roofing is the most popular residential metal roofing today. (The term standing-seam describes the upturned edge of one metal panel that connects it to adjacent sections, creating distinctive vertical lines and a trendy historical look.) But metal roofs can also be made to resemble wood shakes, clay tiles, shingles, and Victorian metal tiles. Aluminum or coated steel is formed into individual shingles or tiles, or into modular panels four feet long that mimic a row of shingles or tiles.
Metal roofs are durable, fire retardant and almost maintenance-free. They are also energy efficient; metal reflects heat and blocks its transfer into the attic. Research by the Florida Solar Energy Center in 1985 showed that metal absorbed 34 percent less heat than asphalt shingles, and homeowners switching to metal roofing reported saving up to 20 percent on their energy bills. Steel roofs offer other environmental benefits as well. They are made from between 60 percent to 65 percent recyclable material. Because they weigh very little, metal roofing can be installed over existing roofs, eliminating the need to dispose of excess material in a landfill.
Installing some metal roofing can be an intricate process best done by a professional, and the initial cost of a premium metal roof is higher than most other roofing materials. You need to compute the lifecycle cost to see if paying more to begin with for a metal roof will prove to be a better investment than some other form of roofing.

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Hot Mop Roofing

Hot Mop Mostly seen in commercial applications, hot mopped asphalt roofing is sometimes applied to flat or semi-flat residential roofs that have good access and proper drainage. Asphalt's advantage is that it is less expensive than other roofing materials and holds up fairly well when properly applied. The technique results in a roof that's not very pretty, although in residential use it is often covered with a layer of decorative stone to improve the appearance. You've no doubt noticed roofing projects that use this technique, since it requires a large kettle of melted asphalt. When being applied, the hot mixture releases extremely high levels of smelly air pollutants. In addition to being unpleasant, the hot asphalt poses a health risk to installers. Because its fumes contribute to smog, hot mopped asphalt may be restricted in some urban areas.

He began his law enforcement career with the City of Mechanicville Police Department in 1964.

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I like investing in companies with solid histories that have recently fallen out of favor in the market.

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Be Wary, One final note

Many of the high end, man made roofing materials made in the last 10-15 years have failed prematurely. Most of these materials promised 50 year warranties. Many homeowners are stuck with failing high dollar roofs, and are involved in class action law suits Be careful in selecting materials that do not have a proven track record. Investigate thoroughly. Also see Cheating Roofing Contractors

New Tax Laws Can Save Landlords $3,500 Annually

From:
https://www.rentalutions.com/education/articles/new-tax-laws-can-save-landlords-3500-annually/

By Laurence Jankelow | 2 years ago
Accounting & Reporting

In September, the IRS released the final version of regulations that may save you up to $3,500 in taxes every year, beginning with the 2014 tax year. If you follow Inman News like I do, then you may have read the article last month by Stephen Fishman that the IRS released its final guidance on tax laws that could allow a do-it-yourself landlord, like you, to save thousands in taxes next year.

But it requires that you or your accountant know about the guidance and specifically elect to not apply a long-standing rule. In fact, Fishman, a regular contributor at Inman on Real Estate Taxes suggests this is one of the most significant tax law changes for rental property owners since 1986 (when passive loss rules limited the use of rental properties as tax shelters).

What’s this all about?

Historically, it has always been unclear whether certain expenses to restore or improve a property are considered capital expenditures (unfavorable for landlords like us) ordeductible ordinary and necessary repair and maintenance expenses (favorable).

Why does this matter? As investors, we want to shrink our current year’s taxable income by offsetting that income with expenses (rather than spreading the cost over several years). For example, if a $1,000 expense can be classified as an ordinary, currently deductible expense, your taxable income decreases by $1,000, therefore reducing your tax liability by $300 and essentially putting that amount back into your pocket(assuming a 30% marginal tax rate). If the same expense is classified as a capital expenditure, then instead reducing your tax liability by $300 this year, you’d only reduce the liability by $10 this year and again for each year over about 30 years (the math here has been simplified for illustration).

Capital expenditures don’t sound as good, do they? We prefer lowering our taxes now as well. The issue has always been about how to determine whether something is deductible this year or over its useful life – which can be up to 30 years.

Specifically, the lack of clarity comes from two sections in the Internal Revenue Code that to an everyday person seems to contradict each other.

[one_half padding=”0 10px 0 10px”]IRC section 263(a) says that any expenses used to buy or improve the property must be capitalized over its useful life rather than be deducted in a single year.[/one_half][one_half padding=”0 10px 0 20px”]IRC section 162(a) says taxpayers may deduct ordinary and necessary expenses incurred during the tax year that are part of carrying on the business, including repairs and maintenance.[/one_half]

How do the new regulations save me $3,500?

The new rule allows a qualified taxpayer to elect to use a simplified version of the code, called the Repair Allowance Method, where all improvement, repair and maintenance expenses can be treated as currently deductible so long as the total for the year does not exceed a specified limit. Any expenses over the limit would then be capitalized regardless of its nature. For us, and most landlords who own just one or only a few units, it is unlikely that you will reach the limit, therefore making this election quite favorable for us.

This means that as a small landlord, you can elect to not apply the complex rules mentioned above and instead opt for the simplified Repair Allowance Method. Any amount under your expense limit will be deducted in the current tax year rather than having to be capitalized over up to 30 years. With this election, you won’t have to worry about whether an expense should be considered currently deductible or must be capitalized.

What’s the limit? Although the limit may seem a bit complex to calculate, it’s roughly the lessor of $10,000 or 2% of the unadjusted cost of the property. For more information or the complete tax guidance, please refer directly to the Office of the Federal Register.

Talk to Your Accountant

If you typically work with an accountant to do your property taxes, be sure to mentionthat you want to discuss the Repair Allowance Method this coming year. Otherwise, bookmark this article and come back to it when doing your tax planning for next year.

You can also visit our complete Landlord Tax Guide to make sure you’re in the know on other tax deductions.

	Case A	Case B
Your machines
Washer Type
% of washes in Hot/Warm/Cold ?
"Cold" wash temp ?
Incoming water temp. (see map)
Water heater type
Dryer Type
Utility rates
Cost of electricity (per kWh)
Cost of gas ($/therm)
Cost of water ($/1000 gallons)
Cost of Detergent make your own for 2¢/load
Loads per week
Cost per load, washer	0.85	0.32
Cost per load, dryer	0.50	0.46
Total cost per load	$1.34	$0.78
Cost per month	$44	$25
Cost per year	$523	$304
Google picks the ads, not me. I don't endorse the advertisers. Some assumptions: 106°F hot, 88°F warm, regulated by washer. Washers are U.S. style (w/both hot & cold supply lines). See other assumptions & sources.