TRANSACTIONAL FUNDING FOR WHOLESALERS

Transactional funding for wholesalers has become more and more prevalent when a double closing is needed to wholesale a deal to an end buyer.  Essentially, transactional funding is a short term loan which funds a real estate closing for a short period of time.  This allows a wholesaler to actually buy the property from the original owner first.  Once that initial closing is completed the wholesaler then sells that property to the rehabber/flipper by having a second  closing within a short period.  This is usually referred to as a double closing.  Both closing take place with little time passing between the first and second closing.  Often they are done back to back.

The transactional funding party will generally take the appropriate steps to verify that the end buyer has been approved for closing and has the required funds in place before they will fund the first part of the deal.  The fee charged by a transactional lender is usually between 3 and 4 points (the percentage of the principal amount of funding).  Generally if the deal extends beyond a 24 hour period you will find that there will be a pretty steep interest rate charged to the wholesaler, in addition to the points, which will cover the number of days that the loan is outstanding.  Interest may be as much as 12 to 14 percent in many cases, which should inspire the wholesaler to get the deal done very quickly.

Transactional funding of a wholesale deal is not uncommon.  It seems like the concept of this type of lending has become more prevalent since the collapse of the real estate market.  Traditional lenders became more weary of certain types of funding once the real estate market situation changed.

The bottom line is this, if transactional funding is the only way to close a deal and you will make money by using this source of funding, do it.

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FLIPPING OR HOLDING MULTI-FAMILY PROPERTIES

A positive result of rehabbing a multi-family property is that you have an automatic “plan B.”  Once you are done you can decide whether to flip it for an immediate profit or hold it for rental income.  There are a number of considerations and calculations you must examine when making that decision.

There are calculations such as cap rate, cash on cash return, rent as a percentage of purchase price, rent percentage of purchase price plus rehab cost and the ratio of operating expenses to operating income.  Debt service coverage ratio becomes particularly important if you are thinking of conventional financing through a lender or refinancing after some experience with renting the property.  Be aware that any multi-family less than 5 units would not be viewed as commercial property by a conventional lender.  That generally means that you will have to show the lender that you are capable of handling the debt by disclosing your personal income and source of funds.  In a commercial transaction you can usually get the lender to consider the income producing property as a stand-alone business without you having to worry about what your personal income is.

Let’s look at some of these numbers.  Cap rate (capitalization rate) is calculated by dividing the annual net operating income by the purchase price of a property (or possibly market value).  So, if a property net operating income is $20,000 (which does not include any mortgage or debt used to finance the purchase of the building) and the building is selling for $200,000 then the cap rate is 10% or 10.  $20,000 divided by $200,000.   For smaller rentals I personally do not pay attention to cap rate.  If there are 6 or 7 units in the building I will ponder it, but if it may not be a deal killer.  In areas like Manhattan or Fairfield County, CT you will find very low cap rates 2, 3 or 4 may not be uncommon.  Buyers of these properties are often looking more toward appreciation then what their return in current income is going to be.  Cap rates in less affluent areas will normally be in the double-digit ranges for good deals.  But again, it is not the only thing to consider.  Generally it is felt that the higher the cap rate the better the deal you are probably getting.

I think cash on cash return should be a consideration in a multi-family buy and hold situation.  After all, if you only get a 3 or 4 percent return on your money then there are probably better secure investments for you.  I calculate the cash on cash by taking the actual cash flow on the property and dividing that by the actual cash you use to purchase the property.  So, if the net operating income on a cash basis is $20,000 in the first year and you then deduct your loan payments, let’s say $10,000 for the year, you have $10,000 of cash flow.  If you had to come up with $40,000 cash to get the building, then your cash on cash return is $10,000 divided by the $40,000 you needed to get the building, or 25%.  That looks like a pretty good use of your cash.

I consider rent as the percentage of the purchase price and the purchase price plus rehab to be a “must compute” type of calculation for analysis and holding rental property. At a minimum, I am looking for the monthly rent to be equal to or exceed 1 percent of the cost of the property.  At one percent I am not crazy about the deal, but if the current rents are too low and I think they can be raised or increased by getting new tenants I would consider the building.  If you can get a 1.5 to two percent rate I think you are doing very well.  So, let’s look at the calculation.  Again, we will say the cost of the building is $200,000.  Let’s say we get $3,000 in rent each month.  The rent as a percentage of the price of the building is $3,000 divided by $200,000 or 1.5%.  This, for me, is acceptable.

I do not like to see operating expenses being more than fifty percent of the operating income.  I include it that calculation a reasonable estimate for vacancy loss as well as a reserve amount.  This calculation with the rent loss estimate and reserve amount included in expenses is probably too conservative for many multi-family investors, but that is a personal preference and I am always willing to consider the pros and cons of this calculation given current market considerations and longer term projections.

The last calculation I will mention is the debt service coverage ratio.  As I mentioned before, if you are looking for conventional refinancing or a bank loan this is an important calculation to a lender along with the cash flow.  Most lenders that I have talked to are looking for a 1.2 or 1.25 ratio.  Some may go with a lower ratio, but plan on a 1.2 or1.25 minimum requirement.  The debt service coverage ratio is the net operating income amount divided by the loan payment amount.  So, if we have $20,000 of net operating income, (which must consider vacancy loss, which should automatically be accounted for when using actual numbers), and our annual loan payments total $15,000 the ratio is $20,000 divided by $15,000 or 1.33, which is acceptable. Presented on a monthly basis, the monthly net operating income is $1,667 divided by $1,250 which is 1.33.  This would be considered an allowable ratio.  So, if the lender was confined to a 1.2 ratio or better, and wanted to see what the maximum monthly allowable loan payment is, the lender would take the $1667 monthly net operating income and divide that by 1.2 to say the maximum allowable loan payment allowed would be $1389 per month.  In this example the monthly loan payment of $1,250 is perfectly acceptable.

Using a spreadsheet when considering multi-family properties before you make a deal allows you to properly estimate your annual income and expenses and then calculating these rates, ratios and numbers. This will help you make a more informed and intelligent decision when considering your alternatives before purchasing a multi-family property that needs work.

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CALCULATING OPTIONS FOR MULTI-FAMILY OWNERSHIP

There are a variety of calculations and numbers to think about when considering your options as to whether you should retain or sell a multi-family property that you are rehabbing.    It is always good to have a variety of exit strategies, and multi-family rehabs can give you that without much thought.

So, there are calculations such as cap rate, cash on cash return, rent as a percentage of purchase price, rent as a percentage of purchase price plus rehab cost and the ratio of operating expenses to operating income.  Debt service coverage ratio becomes particularly important if you are thinking of conventional financing through a lender or refinancing after some experience with renting the property.  Be aware that any multi-family less than 5 units would not be viewed as commercial property by a conventional lender.  That generally means that you will have to show the lender that you are capable of handling the debt by disclosing your personal income and source of funds.  In a commercial transaction you can usually get the lender to consider the income producing property as a stand-alone business without you having to worry about what your personal income is.

Let’s look at some of these numbers.  Cap rate (capitalization rate) is calculated by dividing the annual net operating income by the purchase price of a property.  So, if a property net operating income is $20,000 (which does not include any mortgage or debt used to finance the purchase of the building) and the building is selling for $200,000 then the cap rate is 10% or 10.  $20,000 divided by $200,000.   For smaller rentals I personally do not pay attention to cap rate.  If there are 6 or 7 units in the building I will ponder it, but if it may not be a deal killer.  In areas like Manhattan or Fairfield County in Connecticut you will find very low cap rates 2, 3 or 4 may not be uncommon.  Buyers of these properties are often looking more toward appreciation then what their return in current income is going to be.  Cap rates in less affluent areas will normally be in the double-digit ranges for good deals.  But again, it is not the only thing to consider.

I think cash on cash return should be a consideration in a multi-family buy and hold situation.  After all, if you only get a 3 or 4 percent return on your money then there are probably better secure investments for you.  I calculate the cash on cash by taking the actual cash flow on the property and dividing that by the actual cash you use to purchase the property.  So, if the net operating income (cash basis) is $20,000 in the first year and you then deduct your loan payments, let’s say $10,000 for the year, you have $10,000 of cash flow.  If you had to come up with $40,000 cash to get the building, then your cash on cash return is $10,000 divided by the $40,000 you needed to get the building, or 25%.  That looks like a pretty good use of your cash.

I consider rent as the percentage of the purchase price and purchase price plus rehab to be a “must compute” and analyze type of calculation for holding rental property.  At a minimum the monthly rent must equal or exceed 1 percent of the cost of the property.  At one percent I am not crazy about the deal, but if the current rents are too low and I think they can be raised or increased by getting new tenants I would consider the building.  If you can get a 1.5 to two percent rate in moderate income areas I think you are doing very well.  So, let’s look at the calculation.  Again, we will say the cost of the building is $200,000.  Let’s say we get $3,000 in rent each month.  The rent as a percentage of the price of the building is $3,000 divided by $200,000 or 1.5%.  This, for me, is acceptable.

I do not like to see operating expenses being more than fifty percent of the operating income.  I include in that calculation a reasonable estimate for vacancy loss as well as a reserve amount.  This calculation with the rent loss estimate and reserve amount included in expenses is probably too conservative for many multi-family investors, but that is a personal preference and I am always willing to consider the pros and cons of this calculation given current market considerations and longer term projections.

The last calculation I will mention is the debt service coverage ratio.  As I mentioned before, if you are looking for conventional refinancing or a bank loan this is an important calculation to a lender along with the cash flow.  Most lenders that I have talked to are looking for a 1.2 or 1.25 ratio.  Some may go with a lower ratio, but plan on a 1.2 or1.25 minimum requirement.  The debt service coverage ratio is the net operating income amount divided by the loan payment amount.  So, if we have $20,000 of net operating income, (which must consider vacancy loss, which should automatically be accounted for when using actual numbers), and our annual loan payments total $15,000 the ratio is $20,000 divided by $15,000 or 1.33, which is acceptable. Presented on a monthly basis, the monthly net operating income is $1,667 divided by $1,250 which is 1.33.  This would be considered an allowable ratio.  So, if the lender was confined to a 1.2 ratio or better, and wanted to see what the maximum monthly allowable loan payment is, the lender would take the $1667 monthly net operating income and divide that by 1.2 to say the maximum allowable loan payment allowed would be $1389 per month.  In this example the monthly loan payment of $1,250 is perfectly acceptable.

Using a spreadsheet to estimate your annual income and expenses and to analyze a deal before you acquire a multi-family property is a must.   Then calculating these rates, ratios and numbers based on your findings will help you make a more informed and intelligent decision when considering your alternatives before purchasing a multi-family property that needs work.

OPTIONS FOR MULTI-FAMILY HOUSING NEEDING REHAB

Let’s talk about multi-family housing that needs rehab work.  Obtaining a multi-family that needs work gives the investor a variety of options for both financing the property as well as deciding to flip, buy and hold or buy and hold for a period of time then flip.

METHODS OF PURCHASING MULTI-FAMILY HOUSING

You can always take the conventional route when buying multi-family properties.  By that I mean you can get a mortgage from a lender.  If the property has enough units to be considered a commercial real estate deal (generally more than four units is considered commercial) you can usually get a mortgage based on the income the property generates on its own, without having to prove your own personal income.  If you are buying the property that is in disrepair or has vacancies you will probably not be looking at conventional financing.  If you are not sure if you want to flip or buy and hold, this may not the best way to go.  The expenses of appraisal and closing costs are far too high to consider this economically feasible.  In addition, you may find that a conventional lender will insert a prepayment clause which will make a quick turnaround prohibitive.

There are some hard money lenders who will be willing to finance multi-family properties whether you decide to flip them or hold them.  Again, the rates on these loans may make it prohibitive.  The best sources of funds for buying these properties then boils down to your own cash, private lenders or OWNER FINANCING.

You can often sell your idea of owner financing by simply putting the right information in front of the current owner.  For example, you can make a cash offer at the low end of the spectrum.  You can make an offer subject to obtaining a mortgage at a little higher amount.  Finally, you can make an offer that cannot be refused, by offering asking price or higher, but that offer is on the condition that the owner finance a major portion of the purchase.  You can show the owner how the interest rate you are offering is better than most investment returns he will get elsewhere.  He will have a first position mortgage on the property that will allow him to take back the building in the event of default, and you can have the owner give you a long-term repayment schedule (say 20, 25 or 30 years) with a balloon payoff to the owner after five or ten years of payments.  Show that information to the owner on paper.  Let them see that, in fact, he or she will be making more than what the actual purchase price is because of the interest being collected over the five or ten years of repayment.  If you decide to flip the property there is nothing lost in the transaction, and you have minimized your cash outlay by getting the owner financing in place.

Of course, all of this is predicated on running numbers for both flipping and buying and holding before you even get into the idea of buying the property.  So, we have previously discussed some things about running numbers in the event of flipping.  In a future blog we will look at some numbers and calculations you must be aware of in order to make a decision on a possible buy and hold option.

There are a number of additional and traditional calculations to take into account when considering a buy and hold option on a multi-family rehab project.  I personally do not give the same amount of weight to the importance of some of these numbers as others often do, and I will try to cover that as I discuss each item and the importance of each calculation in my next blog.

You are already ahead of the game by purchasing a multi-family property below market.  The planning for this rehab should generally be a bit different than what you would do for a single-family home that you would be selling to homeowners.  Rental property generally should be viewed with a bit different perspective.  For example, do you put in granite countertops?  It is not likely that you would do that.  Likewise, you may want to use linoleum where you might otherwise tile, or use a variety of flooring instead of hardwood if the hardwood is not already there.

 

TO FLIP OR RETAIN MULTI-FAMILY PROPERTIES FOR INCOME

 

 It is becoming more and more apparent that knowing the ins and outs of house flipping allows the investor to increase his or her possibilities for making the most out of an investment.  A perfect example of what I am talking about is when an investor, who is familiar with house flipping and the costs associated with that process, purchases a multi-family property with the original intention to flip.

Not so fast!  Before you decide to flip that property, I suggest that you review the benefits of possibly retaining the property.  Before we examine what you must know to make an informed decision about keeping the property or flipping it, let’s consider some alternative methods of purchasing the property that may or may not be available to you if you are dealing with a single-family flip.

Generally, if you are flipping a single-family home, you can finance the purchase and rehab of that home by using your own funds, using private money or using hard money.  You may be able to convince the owner to finance the property while it is being upgraded, but I would say that would be rare.  Most houses that will be worth flipping for a good profit are houses where the seller is quite motivated and is looking to cash out more quickly.  The original owner may not be willing to wait for you to fix the house and then sell it, which can take a number of months, and has an unknown end date for both you and the original seller.

Other problems can be created by the original owner waiting.  If they have any idea of the profit you may make you can find yourself at odds with them.  This could jeopardize the project and lead to the entire project becoming a bone of contention. Will there be profit sharing?  If so, how will that be determined?  If not profit sharing will the original purchase price need to be adjusted?  What happens if the profit is somewhat different than what you anticipated, (either more or less) as a result of you running the project?  Also, would the original owner be willing to deed the house to you before getting paid-in-full?  Would they be willing to allow you to tear the house apart and rehab if they do not turn the deed over to you, or they are not sure that you will finish the job or pay them the remainder?  Will you leave the house half done and walk away with less to lose then what they may lose?   Owner financing for a single-family home that is being flipped is difficult to come by, to say the least.

Our next blog will move into the discussion of multi-family housing that needs rehab work.  Obtaining a multi-family that needs work gives the investor a variety of options for both financing the property as well as deciding to flip, buy and hold or buy and hold for a period of time and then flip.

Final Walk-Through

FINAL WALK-THROUGH

As you go through your real estate investing you may feel that a final walk-through of your new purchase may not be necessary.  If you are buying a flip house that you have been in a couple of times and you know it is empty, there is a temptation to skip the final walk-through.

Do not skip the walk-through.  Be sure you or someone who works with you does a walk-through.  You may think that there is no sense to this because you are buying the place as is, you know it needs lots of work and you know it was trashed.  After all, that is why you got such a good deal on it, right?  That is true, but I will explain to you why this is important and what happened to me once when I decided to forego the chance to see the place a couple of hours before I closed on the deal.

I went to my closing, knowing the owner had moved out weeks before.  The house needed quite a bit of work.  The person living there had not cleaned the place for months, if not longer.  The owner was also a hoarder.  I really didn’t feel up to going through that place again.  At the end of the closing I was told that the key had been left on a kitchen counter.  So, I guess that meant that the house had been unlocked for weeks.

I decided to go to the house immediately after the transaction had taken place to revisit what I needed to do to get started and to lock up.  When I got there all the doors and windows were locked.  I figured the guy had locked the key inside, so I was trying to decide how to get into the house without causing unnecessary damage.  I had already tried the front and back door, and as I stood there thinking about my dilemma, a woman came to the front door!  What?!!

In a matter of weeks, having an unlocked vacant house, I had inherited a squatter!  I wasn’t sure she knew how hard or how easy it would be for me to get her to leave.  I have a real problem being mean, but after all, this was my business.  I advised her that she could not stay, and somehow I convinced her to leave, at least for a while.  I immediately changed all of the locks.  When I had another conversation with her I told her that she had until the next afternoon to come and pick up her belongings.  If she wasn’t there by the drop-dead time I gave her, I would put everything on the curb.  I had a tough time with this, but it was a result of my own doing.

I was fortunate that she did not press the issue of leaving, and she did show up to get her belongings.  If she had given me a hard time, it may have been weeks or more to get her out of that house.  If you do what I did, you may not be quite so lucky.  Do your final walk-through.  This will give you a chance to hold up the closing if you find an issue that had not been noticeable earlier, or if you find what I did, a squatter.   

Tax Liens and Tax Deeds

TAX LIENS AND TAX DEEDS

 Tax liens and tax deeds should be a serious consideration if you are thinking of investing in real estate.  Each state has its own set of laws and rules when it comes to tax liens and deeds.  You should make yourself familiar with those laws and rules in any state where you are considering investing in a lien certificate or deed.

Tax liens occur when a property owner fails to pay the property taxes that are due on a piece of property that he or she owns.  Once a certain amount of time passes after a tax payment becomes delinquent, the taxing authority can place a lien on the property.  The taxing authority, of course, must collect taxes in order to provide the services needed in that community.  If they do not collect the tax they will not have the funds to provide those necessary services.  To be sure that the taxing authority can collect funds they will sell tax lien certificates to investors.  The certificate will include past due tax, any penalties and interest.  The interest rate will depend on the state and the format of the auction that is conducted when selling the certificates.  If the property owner pays the amount due to the taxing authority in the prescribed amount of time (the redemption period), the taxing authority will then pay the tax lien certificate holder (the investor) the principal, penalties and interest.

A tax deed purchase is when you actually acquire title to property at the tax deed sale.  Generally, in most tax deed states, you will own the property free and clear of any other encumbrances that may have existed on the property.  In a pure tax deed state once you, the investor, own the property the prior owner has no right of redemption.    

As mentioned, some states are tax lien states.  To be clear, in a tax lien state you do not acquire ownership or title to the property.  Some states are tax deed states.  In a tax deed state you acquire ownership and title to the property. 

There are a number of states that are considered hybrid states.  Their process is a mix of tax liens and deeds.  For example, Connecticut is a hybrid state.  You can actually acquire title to the property but it is subject to the prior owner having the right to redeem (by paying the back taxes, interest and any penalties in full) within a six-month period, and getting the property back.

Tax liens and deeds can be a lucrative investment.  You can earn as much as 18 percent or more, or even come away with property that is worth much more than what your capital investment is.  When you know what states you have an interest in you should research the process and properties before you bid.  If you are investing in a lien or hybrid state you must know how long your money may be inaccessible to you.  Don’t give up.  You may find that there is heavy competition in some areas, but if you can get in the game it can be lucrative.

Cash on Cash Return – Maximize Your Investment Earnings

CASH ON CASH RETURN – MAXIMIZE YOUR INVESTMENT EARNINGS

Maximizing the cash on cash return on a real estate investment is what all investors should want.  People often wonder how others have done so well with real estate investing.  There is often an assumption that people who have accumulated wealth through real estate investing must have started with a good deal of money, got in at the right time, inherited property or had lots of cash.

Many people who have created wealth in real estate have done so by being creative or understanding how to maximize the return on their real estate investment.  Maximizing the return on real estate investments can be accomplished in a number of ways.

Many investors know that using leverage is a way of getting into real estate in a bigger way then just using available cash.  Leverage is basically using borrowed money to buy the real estate.   Buying rental property with the help of a conventional mortgage or negotiating owner financing are ways of using leverage.  Leveraging your investment increases your cash on cash return.

You determine your cash on cash return by taking your net cash revenue (cash in minus cash out) and dividing it by the cash you had to use to acquire the rental property.  For example, let’s assume you buy a 3-family house for $200,000.  You have $40,000 as a cash down payment and you finance the remainder.  Assume too, that the property generates a net cash flow of $1,000 a month, or $12,000 per year.  Your cash on cash return is the $12,000 divided by the $40,000 cash used to buy the property.  This gives you a cash on cash return of 30%.

Now let’s you had paid all cash for the building.  Also, let’s assume your mortgage payment in the prior example was $1,000 per month.  Now you wouldn’t have to pay a $1,000 per month mortgage payment.  In this example, your cash increases by $1,000 per month.  Therefore, your cash on cash would be $24,000 net cash flow annually divided by the $200,000 used to buy the property, or a cash on cash return of 12%.  Still a good return, but not the rate that you get when you use leverage, as the 30% cash on cash rate of return in the first example indicates.  The fact that you have used leverage (borrowed capital) in the first example shows that you have maximized the return on your cash investment.

As time passes refinancing rental property can allow the owner to take money out of the property and purchase more rental units.  The ability to refinance a building and remove cash is a result of appreciated value on the property as well as paying down some of the original debt.  Also, refinancing a larger percentage of the value of the building then what was originally financed increases the amount that can be taken out of the deal.  In other words, if you originally financed 80% of the appraised value and you can now refinance 90% of the appraised value, you are financing an additional 10%.  Even in a situation where there is no change in the value of the building you conceivably can to take out money through refinancing.

An investor can also obtain property that is turn-key and has positive cash flow.  Turn-key is obtaining property that needs no work and little effort on the part of the owner.

The actual after tax return on any real estate investment can be increased if the funds used to acquire the property are within a Real Estate IRA, which can accumulate earnings tax free.  In this approach financing can also be obtained to free up funds for another investment. Howerver, if you are using an IRA to buy the property and also have the property mortgaged you must be aware that there is a distinct tax treatment you must follow.

Hard Money Lenders

HARD MONEY LENDERS

A Hard money lender is a lender who loans money to real estate investors.  Typically the lending period is a short period of time, generally not more than one year, and the interest rates are quite high.

Hard money lenders do have a place in the real estate investment game.  Most flippers, and sometimes landlords, take over property that is not acceptable to a bank for a conventional loan or mortgage.

The use of a hard money lender in a house flipping business is quite common.  The flipper has purchased a house that needs work.  Obviously, for the flipper to buy the house, it is a home that does not command getting sold for a price that would be the normal selling price of the house if it was in reasonable condition.  The flipper has no intention of keeping the house long term, but needs some additional funding to either buy the property or to do the updating and rehabbing work.  A bank will not finance a house in this condition for a short period of time.  In addition, a conventional lender would have too long of a process to obtain the funding.

The whole business plan of a house flipper is to get in, fix it and get out as soon as possible.  Generally a hard money lender can accommodate this need.  They are niche lenders and can do quite well when lending to the right people in the right location with the right value being placed on the property.

If you have ever used a hard money lender you know that the interest rates you find are high.  I have seen rates as high as 5 points and 15 percent ranging down to 3 points and 9 percent.  The most frequent rates that I have seen are 3 points and 12 percent and 2 points and 10 percent.

Usually the hard money lender will require that the borrower have some “skin in the game.”  By that I mean they want to see the investor have some of his or her own money at risk, which is an indication that they will not walk away from the investment.  Also, most hard money lenders want a first position mortgage, and may not allow second mortgages.  They often require payment of monthly interest while the project is a work-in-progress, and they will deduct the points that they are charging from the proceeds of the loan.

For example, if you sign a note with a hard money lender for $100,000 and you are paying 3 points and 12 percent interest, you will actually receive $97,000 at closing (3 points = the $3,000 taken from the proceeds).  You will usually make a monthly interest payment while the working on the house and until the loan principal amount, which is $100,000, is paid at the time of sale of the property.  The lender will also require the borrower to pay all closing costs related to the loan.  Again, hard money lenders certainly have their place, but of course the numbers have to work for the borrower in order to make the job profitable and the borrowing worth it.

QuickBooks for Real Estate Investing – Rentals

QUICKBOOKS FOR REAL ESTATE INVESTING

QUICKBOOKS FOR RENTAL PROPERTIES

 

In a prior post I covered using QuickBooks for property flipping.  Using the software for flipping is a more straightforward use of QuickBooks and is somewhat easier to explain.  Many software systems have been created to account for rental property, but if you are doing your own bookkeeping and you do not have a very large number of units, it is worth taking a look at QuickBooks and this system.  If you are managing your own property the method I will outline here is a great way to track your buildings, tenants and rents without spending an exorbitant amount of money on an accounting software package.

This is a brief outline of how to use the software for rental property.  I cannot go into extensive detail because it would certainly require much more than a blog post.  If you do decide that this is the method for you after reading this post, there are manuals that have been written that will give you great detail on how to set the system up.  The software is user friendly enough for non-accountants who are willing to put in a little bit of time and effort to learn.  It will allow you to control your real estate investment portfolio and know at any given time where the business stands financially.  There are a variety of useful reports that can be generated in addition to the standard financial reports such as a balance sheet and an income statement (P & L statement).

When setting up your system there is a section to track customers.  For a rental system it is recommended that your buildings are identified as your “customers.”  Within the customer base you can identify individual jobs.  Your tenants become your jobs.  So, your customers (buildings) can have within them multiple jobs (tenants).  So, for example, let’s say you own two apartment buildings.  Each building has three tenants.  Your system would look like this:

Customer:  100 Main St.  (This is building 1)

Jobs:  Apt. 1 Smith

Apt. 2 Jones

Apt. 3 Williams

Customer:  200 Elm St.  (This is building 2)

Jobs:   Apt. 1 Rodney

Apt. 2 Dangerfield

Apt. 3 Quick

 

In my prior writing I discusses the significance of using the QuickBooks class system for flipping properties.  Now I will let you know how it is useful in tracking rental properties.

One way of using the class system for rental properties is to set up each property as a class.  There are other identifiers that can be used within the class system as well, but the basic setup for rental is to identify each building as a class.  There should also be a class for items that may not necessarily be related to a specific building.  Each expense and revenue item you record should be identified with the class that corresponds to the building the revenue or expense is attributable to.  If it is a general expense that is not specific to a building then the class would be a “general” or “office” or some other identification that is to your liking.   When you want to see how each individual building looks financially you would go to your reports and request the balance sheet and Income Statement (P & L) by class.  You will be quite pleased to see that you have tracked the worthiness of each building and now know how each performs independently.

There are probably a few different reference manuals published that explain the system, but I found That “Property Management with QuickBooks” written by Don M. Lander and continued by his daughter, Lisa Edwards was a great reference for this system with great detail.  More information can be obtained at:  http://www.quickbooksforrentals.com/  or    http://www.quickbooks-4-rentals.com/