The Laughing Landlord: Rental Real Estate Is a Business

By William E.J. McKinney

Many people are baffled by the concept of investing in rental real estate properties. They are uncertain about what it takes to be a landlord. "The Laughing Landlord" will help you to understand all aspects of the business. It will help you to determine if you have the skills and the attitude to be a landlord. More important, it will tell you how to run a successful rental real estate business. Rental real estate is indeed a business like any other. It requires a manager, it has product (homes) and clients (tenants). There are potential financial rewards in property appreciation, property depreciation, rental profit, and tax write-offs. If you ever wondered about how to get started, or what is involved in this business, then this is the book to answer your questions. Rental is currently a growing and enduring business.

• Language: English
• Publisher: Xlibris US
• Release date: Dec 3, 2013
• ISBN: 9781483684062

William E.J. McKinney

William E. J. McKinney Scientist, Author, Lecturer, Product Manager, Entrepreneur BA in Liberal Arts, Villanova University, 1962 Graduate studies, University of Delaware World lecturer, and teacher with technical courses running from 8 to 40 hours. He created and ran a world class 5000 square foot center for radiographic processing training. Authored 50 technical papers, including "Ambient Temperature Tank Developing in Tropical Climates" for the World Health Organization. ASNT Certified Level II Radiographer. Bill is a past member of the Quality Control Society, and past Vice Chairman of the Radiation Committee of the American Society of Nondestructive Testing. Marketing and business experience in the retail oil business. Volunteer financial counselor. He has conducted scientific research in cancer and both medical and industrial radiography. He is acclaimed a world expert in radiographic processing and quality control. Retired, after 26 years, as Senior Technical Specialist and Product Manager, E. I. DuPont de Nemours Co. As an entrepreneur, he had his own rental real estate company in Delaware. Retired to Florida and became a multi-million dollar producing Realtor. He is a member of the National Association of Realtors, the Florida Association of Realtors, and the Naples Area Board of Realtors. An avid bridge player. Bill sings in two church choirs and with the Naples Orchestra and Chorus, and previously with the Naples Philharmonic Choral.

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Copyright © 2013 by William E.J. McKinney.

ISBN:                  Softcover                        978-1-4836-8405-5

                            eBook                             978-1-4836-8406-2

All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without permission in writing from the copyright owner.

Rev. date: 11/19/2013

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Table of Contents and Index

Preface

Introduction

Chapter 1   Why?

Chapter 2   Where to Start

A.    Groundwork

B.    Financial aspects

1.   Finances

2.   Types of real-estate investments

a.   Sole

b.   Partnerships

1.   Limited

2.   Investment

3.   Managing

4.   General

5.   Investment clubs

3.   Allocation of funds

4.   Allocation of time

a.   Do-it-Yourself

b.   Hired Help

c.   Priorities

d.   Long-range Planning

Addendum: How Much Can You Afford?

Sample Estimate Worksheet

Sample Estimate Worksheet

IRS Schedule E

IRS Depreciation     Form 4562

Allocation of Time

Chapter 3   Selecting Investment Properties

1.    Single family houses.

2.    Detached, Free Standing Dwellings

3.    Semi-detached and Attached House

4.    Multifamily Dwellings

5.    Multifamily Buildings and Condos.

6.    Apartments

7.    Rooming Houses

8.    Location

9.    Garages

10.    Basements

11.    Laundry Facilities

12.    Land

13.    Timeshares

14.    Price

15.    Occupancy Rates

Addendum: Floor Plan showing changes

Chapter 4   How to Buy

A.    Choose Properties

B.    Price

C.    Offer

D.    Inspections

1.   Physical

2.   Radon

3.   Termite

4.   Other

E.    Mortgage Contingency

F.    Cost to close

G.    Title Insurance and Other Expenses

H.    Starker 1031 IRS Code Exchange

Addendum: House description

Field Report, grading property

Maintenance

Maintenance Discussion

Am. Society of Home Inspectors

Timeline of Events: purchase

Sample Sales Contract

As Is Rider

Lead Based Paint Rider

Buyer’s Estimated Costs

HUD-1 Statement

Seller’s Disclosure

IRS Form 8824 for Exchanges

IRS Schedule E (1040)

IRS Expenses, example

Inventory Discussion

Inventory Form A

Inventory Form B

Chapter 5   Leases

A.    Leases

1.   Phraseology

2.   Legal Perspective

3.   Tenant Rights

4.   Excess Demands

B.    Applications

C.    Inspection of the unit

Addendum: Rental Leases Overview

1.   Rental Agreement

2.   Carpenter

3.   By this agreement… .

4.   Rental Lease Agreement

5.   This Rental Agreement

6.   Florida Realtors

Rental Application Overview

1.   Author’s form

2.   Application for apartment lease

3.   Autumn Woods

4.   Positano

5.   Bristol Pines

6.   Patterson

7.   Downing-Frye

7.   Florida Tenant Service

Chapter 6   Tenants

A. Finding Tenants

B. Keeping Your Tenants

C. Rights: Landlord-Tenant Code

D. Handling and Communications

Addendum: Landlord-Tenant Codes Discussion

1.    Maryland

2.    Florida

3.    Delaware

Chapter 7   License and Inspection

Chapter 8   Liability and Insurance

Chapter 9   Operating Expenses

Addendum: one year set of books

Chapter 10   Maintenance

A.    Scheduled Maintenance

B.    Unscheduled Maintenance

C.    Buying Strategy

D.    Do It Yourself Tips

E.    Hired Help

Chapter 11   Property Turnover

A.    Introduction

B.    Depreciation Basis

C.    Profit Basis

D.    Condo Conversion

E.    Trading Properties

F.    Installment Sale

G.    The Turnover

Chapter 12   Management

A.    Record Keeping

B.    Income Taxes

Chapter 13   Partnerships

A.    Working Agreements

B.    Work Delegation

C.    Accounting

Rental real-estate is a crazy business.

But, it can be fun and profitable.

Preface

This book is primarily about house and apartment rental property.

Other types of rental real estate include land and commercial space such as warehouses. I got into this business 25 years ago primarily to take advantage of a tax loophole through depreciation. The objective was not so much to shelter my moderate salary as to protect against the extra taxes I had to pay each year resulting from my stock portfolio transactions, such as dealing in options. That was back in their early 1980’s. Now I am in real estate under the new tax plan of 1987 to generate income, which is taxed at lower rates. This is all discussed in the book.

A secondary reason I got into the rental real estate business was because I enjoy working around houses and had always dreamed of restoring a house. I have rebuilt three houses and renovated several apartments. These experiences are discussed. But, this is not an activity that you may want to do, or that you need to do to be in this business.

But, where does the title come from, you ask? Some people believe you have to be a little bit crazy to get in to rental property business because of all the headaches. That is true, except every business has headaches or problems to be solved. And, this is a business. I was creating titles off and on over several days when I found out one of my tenants had moved out lock stock and barrel, as the saying goes. There was only some papers left. I spruced up the place, and cleaned the bathroom and kitchen. I posted For Rent signs on the building and placed an ad in the paper. The other building tenant stated that the missing tenant had gone crazy. He had been making passes at her and carrying on, so she called the police. Later I found out that the live-in girlfriend had moved everything out after the tenant was carted off. Such is the business. But, this is a rare situation, and this is only the beginning of the story. The male tenant apparently had a bout of depression and was disoriented. Not what one could call certifiably crazy. A week later, two cars pulled into the driveway of the building. The male tenant explained he was okay now and wanted to move back into the apartment. The female tenant and her friend, who arrived in a different car, stated she was not moving back. I explained that the apartment had been abandoned, but would allow the male tenant to return. After all, the rent had been paid in advance for the month, and two weeks remained. Such subtleties and how they would be interpreted legally make real estate an interesting business. The tenant moved back in as if nothing happened. Unfortunately, as much as I liked him as a tenant, I had to evict him about six months later for failure to pay rent. He lost his job due to his illness and spent almost two months in the state hospital. During that time, I could not contact him and did not know where he was. His sister, or niece, paid me one months rent. Registered letters were returned marked by the Post Office addressee has moved. This was crazy because all of his stuff was still in the apartment. I happen to stop by the apartment to rake leaves and saw someone in the apartment. It was a nephew who refused to answer the door, but I thought it was the tenant. As I waited him out, up walks the tenant. I told him he had to be in court on Tuesday. It was not a legal summons, but he showed up, and I was awarded possession. If he had not shown up, I would most likely have won the case by default judgment. Considering his illness, I thought it was more in my interest that he be there.

I ended up helping the tenant move out and had to work to clean the place up. I was making appointments to show the apartment. After two showings, I had an application, a deposit and six more people who were mad because they could not rent the apartment. They could not believe it was rented so soon. It was crazy. I decided to have a Saturday morning open house and then go to another unit which needed repair. Although I had told a dozen people about the Saturday showing, I signed a lease contract for a new tenant late Friday night. I could not afford to sit around for four hours turning people away. It was too late to phone Friday night. So early Saturday morning I took down the for rent sign and posted a large sign in the window apologizing to one and all. I am sure those folks thought it was a crazy business. One young lady who wanted the apartment was unemployed. She returned with the deposit and a cosigner. I chose another applicant so I had to return her deposit. Only then did the boyfriend get involved. I was concerned about this mystery man who never visited the apartment and turned to be a veteran with disability income. They might have received a more favorable review if they had been clearer on their circumstances and income. It is a crazy, but fun and profitable business. One has to laugh at these interesting events.

It is hoped this book instructs you and that you find it enjoyable if you are curious about how to run a real estate business for fun and/or profit.

You will find this book useful as it will either convince you to seek other work, or to jump in enthusiastically. Is it fun? Yes, in a curious way. I like people and I like to work with my hands. I like the challenges of people and things. Is it profitable? It has been for me. It has meant no taxes under the old system, and it financed my wife and I a tour of China for three weeks. It provides me certain business benefits such as the use of a free truck and free fuel under the new tax plan. It is a crazy business indeed. You tell yourself oh well at the less fun things and smile or laugh when others wonder how you do it. As with any business you have to work, and work brings satisfaction and helps keep you from going crazy. Just laugh at the funny things in this business.

Now you know where the other title comes from. If you can not laugh at these things, you probably should not be a landlord. Not everyone is cut out to be a landlord. You will go crazy if you take things too seriously. Face it, this is not a business for everyone.

On Being A Landlord

Introduction

This book will guide the person interested in real estate investments, in particular in the area for apartment houses. As with any endeavor, there are various degrees and specialties. This book deals with small multifamily houses with two and three apartments each. Such words as a multifamily, landlord/tenant codes, license and inspection, closing costs, etc., are all a part of this new exciting world. Many would-be entrepreneurs are turned off by not feeling knowledgeable and, thereby, comfortable with the vocabulary of this or any business area. Many of these terms and some of the procedures and principles of real estate will be discussed. I am only a poor working stiff who got into real estate to create a tax shelter and to obtain an investment. Based on the oftentimes funny school of hard knocks, almost every conceivable facet has been encountered. These learning experiences include buying four buildings in two different partnerships, four condos in two counties with three partners, and 17 properties in two states. I learned about eviction procedures, court legal methods, renovations, and a part of one partnership initiating a bankruptcy, all in the first year. Because of my hands-on experience, when I retired from my regular job, I became a licensed Realtor.

In all of this, there is hard work and long hours, but there is always the ever present thrill to know I am an entrepreneur, a businessman. I have my own business and I control it. Real estate is my hobby and it is my second career. My primary job was as a senior technical person for a chemical company. Thus, it is hoped that this combination will provide others with insight into a fascinating aspect of real-estate and finances.

Speaking of finances, basically there are three ways of improving your finances, other than getting paid more. First, you can invest in stocks, bonds, etc. that offers growth and dividends. You can develop a budget and reduce spending. Or, you can do something that reduces your tax load. In the investment world, advisors will tell you to diversify. If you own stocks, your personal house is another form of investment and is a part of diversification. Rental real estate property becomes further diversification as it offers appreciation and depreciation benefits. Also, as in the third idea above, depending on your income level, rental real estate can provide significant tax lowering advantages.

As you read through the various chapters you will find several points restated. Some points need to be included in large subject areas, and then repeated on their own merit. If important points are simply stated, they may get lost or forgotten. Being reminded several times will help them to sink in.

Chapter 1

Why?

Why, how, but!? Your friends will stutter, stammer, catch their breaths, there minds racing as they try to ask intelligent questions so they can gain as much information as possible. It is amazing how many people listen when words E. F. Hutton are mentioned, but the reaction pales against the mystique of real estate. To mention real estate, other than one’s own home, in some cases raises the pulse of the listener, their eyes see millions of dollars, and secret fantasies flush to the surface uninhibited. Why is this so? First, home ownership is an extremely strong economic and psychological goal, it is status and security. The fact that it is an excellent financial vehicle is often secondary. For some it means a vacant lot up north on a lake or down at the shore, which might easily yield a cabin or family cottage retreat. Again, this possession is considered a worthwhile luxury, and not an investment. Thus, it too, creates only mild curiosity and a listener assumes the owner inherited a few extra bucks.

To say you own investment real estate is to invite hoards of listeners to want instant mini-courses on the subject. They want to know how you got so smart, so wealthy, and so gutsy. They are sure the wealth you earned is a result of your smartness. Oh, the envy; the presumed glamour!

Well, rule one is: do not get into this, or any other business, if you seek to lord it over your social group.

There are many reasons why people get into real estate. The first realization of the magnitude of possibilities available from real estate occurred to me when an uncle came to realize college for his son was expensive. He was a sales manager with a good income. His son was accepted at the State University with lower tuition, but located in a large expense city. The father thought about the cost of room and board, and his options. The conclusion, which was technical and economical, was to propose to the son that they buy a multifamily apartment house in the city, close to the school. The son would be responsible for building a basement apartment for himself. The building cost, including down payment, fees, closing cost, etc., were about the equivalent of a year and half of room and board purchased at the University. The son lived free for four years, he cooked his own meals and received, more importantly, a free education in being a responsible and able business manager. The rents paid the mortgage and taxes. The hands-on experience ultimately led to the son becoming a licensed carpenter and general contractor. After four years, the house was sold for profit and eliminated the initial cost. Of course, nothing is truly free. Trips had been made, time spent to find and acquire the property. The son had to manage the property, and spend time on maintenance, and manage himself. The sum of this tale is money was saved, lessons learned, and a profit made. That is fun. What a business!

The same uncle was later transferred 200 miles away. The relocation would last no longer than five years, and he did not want to sell or leave his home, a small Midwest town where he and his wife were raised. After a week of motel living, it was time to find a home away from home. He used the same tactics as with his son because the same problem existed. The economic situation in the new town suggested purchase and rent were a reality. One house led to another until there were six. On weekends, he commuted home, his expenses mostly paid for by his real estate business. He lived free and enjoyed it. Why not enjoy making money? Too many people work for a living doing a job that provides security, but perhaps not a challenge, or variety, or fun.

My father and I built a house at the shore on a barrier island. I was only ten at the time, but he said I was a big help. At some point, I realized the family cottage was rented during most of the summer and that we could only use it at the end of the season or during the off-season. That did not pose a particular hardship since we, and other natives, knew the best days were in the early fall when the beaches were not crowded and the days a little cooler. But, that is another story. One year mom and dad had a little mathematical problem to determine if they could purchase a washer and dryer for the cottage. Tax write-off, capital investment, and rental income were all balanced against the price of the washer and dryer. I became aware that it was pretty clever to be able to have a vacation free and some additional time to make a profit. The depreciation on that house was tremendous, but the memories were greater. Most parents would like to provide the memories or the environment for these memories, but lack the money, skill, or knowledge. Some accomplish the same end result by having a second job, or a money producing hobby.

More recently, we met the parents of one of my son’s classmates.

They invited their son’s classmates and families to the shore for a weekend birthday party. Some 30 of us were put up at a motel, on the beach, with a swimming pool. The kid’s parents owned the motel which only operated in the summer. It may be crass to point out that the father had few expenses because the whole package was a write off. He owned the motel. Everyone had a great time and became fascinated with this chap who detests getting dressed up, especially ties, and yet is handsome in anything. Who do you work for? This is a typical question. This easygoing, quick thinking, self-made millionaire with a fast smile and a chuckle, answered: I own things. I am basically a private person and reluctant to be a pest in asking for financial information. But, I like to poke around and play detective. I found out, my host owned a part of the bicycle shop, near the boardwalk. He previously owned a hotel and traded it for part ownership in another. He owns a part of a couple of places in the next resort south, and land in Florida near Disney World. There was an automobile dealership that he sold. As part of the sale price he had a free Lincoln Continental, with free maintenance, every year for five years, with the last year allowing him to buy the car at cost. Since his motel was on the Jersey shore, near Atlantic City, it did not take much imagination for me to realized that here was a person who played real live Monopoly. What excitement! I and my kids get excited playing the board game Monopoly for hours on end. Imagine playing the real thing where you buy and sell, trade, split, form and break partnerships. It can be as big as a corporation, as wealthy and complex, or just you. Such vastness, holy cow! I am getting fast pulse rate just thinking about it. It does exact a price in hours of work and pressure. Perhaps, you cannot see yourself in a similar position, or would not want to. Yet, think big, but not too big, but a little bigger than you can handle. For instance, you might decide to buy one apartment house with two units this year, and if things work out pretty good, buy another apartment house next year. That is a good business plan. But, what if next years great buy shows up this year? Why not plan for the eventuality, even if it does not occur. I only wanted one house and not even a multi-unit. I bought three multifamily units. Six months later, I decide to buy one or two units the following year. At that time, my friend who knew of my business and had gleamed some pointers from me, became interested in the business as he began to think more seriously about investing. He talked to some of his colleagues and was flabbergasted to find out three of six already were in the business. He needed some tax write-offs for the current year, and we had only three months left. I promised him we would find a place, so we started looking at properties. We found a gem and signed papers to purchase the three story building at 1:00 A.M.

Well, there I was, one business with seven apartments: one in renovation and new tenants, two apartments where I had to evict people for non-payment, the heating season starting, and now another three story house to renovate. Everything was done on schedule. I do not feel I am in the same league as my friend who owns motels, but I would not mind being there in 10 years when I could take early retirement from the job I like, to a job I would love. Besides, if I am careful, I should be able to control and expand my business. Grand words: my business. I control it.

Is this, then, why I got into the real estate multifamily apartment rental business, which is often referred to as being a slum landlord? I have always wanted to restore an old house for some unknown reason. All of my buildings were built prior to 1930, and some in the 1890’s. They are all in good to excellent condition in nice neighborhoods. Some have new wiring and/or plumbing. Rents are at or near the top of the rental scale, I hardly feel that my property is in the slums. As a