Real Estate and All That Jazz

Insecure about Security Deposits in San Diego CA.?

Legal definition: A security deposit is money a landlord collects from a tenant in case the tenant fails to pay rent or damages the unit. The number one issue in my experience is the interpretative difference between "normal wear and tear" and "damages".

I can honestly say that 95% of tenant issues and law suits have to do with the returning of the security deposit. What are security deposits and why do so many problems arise when tenants move out?

It is easy to get into legal trouble over deposits because they are strictly regulated by state law and sometimes also by city ordinance. State law tells you how much you can collect, how you can utilize it and when to return it. (In CA it is 21 days after move-out). It is essential that if you own/manage property you know the laws in your state.

In an unfurnished property a deposit cannot exceed 2 month's rent. In a furnished property you are allowed 3 month's rent. (** note- the first month's rent is NOT considered a deposit since it is due.**). In CA the security deposit does not have  to be returned with interest, or even placed in a separate account.


The following are considered damages:

Misuse of Appliances:I recently had a tenant move out who actually cleaned the unit quite nicely, but the problem was the 2 year old toilet: the tank was "cracked" about 8" and someone had tried to glue it together. Normal wear and tear? I don't know about you but I haven't ever cracked a toilet tank. So I had to replace an almost new toilet plus the cost of installation.

Broken Windows/Screens:  I had one incident where the tenant's cat had decided that the window screens would be a geat place to sharpen their claws and as a result the screens had to be replaced---not a big deal, but certainly not normal wear and tear. The tenant thought that a cat "normally" needs to sharpen their claws, so a screen is as good a place as any. 

Carpets: Another tenant who was a Psychic and had "seances" in her home, had spilled candle wax on a new wall-to-wall carpet. She said it was an accident, but the wax could not be removed and the carpet had to be replaced.

Light bulbs: Most tenants consider these the landlord's expense. I beg to differ. Especially when you have recessed lighting and the halogen bulbs cost $3.00 each.

Holes in Plaster: Putting up curtain rods and hanging pictures are ok as long as you repair the damage. It may not seem like alot, but imagine a dozen nail holes over the course of 4-5 years. They really can destroy the drywall and texturing.

Plugged up Drains/Disposals: It is not normal wear and tear to find a washcloth in the bathroom drain or a beer can tab in the disposal . A tenant argued that the pipes were not hers and therefore the landlord had the responsibility to "clear" them.


The following are considered normal "wear and tear":

-Scuff marks on woodwork or walls

-Any breakdown of plumbing or appliances that is not due to tenant's negligence

-Cleaning dirty carpets as long as all stains can be removed and were not present upon move-in.

Remember to always have a tenant fill out the "Move-In Checklist" 7 days after moving in, and returning it to you signed and dated. This document will keep you out of court.

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San Diego,CA Real Estate has always been a good long term investment. Barring the recent meltdown, investing in real estate has historically out-performed other investments over the long term. One caveat: management. You do not manage a stock portfolio the same way you manage a property. Most stock portfolios I know don't have leaky toilets or termite infestations.

One of my prospective clients asked what I did to find a tenant in San Diego, CA that he himself wasn't able to do? I said, actually you can do everything I can do....but why do you WANT to spend your free time working? Should you buy income property in San Diego, CA and manage it yourself? Maybe, but be prepared to answer the following questions honestly:

Do you:

1. like to spend week-ends showing property?
2. have familiarity with local laws and/or access to a Real Estate Attorney to help you?
3. have good "people" skills?
4. know how to mediate tenant issues that arise?
5. have access to handymen, cleaning crew, painters etc
6. know how to do book-keeping within the requirements of the law?
7. know how to be completely neutral to race, gender, sexual preference or religion?
8. know how to handle deposits as required by law?

Here is another way to look at income property in San Diego, CA and self-management:

I like to paint. I have a ladder, brushes and paint. But wouldn't it be more cost effective for me to hire a painter? Do you think the professional painter could do a better job in half the time? And aren't I better off doing what I do best, Real Estate? You cannot say that you save money by doing your own painting unless you factor into the equation what your time is worth. If your time is worth $150/hour, and it takes you 20 hours to paint your house, then you just lost $3000 of income. If you can pay someone $2000, you are ahead of the game by hiring a professional. I am sure you get my drift.

Paying a professional property manager to keep your place filled with good quality tenants, making sure it's maintained and keeping the Financials within the requirements of state law---considering poor management is the number one reason income property fails to produce income---we are worth our weight in gold!

Contact Me to Manage Your Property!

"And the day came when the risk it took to remain tight inside the bud was more painful than the risk it took to blossom"   ~Anais Nin~

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Maybe you already own income property, or perhaps you are thinking of buying an investment for your retirement portfolio. Did you know the number one reason income properties do not succeed is due to poor management?

That's right! So why not learn to “self-manage” and reap the rewards of extra cash flow and peace of mind. It really is not that difficult or time consuming. I wish I had someone tell me the following things before I became a Landlord 25+ years ago.

1. Treat your tenants fairly. They are paying your mortgage and it is because of them you are going to have a successful investment.

2. Never ask for rent. Everyone knows their rent is due on the first of the month, and asking for it just sets up a “Landlord as Beggar” scenario.

3. Always do credit checks. You never know who is hiding an eviction or worse.

4. Don't micromanage your property. Or if you do, don't make it obvious. No one wants to see a “nosey” landlord on a daily basis. It makes for animosity and distrust.

5. Accepting late rent even once without a late fee just because you are a nice guy sets up a bad precedent. After 2 late rents, I have it in my lease the tenant will be given a 30 day notice to leave.

6. Accepting dogs can be a disastrous decision. Not only can some dogs be noisy and bite, but some Insurance Companies do not allow some breeds and will not pay for a claim if there is an incident. You cannot imagine the problems many Landlords have from dogs. It's just not worth it.

7. Be “friendly” with your tenants but never “friends”.

8. ALWAYS have tenant fill out a “Move-in Checklist”. This is the single best protection for you in case you have to go to court.

9. Empower your tenants by allowing them to make some decisions. For example, I do not assign parking spots in one of my 4 plexes, I let them figure out amongst themselves who parks where.

10. Cats may not be your favorite animal, but 75% of the renting population has a feline. A cat cannot bite neighbors, is quiet and doesn't chew wood work. An extra pet deposit can be taken on top of the security deposit.

    

                                                    Meow-Meow

Your metro Income Property Specialist: Serving City Heights, Normal Heights, North Park, College Area, Hillcrest and Golden Hill.

In the early 2000's the best investments were multi-unit properties: 2 units or above. A single family home was not considered to be an investor's arena. Why? Price too high to even approach a “break-even” point with a modest (10%-20%) down payment. Sure, ok to buy for future appreciation and tax shelter, but for the most part single family homes were not the arena of the small investor. 

The San Diego income property market in some zip codes has changed all that. One area that has been hit exceedingly hard by the sub-prime disaster has been “City Heights”. A densely packed multi-ethnic area of single family homes and small condo buildings, City Heights has been gentrifying rapidly. There is a huge mix of housing options: single family, condo, rental apts. and from low-end to (although I would not call it high-end) nice urban digs, close to downtown and city services. City Heights also has one other benefit going for it: the benefit of a “coastal climate” with cool ocean breezes much of the time. Just a few miles inland and you can see temperature differences of 10-15 degrees. This a HUGE benefit during Fall in San Diego....and it's a bonus!

I manage a property for an out of state owner. It is a clean house, 3BR 1.5 BA on a small lot of land and I woud classify it in quite reasonable condition. There is in addition, a lovely family room w/fireplace, and private entrance (think Granny, roommates, teens).The front yard is a small enclosed area with some fruit trees and parking for 3 cars.The house is set far back from the street. The lot is non-existent, but that translates into no upkeep.

KITCHEN

                       VIEW OF FRONT YARD FROM HOUSE

                                                                                      FAMILY ROOM WITH F/P and PRIVATE ENTRANCE

FRONT OF HOUSE                                                             

OK let's talk monthly numbers. At a selling price of $170K the down payment is $20K (10% down and 3K closing costs)

P & I =$848 (5.5%)

Taxes =$156.

Insurance =$50.

Maintenance =$50

Basic Expenses = $1104.00

The rent is $1350. That would bring the cash flow to $246 /month.But for argument sake, let's say the house breaks even the first year, investing the $246 back into the house for new paint/repairs/upgrades. You would now have a single family home in an urban market in San Diego for $20K down, and you could ride the next wave of appreciation with not a care in the world. Oh and did I mention I had 12 calls on this rental the first week? And that rents usually go up after the first year? This is a great start for the new investor in San Diego income property.

Seems like a “No Brainer” to me.  Contact me, let's talk.

Creating Wealth: Investing for Dummies

Investing in San Diego Income Properties-2nd in a 4 Part Series.

(2nd in a 4 Part Series)

The Beatles song Gimme Shelter was not referring to a tax shelter, but nonetheless a "shelter" is a "safe haven". A tax shelter is an investment strategy that allows you to legally decrease or avoid taxation. It is a way of off-setting losses to other taxable income.

The beauty of investment Real Estate is that it is a natural tax shelter. There are no gimmicks and no loopholes to create. Uncle Sam created it this way, and "fools we mortals be" for not taking advantage of it. (Note that there is a special break allowing a "passive loss" from rental real estate to be deducted from "non-passive" income such as wages. The passive loss deduction is limited to $25K but is reduced by 50% of the amount of the taxpayer's adjusted gross income that exceeds 100K.).

You may be thinking "Oh I'm just a small time investor". What does a tax shelter mean to the small investor in the San Diego income property market? A great deal! Up to $25K in mortgage interest and property taxes is money paid by you for your investment. Some of this "passive income" is deductible against your "active income" or "wages". In 2009 the following income tax rates apply to a single person:

25% on $33,950-$82,250

28% on $82,250-$171,550

33% on $171,550-$372,950

35% on $372,950+

That means with no tax shelter, if you are making $60K annually $.25 of every dollar is paid by you in taxes to Uncle Sam or $15,000 . If you are making $100K annually, $.28 of every dollar is paid by you in taxes to Uncle Sam or $28,000. I don't know about you, but if I had an extra $28K annually I would be blogging right now from a sailboat in the British Virgin Islands (using a waterproof laptop) or a Yurt in Mongolia (do they have wireless there?) Do you see where I am going with this?

 Depreciation is also used to shelter your income, since it is treated as an expense for tax purposes. It is an "accounting" loss, which shows up on paper only. However, you can deduct some of the cost on your tax return each year via depreciation.

Of course you must decide where the funds for down payment on any investment would best serve you. Using funds for one investment eliminate the use of those funds for another investment (i.e. stocks).Consult with your CPA or Tax Attorney for your own personal "wealth-building" strategy.

 Disclaimer: I am not a CPA and encourage everyone to consult with their CPA or Tax Attorney for personal tax advice regarding their specific tax situation. The tax laws change frequently and this Blog is by no means attempting to give tax advice.

Contact me today!

Creating Wealth: Investing for Dummies

(First in a 4 Part Series)

San Diego is a great place to live and imany investors have had unsurpassed success in finding good tenants in San Diego. Rentals are in high demand in most every part of this county and you can be assured that "bread and butter" units will be at the forefront of desirable properties to buy or sell. I specialize in small to mid-sized investment properties and many of my clients are novices who have done extremely well by following my investment advice.Why do investors buy income property as opposed to stocks? What are the benefits of owning real estate?There are 3 main reasons people buy Real Estate.

 Cash Flow, Tax Shelter/Depreciation, Appreciation

 What is Cash Flow?

This is the cash left over at the end of the year when all debt, taxes and management fees have been paid. This is the money you can spend on vacations, a new car or that new kitchen you have always wanted. This takes into consideration the expenses of owning property but is not limited to: debt relief, property taxes,vacancy rate, insurance, utilities, maintenance, advertising, repairs and legal fees. Is cash flow a necessary component of a performing real estate asset? No it isn't. You may be wondering then why would I bother to invest all my money in an asset that produces no income? Glad that you asked! Depending upon your specific financial goals and earnings, cash flow may just be a burden for you. If you pay Uncle Sam 28% of every dollar you make, why would you want to earn more dollars? The key to building wealth is not by earning as much money as possible but by keeping as much money as possible. Why work harder to make more money if all you are going to do is fork it over to Uncle Sam? So defining cash flow as your primary (and only) investment objective is a short-sighted approach to real estate investing and you just might miss out on some "diamonds in the rough"....to say nothing of putting yourself in a financially disadvantageous position. There are some great investments that may even lose money before taxes the frst year or 2 or even longer!

Then what should you be looking for?

Stay tuned for part 2

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