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avatar You are viewing an archive of articles by Sasha. Along with her partner, Sasha owns and manage six residential rental units. Sasha endeavors to support the causes and organizations she believes in through more conscientious spending practices.

Sasha

Editor’s Note: This is an article written by Sasha, a former Consumerism Commentary staff writer. In 2007, Sasha shared her experiences with purchasing and managing residential rental properties and the lessons learned. We published these articles in a series of ten. I’ve re-edited the pieces and consolidated the great advice into one article.

Looking to diversify your investments and take advantage of the current dip in real estate prices? While by no means a passive investment, real estate investing offers several advantages. Residential rental property can provide additional short- and long-term income and significant tax benefits as well.

10 Tips for Buying a Rental Property

But the trick’s in the buying. An error at this critical stage is one you’ll pay for again and again over the life of the property. It’s important to be a well-informed and cautious buyer, taking the time to do the necessary research.

My own experience with six rental properties has taught me a few things worth sharing.

1. Buy at the right price

A bargain now will help you to better withstand fluctuations in property value over time. That way,  you can profit if (and when) you eventually sell.

You need to develop a deep understanding of what constitutes a “value” price in the neighborhood(s) in which you’re looking. As an investor, you can keep making low-ball offers and wait for the deal you want. Investors, however, generaly snap up great bargains. So, you need to be able to act quickly once your target’s in sight.

You also need to benchmark rental prices for comparable units in the area, getting a feel for demand.

The local classifieds are a great starting point for this. A few hours of research should give you a good basis for determining what you can charge. Just make sure to factor in for utilities (electric, gas, oil, water, sewer, cable, etc.), if they’ll be included in the rent.

Depending on your personal goals, there may not be enough of a spread between what you will pay out monthly — in mortgage, taxes, and utilities — and what you can charge tenants. Figure out what your spread needs to be, and analyze every house you consider against this amount.

I’m looking to make a yearly profit without much additional out-of-pocket investment beyond the down payment. Because of this, my rule of thumb is that there needs to be at least a $500 difference per month between income and costs.

Of course, a bigger spread is preferable, as it means more profit. That also provides a buffer for the months in which you go without a tenant, or when the hot water heater springs a leak.

If you’ve got a few good options to consider, the differences in the spread can aid in your decision-making.

2. Find the right neighborhood

Rental properties don’t always make good neighbors, but there are a few tricks to making it work.

Overall, it’s important to find a community where your rental property will have a good chance of being accepted. The ritziest corner of town may not be it.

On the other hand, it’s hard to find and keep good tenants in bad areas, where crime rates may be higher.

I’ve had the best luck with solid, working-class neighborhoods. These are generally middle- to lower-income areas, where tradesmen and even some businesses might reside, intermingled with the houses. One can often tell these neighborhoods by the work vans and trucks parked in the driveways.

Not only do the residents understand the value of hard work, they appreciate the effort I invest in rehabilitating and improving my properties. Your presence in the neighborhood should help to make it a better place.

Regardless of which neighborhood you choose, you never want your property to be the worst-looking one on the street. Not only will this impact your rentability, but complaints and possibly citations may follow.

If you choose a property which visibly needs maintenance, you should budget to correct these issues within the first year, and ideally prior to renting it at all. This helps to show the township or city officials that you’re one of the good landlords, committed to keeping your property up. It can make a huge difference in your experiences over the life of the property.

Each property you own serves as a reference to your work, abilities, and commitment.

3. Be aware of local rental regulations

In many locales, rental properties are treated more like businesses than residences. This can lead to many (expensive) surprises, if you don’t do your research beforehand.

For example: while 8×10 might constitute a proper bedroom in your personal home, it likely won’t be considered such for a rental property. In one local township where we presently own three properties, there are minimum ceiling heights (7′) and square footage (100 sq. ft.) for bedrooms. This is substantially different from what is required for residential homes.

Occupancy is also calculated by that same township based on the square footage of the unit. So, what the local realtor touts as a four bedroom home may only legitimately be a two bedroom home, if rented.

Township-enforced renovations can be a massive expense. In fact, I personally know someone who paid nearly $50,000 to get two basement bedrooms and a bathroom upgraded to meet code. He’d bought the house with a “finished basement,” which the previous owners had completed without a permit.

Because rental properties are treated as businesses, he was not allowed to do the work himself. Instead, he had to hire an architect to draw and seal the plans, then licensed plumbers, electricians, and building contractors to do the work. He also had to pay to relocate the existing tenants until the work was completed.

It is a safe assumption that you’ll need to bring your property into accordance with local rental regulations prior to your earning any income from the property. Knowing the issues, you can budget accordingly before you ever put it up for rent (or even put in that offer to buy!).

4. Ensure proper parking is available

In one local township, for example, parking requirements for rental and residential real estate differ substantially.

There, almost anything goes for residential homes. For rentals, though, one paved off-street parking space is required for all tenants old enough to hold a driver’s license, whether or not they actually have a license or own a car.

A house rented to a family of two fifty-something adults, an 18 year-old son, and a 20 year-old daughter would require 4 parking spaces.

Some jurisdictions may institute a flat, per-property parking space requirement. Others, a sliding scale based on square footage.

More and more municipalities are passing such regulations, which are often conditions for licensure. Landlords are being forced to either retrofit their properties to meet the new requirements or throw in the towel and sell. The latter is especially true, as many properties lack the free space to even provide sufficient paved parking.

Besides meeting existing regulations, off-street parking is desirable for landlords seeking quality tenants in areas where cars are de rigeur. People who care about their cars don’t typically like to park them on the street. Therefore, offering a protected parking spot can help you to attract better tenants.

5. Look for simple construction

That Victorian home you’ve been ogling may feature lovely leaded glass windows, but you’ll never find a suitable replacement at the local home improvement store.

A slate roof is a beautiful thing to behold, but can be terribly expensive to repair. And if the roof’s very steep, costs could go up even further.

At the end of the day, look for a house that has simple, solid construction and uses relatively standard materials, where everything’s easy to access. These are generally the easiest and most inexpensive to maintain.

As some building contractors will tell you, the shape of your structure provides a general measure of its complexity. Count the corners of your building. Four-corner buildings are often simplest to maintain and add onto. From there, more corners typically means more costs.

When examining a potential investment property, you should also consider ease of access to the heating, cooling, plumbing, and electrical systems. A panel or wall behind the shower allows quick access to plumbing in case of a problem. If that shower instead backs up to another bathroom, you might be looking at removing a whole tiled wall in order to complete a repair.

Complicated landscaping may be expensive to maintain, as well. I look for properties with a simple, small lawn, nice manageable planting bed, and ideally a large rock garden or patio. These mean less maintenance for your tenants and for you.

6. Beware of houses built on a cement slab

Not having a basement can cost you much more than storage space.

In some places, like parts of Florida and Texas, all houses are slab construction. Real estate investors have no other options. For those areas, it’s important to understand the issues involved with this type of construction, as it can have major financial impact over time.

In such structures, you can bury duct work, heating pipes, plumbing, and electric lines can in or beneath the slab. If your plumbing pipes are set beneath the cement, you may end up jackhammering out the floor just to fix a simple leak.

Moisture and drainage issues are also exacerbated in structures which are built on a slab. I’ve seen a number of slab homes which are set low to the ground, making flooding more possible and more damaging in areas without proper grading and drainage.

Depending on the area in which the home is built and how well the ground is allowed to settle before construction begins, you could also have issues with shifting. If the ground moves too much, the slab can crack. This is a costly repair that you’d rather not deal with… believe me.

Lastly, any time you have a slab home, you’re looking at less living space because you may lose a room (or space in the garage) to utilities such as the furnace, water heater, and washer/dryer. It’s a safety violation to house many of these items within the bedrooms, so they’ll need a room or walled space all their own.

Not to mention that if one of these appliances springs a leak, they’ll do a lot more damage if placed in the interior of the home, rather than the basement.

7. Look out for safety issues

An excellent value for the money, a licensed home inspector can help to identify potential safety and maintenance issues before they crop up. They can even provide ballpark estimates for correcting them.

I would personally never purchase an investment property without consulting an inspector. Far too many potential dangers lurk within and behind the walls, which can turn your House Beautiful into The Money Pit.

Radon, lead paint, asbestos, and mold are four primary concerns, as they pose significant health risks and can be expensive problems, requiring specialists to remediate.

My insurance company will not even insure a property which it believes to have lead paint, for example. I’ve also been hearing reports lately about local code officials doing tests which penetrate the top layers of paint to reveal any presence of lead below.

As a landlord, there are certain things you need to pay special attention to in order to prevent potential lawsuits. These include:

  • Exterior stairways without handrails or where ice/snow/rain may cause a slip hazard
  • Steep steps
  • CO and smoke detectors (fire hazard)
  • Obstructed doorways or exits (fire hazard)
  • Broken windows/glass
  • Cracks or unevenness in sidewalks, driveways, or walkways (trip hazard)
  • Open electrical circuits, outlets or wires (electrocution hazard)
  • Unfenced swimming pools (drowning hazard)
  • Lack of GFI outlets near kitchen/bathroom water facilities (electrocution hazard)

As a rental property owner, you have an increased risk of lawsuits overall. Safety is always a primary concern, though accidents still happen.

Owners often choose to limit their personal liability risk by establishing each property as its own LLC. Consult a lawyer to ensure that your other assets will be protected in the event of a lawsuit.

8. Stay close to home

Absentee landlords tend to find out about and resolve problems less quickly. In turn, this can allow them to turn into big, expensive problems.

Municipalities are none too fond of absentee landlords, either. This can also lead to bigger, more expensive problems, like fines and even citations.

Twenty minutes or less is an ideal distance. It allows you to appear involved and available to your tenants and local officials. You can also be a visible part of the community, and respond rapidly when help is needed.

One unfortunate landlord I know attempted to hold down a busy job in Manhattan and establish a startup company, while managing several properties over an hour away in New Jersey. He invested a chunk of money to fix up his properties, and everything seemed fine. That is, until a minor plumbing problem occurred in one of the houses.

It was an easy fix involving a five dollar part, but this landlord was late to respond. He didn’t have much luck with the local plumbers he reached out to, and more time passed. One day a plumber finally called back after visiting the house and angrily exclaimed that he refused to work under those conditions.

What conditions, you ask? Well, in a house of eight tenants, raw sewage had been pouring into the basement for over two months. The muck was knee-deep, the stench was abominable, and yet the tenants –college students — had never said a word.

The house was in foreclosure within the year.

9. Bigger is not always better

As your property size and square footage help to determine your tax rate, an acre or more of land really isn’t necessary.

Beyond increasing overall property value, it won’t do much as far as rental income goes, unless you have plans to build an addition or another rentable structure on the lot. Plus, you’ll mow it (or pay to mow it) and pay extra taxes for it.

Room size also won’t have a worthwhile impact on rental income.

As long as you meet the minimum bedroom requirements required by the township or city, more square footage per room doesn’t necessarily help. Four small- to medium-sized bedrooms may actually produce better income than three large bedrooms.

One of our rental properties featured a lovely (but immense) bar in its finished basement, which we immediately earmarked for removal. Giving our tenants the ultimate party basement sounded like a bad idea, and a good opportunity for added wear-and-tear/foot traffic. The extra initial cost has paid off in the long run, especially when we decided to rent to college students.

If our goal was to flip the house, we might have left it. For our intended use, though, it was more of a liability and took up extra space.

In the end, the optimal rental property (for tax purposes) is a solid structure on a relatively small lot with adequate distance from the neighboring properties to diminish noise. It features a number of small- to medium-sized bedrooms, and has enough space for the tenants to comfortably congregate without substantial excess.

10. Utilities can use you up

Utilities can be a major issue for landlords if not set up properly. If you supply utilities to your tenants, you generally cannot terminate them for nonpayment or other issues. If you do, the penalties can be severe.

Want to keep the bills in your name but have the tenants pay their portion to you? Just know that the law does not generally allow you to collect if they default on these sums, so you may risk losing out if the tenant stops paying their portion of the utility. Plus, you are still required to furnish them with these utilities, even if they fail to pay.

Unless you can incorporate a flat fee into the monthly rent figure, which covers your expenses even as costs continue to rise, it is best to insist that tenants pay utilities directly, under their own names. Then, in the event of default, you are not responsible.

This means that properties containing two or more rental units need to have split utilities. Separate furnaces, hot water heaters, meters, etc. will all be necessary.

It is much easier and cheaper to purchase an already-split property than to try to do this yourself, so this is an important factor when you are looking at multiple-unit properties. Just know that duplicate systems will mean more maintenance costs over time, however.

Related: Is Being a Landlord the Right Move for You?

Purchasing and managing rental property is a great way to grow assets and establish passive(ish) income. It can be a truly great investment.

While owning rental properties may not be for everyone, it can be a successful venture if you implement a few safeguards. These ten tips will hopefully help you find and vet the perfect property for you. Good luck!

We would love for you to share your rental property experiences with other Consumerism Commentary readers. Learning from each other is one of the most powerful ways to ensure your project succeeds!

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We’ve talked about tax deductions related to your reception site, but there are a few other nice opportunities for wedding-related deductions that shouldn’t be missed, both for during and after your wedding.

The I Do Foundation has a number of creative ways to incorporate giving into the wedding itself, which you can do through them or replicate yourself. I will be doing a number of these for my own wedding next year.

  • Give on guests’ behalf. Give to your favorite charity on behalf of each guest, then provide a favor related to that gift, whether a printed card or something more specific. Then, deduct the full amount as a charitable donation. We’re thinking of donating to our favorite avian charity, then attaching announcements printed on plantable hearts filled with seeds (we plan to make these ourselves) to these cute dove bottle openers. (We’re trying to find a source for the doves without the packaging, however.) The favors themselves, of course, are not deductible, but they make a nice presentation. The Knot has some more stories of fun ways couples incorporated tax-deductible giving into their weddings.
  • Build a registry of charities. Create a registry of the charities you wish to support, then let guests make their own selections when giving. JustGive and Changing the Present are two more great charitable gift registry sites which makes it easy to set up a registry of the organizations you want to support. You can add explanations for why these are meaningful to you as a couple and how they support your shared beliefs. Then all of your guests get to claim a deduction and they’ll have you to thank when filing their 1040s.

And this one’s not a deduction, but I’m listing it anyway because it’s a good idea: have your gift registry give back. You can create a gift registry with one of the I Do Foundation’s partner stores and have up to 10% of the purchases given to a charity of your choice.

Next time, I’ll share some donations you can write off after the wedding festivities.

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We’re entering the peak wedding season, it seems.

Ever since I got engaged earlier this year, I’ve been bombarded by sales pitches from every angle. They’re certainly tricky. They come disguised in several colors of tulle, bearing elegantly inscribed messages to remind me that I only live once and want my special day to be perfect.

Perfect, of course, translates to premium, as in every upgrade on the already mile-high price list. If you’re a frugal sort, it’s almost enough to make you fall out of love with the idea completely.

For my fiance and myself, our special day will only be perfect if we can have all our family and friends join us without incurring additional debt. The perfect wedding should be the start of our perfect life together, where we can actually afford our bills and monthly expenses. So I’ve been searching relentlessly for information to plan an affordable event to remember which still reflects our beliefs and way of life as ethical consumers.

Luckily, my search has revealed that there’s a great way to save on money while still supporting causes we believe in: finding tax-deductible wedding expenses.

The Venue
I’ve learned that the reception is typically the most costly part of the wedding, comprising about half of the total cost, according to theknot.com. This estimate includes the cost of the venue, catering food and service, alcohol and beverages, wedding cake and parking.

If you choose to have your reception at a site owned by an approved nonprofit organization, your site fees may be tax-deductible, as the cost can be considered a donation to support the upkeep of the facility. This applies to a number of historic landmarks and homes, museums, even nature centers.

I’ll share a few local spots I discovered:

Prallsville Mill, a rustic, historic mill in Stockton, NJ, holds up to 150 guests.
Tax-Deductible Facility Fee: $1,850

Honey Hollow Barn, the nature center for the Bucks County Audubon Society, is a lovely stone barn with exposed beams in desirable New Hope, PA and holds up to 75 guests.
Tax-Deductible Facility Fee: $2,500 for a Saturday wedding

Things to Know
You must obtain a statement from the nonprofit organization which states the amount of your contribution. Goods and services recieved must be deducted from this, if applicable.

For church rentals, although only your accountant can tell you about any other applicable rentals, any amount beyond what is considered to be the fair market value of the rental is tax-deductible. You may be able to deduct gifts paid to clergy as well.

In order to claim these deductions, you will need to itemize them using Schedule A.

Know of any more great, tax-deductible spots for a wedding reception? Post them in the comments!

My next entry will feature more tax-deductible wedding savings ideas.

Image Credit: babasteve

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As I shared with you a few weeks ago, I choose to pay more for my electricity. And in 2007, 71 percent of my total grocery budget went to support local agriculture and small businesses.

Each year, I buy a harvest share at a local community supported agriculture farm. I promise to start waxing poetic about my fabulous fruits and veggies once they start pouring in around mid-May. But for now, my topic of discussion is the act of deliberately choosing certain sources and providers for my purchases.

Sometimes I spend more, sometimes less, but I always try to spend consciously. And this concept is at the very root of ethical consumerism.

Wikipedia defines ethical consumerism as:

…buying things that are made ethically. Generally, this means without harm to or exploitation of humans, animals or the natural environment.

I find this to be a somewhat narrow definition, really, as ethics are a highly personal matter. While I may believe in supporting local agriculture and channeling my grocery budget away from factory and agribusiness farms, someone else may want the Coca-Cola company to take over the market and choose to channel all his spending towards their products.

I prefer to look at it instead as conscious spending. Whatever my interests, when I look over my budget and spending, I want it to reflect my personal moral criteria. There are two main ways to accomplish this goal: paying for products and services you believe in, and avoiding those you don’t.

Positive Buying – This is the term used for what I call “voting with your dollars,” channeling your spending towards recycled or fair trade goods, local organic farms, woman- or minority-owned businesses, cruelty-free products, etcetera. Essentially, you are investing your monies in a business you believe in, helping to ensure its success.

The United Kingdom has a relatively active ethical consumist movement, and even a magazine dedicated to the topic, Ethical Consumer. The publication rates companies according to an “ethiscore” which is meant to assess the environmental, human/animal rights, and political impact of each company, the idea being that consumers can then choose to support companies with the lowest negative impact.

Moral Boycott – The other side of this is the avoidance of companies whose practices you do not support. Ethical Consumer has a large list of these as well, including:

  • Adidas, for its use of kangaroo skin in footwear
  • ChevronTexaco, for dumping toxic waste in the Amazon
  • Starbucks, for failing to support fair trade practices

If you watched Blood Diamond and then decided never to purchase diamond jewelry, you are practicing moral boycott.

Why Bother? – Well, sometimes it works. The primary law of consumerism, if you buy it, they will sell it, comes into play when these purchasing behaviors are witnessed on a larger scale. Wal-Mart starts selling organic products. Sweatshops close, while fair trade coffee shops open. There’s been talk that specific purchasing behaviors only serve to create niche markets, but these markets are growing.

Just this month, BusinessWire reported that:

The organic food segment dominates overall organics spending with sales in excess of US$20 billion in Europe and US$17 billion in the US alone. Food products are also increasingly being tagged as organic. In 2007 15.1% of new food product launches tracked by Productscan were tagged as organic, compared to 7.3% in 2002.

As the ethical movement has grown, a number of companies have tried to position themselves as green, some with more success than others. Going forward it is imperative that businesses create a clear plan of how to re-adjust to meet consumer demand or risk being left behind.

While some companies merely posture (a tactic termed “greenwashing“), many companies are reacting to public demand and pursuing more socially responsible and environmentally sound business practices.

Conscious buying alone may always not achieve what you’re looking for. If environmental impact is what concerns you, tossing a household full of products into a landfill won’t offset all your new, green purchases. Buying consciously while buying only what you need is the key.

Does your spending reflect your beliefs?

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My Electric Bill: Why I Pay More

by Sasha

I asked a few weeks back whether any of you had changed your spending behaviors based on our current recession. Some of you had cut back, while others underscored the importance of always living frugally, so no recession-time cutbacks are necessary. I, too, choose to live frugally. But sometimes, I also choose to pay more. […]

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Cost-Cutting Consumers Trade Down from Steak to Chicken

by Sasha

RIS News, a retail technology publication, announced some interesting findings recently related to consumer shopping behavior. According to Deborah Weinswig of Citi Investment Research, the recession is creating more bargain hunters and transforming our shopping style in four key ways: 1. “Trading Down” to Private Label There’s a cost benefit to going generic, and store […]

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Too Cheap for iPhone or Blackberry, But I Got My Mobile Web Access

by Sasha

My day-to-day existence includes nearly 4 hours of commuting, 8-12 hours of work where I’m without access to my personal e-mail, and very little time left over in which to live life to the fullest. In my endless struggle to balance work, friends and family, I find that mobile web access is a must. For […]

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How I Evaluated and Declined a Recent Rental Property Investment

by Sasha

As my partner and I are active landlords and property investors, it’s no surprise that people approach us with real estate offers. Sometimes they’re great deals, too – people occasionally inherit properties they want to get rid of quickly and therefore cheaply, or learn of a house at a great price that just isn’t selling. […]

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My Favorite Source for Movies? The Library

by Sasha

I’ve never been a big movie buyer, and I own a whopping three DVDs. If I can’t guarantee I’m going to watch it at least five times, I don’t want it cluttering my abode. But I do like movies, and so I opt for rentals. And there are more rental options out there now than […]

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Searching for a CD as the Rates Plummet

by Sasha

Ah, hindsight. Although I’m glad I got a 5.65 percent CD when I did, of course I wish I’d invested more and for a longer term than 6 months. But it’s not too late to still lock in a CD at an okay rate. Or so I’d hoped. Recently, it seems the pickings are slim. Emigrant […]

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