Several of my readers have requested that I share my views on the future of the Albuquerque and Rio Rancho single-family rental housing market.  In my view, it is a great time to invest in income property in the metro area.  If you have cash for a down payment take a hard look at single-family income property in the metro area.  If you live in a single-family home and wish to move, look into renting the home instead of selling.  Every landlord dreams of investing while the house price is near bottom and selling when it reaches the top.  Below is a discussion of why I believe now is the time for the landlord’s dream to come true.

Nearly 100 million Americans, about one third of us, rent: Lawyers, painters, accountants, office workers, retail clerks, and doctors – they all rent.   There has been a lot of information in the national media lately about rising rental demand, especially as it pertains to the apartment industry.  Historically, a high apartment demand will spill over to the rental single-family home market.  There are two major drivers for increased rental demand in the Albuquerque and Rio Rancho market: situational and demographical.  I believe of the two the demographic trends will have a more dramatic and longer lasting effect on our local market.

This is a need to know, if you use a credit report when screening applicants for rental housing.

Currently the Fair Credit Reporting Act requires that an adverse action notice only include notice of the applicant’s right to receive a free copy of his or her consumer report. The new federal Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires users of consumer reports, beginning on July 21, 2011, to also provide credit scores to applicants if the score was used in taking adverse action.  This includes tenant screening that use consumer reports as part of the acceptance process.  This includes application denial or additional conditions imposed based on information in consumer reports such as credit reports.

For landlords, compliance entails that adverse action notices are provided to rental applicants who, after the tenant screening process, are denied or conditionally accepted (i.e., subject to a cosigner, last months rent or higher deposit) based on information in a consumer report. Currently the notice must include: 

Fortunately for landlords, Congress decided to spend time repealing a new law they had just spent time passing.  On Thursday, April 14th, President Obama signed H.R. 4 into law, officially repealing the new onerous paperwork 1099 requirements on small businesses and landlords. This legislation will be retroactive to December 31, 2010, essentially putting businesses and landlords in the position that the new 1099 reporting requirements never occurred.    

Finally, there is some good news for the Metro’s single-family home investors.  Rents are rising in the Metro Area.  If you have not increased your rent in over twelve months, I believe the rent for your property may be increased 5% to 10% this year.  While the average rent per square foot works for apartments this formula does not work for single-family homes.  Apartment rents began increasing last year, single-family home rents in the metro area began rising significantly in January.  House rent increases are driven more by location and condition of the home than by square footage.  For a more in depth discussion on the metro areas housing demographics see my last post, “Domain Demand deconstructed” twister.

The first step in determining the fair market rent for your home is to analyze the latest asking rents of similar homes in the area.  As there is no MLS for rentals and most rentals are not listed in the newspaper you may have to drive around and make some calls from yard signs. If you have a property manager they will know the current rents in your neighborhood, and can also pull recent actively reports from internet sources, including other management companies listings, MLS, relocation networks etc.

Once you know the current market rent you need to consider adjustments related to your unique property.  The follow are some on the things I take into consideration: the average cost for a resident to move at your price point, the number of current available rentals in the same school district, the time the resident has spent in the home, the status of the lease (eg. month-to-month), payment history, age and condition of carpet and paint, etc.

Q: Can the landlord claim their residents as dependents for Income Tax purposes?
A: No, darn it. The following is my checklist of things to consider when getting together your rental property information for your income tax advisor. Please consult you tax advisor as to what applies to your tax return. If you are working with a professional property manager some of this information is gathered for you as part of their services.
Q: What are some of the items I should include in my gross rental revenue
A: All monies collected from renters (and kept). This may include:

• Base rental rate

• Cleaning fees (cleaning expenses are deducted in expenses)

• Parking fees

• Amenity fees

• Pet fees

• Any portion of a security deposit that you keep (e.g.: funds applied to unpaid rent)

Q: What can I deduct from rental income?
A: Documented expenditures paid out during the tax period directly related to the property or rental activities during the time the property is a rental. Some items such as depreciation and/or amortization expenses may also be deductible. Restrictions apply on deductions, so be sure to check with your tax advisor. Items to consider include:

Investment expenses

• Property taxes

• Property insurance

• Hurricane/wind/flood insurance

• Liability insurance

• Mortgage interest

• Private mortgage insurance (PMI)

• Refinance and/or closing fees
• Homeowner’s Association
• Dues Special assessments (may be amortized under capital improvements) Travel expenses to attend meetings
• Operating Expenses
• Utility bills, including power, gas, water/sewer, phone, cable/satellite TV service, Internet service, etc.
• Housekeeping expenses
• Expenses incurred to repair damages
• Out-of-pocket payments/deductibles for insurance claims
• Maintenance expenses, including pest control, lawn and garden upkeep, preventative maintenance, etc.

This article is timely and well done. I thought I would share it with you so you do not need to read the “OCC and OTS Mortgage Metrics Report, Third Quarter 2010”. However, if you suffer from insomnia I highly recommend reading it. Journal of Accounting: January 11, 2011 Foreclosures Climb, But Overall Mortgage Performance Stable Mortgage servicers reported a 31.2% jump in new foreclosures in the third quarter of 2010, but the nation’s mortgage portfolio showed some signs of stabilizing as the rate of serious delinquency dropped to its lowest point in five quarters, and the percentage of mortgages in good standing remained unchanged. The OCC and OTS Mortgage Metrics Report, Third Quarter 2010 said 382,751 new foreclosures were initiated in the quarter—the most in more than a year. The report also indicated that “new foreclosure actions are likely to continue rising as alternatives for seriously delinquent borrowers are exhausted.” The report covers about 64% of all first-lien mortgages in the country—about 33.3 million loans with $5.8 trillion in outstanding balances. The report said 87.4% of all mortgages were current and performing in the third quarter, the same rate as the previous quarter but slightly better than the 87.2% rate in the year-ago period; 5.8% of all loans were seriously delinquent (60 or more days past due, or 30 or more days past due in the case of borrowers in bankruptcy), down from 6.2% a year earlier. However, the report noted a slight uptick to 3.2% in the rate of loans delinquent between 30 and 59 days. While the number of loan modifications declined by 17% from the previous quarter, lenders continued to aggressively pursue principal and interest rate reductions of loans they did modify. In the overall portfolio, 88.2% of modifications made in the third quarter reduced principal and interest payments; and 54.1% reduced monthly payments by more than 20%.

Listening to the State of the Union address, I was ecstatic when the President said he would look into relief from the new 1099 rules effective for 2011 and 2012. I am sure I looked ridicules cheering and jumping up and down if front of the TV, but the topic is dead serious. If you are not familiar with the new rules affecting rental property, you can refer to my previous blog entry “Attention Landlords! The IRS Has Something New, Just For You”
The following Journal of Accountancy article, although very dry reading, provides an excellent recap of where the issue currently stands. I will continue to keep you updated as things progress.
Journal of Accountancy: January 27, 2011
New 1099 Rules: President's Speech Offers Hope for Some Relief; Exceptions for Rental Income Reporting Remain Vague
For small businesses that were dreading the thought of having to produce a Form 1099 for every payee to which they paid at least $600, President Barack Obama offered the prospect of relief in his State of the Union speech Jan. 25 when he said, “We can start right now by correcting a flaw in the [health care] legislation that has placed an unnecessary bookkeeping burden on small businesses.”
The Patient Protection and Affordable Care Act, PL 111-148, caught many by surprise when it became known after passage that payments to corporations are no longer exempt from information reporting requirements after 2011 and that 1099s would be required for purchases of goods as well as payments for services. The IRS National Taxpayer Advocate estimated that the new rules affect approximately 40 million businesses (including 26 million sole proprietors) and other entities, which will have to issue a Form 1099 for everyday transactions, such as purchase of a printer from an office supply store if it costs at least $600.

Q: Can the landlord claim their residents as dependents for Income Tax purposes?
A: No, darn it. The following is my checklist of things to consider when getting together your rental property information for your income tax advisor. Please consult you tax advisor as to what applies to your tax return. If you are working with a professional property manager some of this information is gathered for you as part of their services.
Q: What are some of the items I should include in my gross rental revenue
A: All monies collected from renters (and kept). This may include:
• Base rental rate
• Cleaning fees (cleaning expenses are deducted in expenses)
• Parking fees
• Amenity fees
• Pet fees
• Any portion of a security deposit that you keep (e.g.: funds applied to unpaid rent)
Q: What can I deduct from rental income?
A: Documented expenditures paid out during the tax period directly related to the property or rental activities during the time the property is a rental. Some items such as depreciation and/or amortization expenses may also be deductible. Restrictions apply on deductions, so be sure to check with your tax advisor. Items to consider include:
Investment expenses
• Property taxes
• Property insurance
• Hurricane/wind/flood insurance
• Liability insurance
• Mortgage interest
• Private mortgage insurance (PMI)
• Refinance and/or closing fees
• Homeowner’s Association
• Dues Special assessments (may be amortized under capital improvements) Travel expenses to attend meetings
• Operating Expenses
• Utility bills, including power, gas, water/sewer, phone, cable/satellite TV service, Internet service, etc.
• Housekeeping expenses
• Expenses incurred to repair damages

If you own a rental property or rent out your vacation home there is a new IRS requirement and will necessitate more paperwork. Tucked into the Small Business Jobs Act enacted in September 2010 is a provision that expands Form 1099 reporting requirements to include independent landlords as of Jan. 1, 2011.

Under prior law, taxpayers whose primary trade or business was rental real estate ― such as owners of multifamily apartment buildings, property management companies, etc. ― were subject to Form 1099 reporting requirements. However, landlords not in the trade or business, e.g. owners of a few rental homes or a second home used for rental purposes, were not subject to 1099 reporting requirements.  

Beginning with payments made in 2011 the new provision requires taxpayers who own rental properties to issue a Form 1099 to any unincorporated service providers.  This includes plumbers, painters, accountants, housekeeping, property managers, etc. that you paid $600 or more to in a year, Those 1099s (typically, a 1099-Misc) have to be sent to the Internal Revenue Service as well.  The IRS has already said it won’t require 1099s for purchases made with a credit card to companies such as Home Depot, Wal-Mart, Office Depot or Staples, assuming you don’t pay cash for your purchases.  

Further, the millions of landlords covered by this new requirement will also be subject to the expansion of the 1099 reporting requirements that was included in the health reform bill passed in March 2010.  Starting in 2012 that bill requires businesses, charities and even local governments to issue 1099s to all companies they buy more than $600 of goods or services from―not just to unincorporated service providers.

In today's rental market good credit has become as important for renting a home as for purchasing a home

While professional property managers have always looked at an applicant's credit scores, before the recent rash of forclosures, most individual landlords who self-manage their own property did not.   Times have changed. Today, almost all individual landlords run a credit report before entering into a lease with a new resident.   If your credit is less than perfect, it is best to be upfront with the individual landlord or property management company about any potential credit score problems. Do not be discouraged.  Remember, that landlords usually look at the complete application, including references, when making their determination. You may discover that your credit is not below the credit cut off line for that landlord or that your score can be mitagated with advance rent payments. 

Property Management Companies often use an outside resident screening service that provides the property management company with an acept/reject score.  This services provides credit reports from major reporting agencies, an eviction search, employment verification, criminal background search and other information.  In this case the application would need to be run through the application process to determin if their application is within the acept range.

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