Whether you’re just beginning to explore smart locks or looking to upgrade an existing access control system, there are five essential questions to ask first. Read on to discover just what to ask and more importantly, discover helpful answers to guide you to the successful implementation of a keyless entry solution.
1) WHAT KIND OF COVERAGE DOES MY CURRENT INTERNET PROVIDE?
Most multifamily communities these days are equipped with some level of Wi-Fi. According to a 2023 report from research firm Parks Associates, 88% of renters of multiple dwelling units (MDUs) and multifamily properties in the United States report having access to Wi-Fi through their property, either in unit or in a common area.
Determining whether or not your existing network will support smart locks is often a question for a professional. Internet providers who specialize in multifamily properties can perform an assessment to uncover the way your building’s layout and construction impacts your network, pinpoint performance issues and suggest any improvements.
When it comes to keyless entry, just know that outfitting an entire property with Wi-Fi enabled smart locks may not be possible. Property owners and managers may discover that the building’s Wi-Fi network won’t stretch to connect to a smart lock on a pool gate or an outbuilding. Off-line locks provide great solutions for these outliers.
For example, ReadyPIN-enabled smart locks work on or offline. ReadyPIN-enabled smart locks do not ever need to connect online to validate the PIN because the PIN code itself is encrypted with all the access permissions needed. This allows users to bring remote access control capabilities to any door, with or without a Wi-Fi network connection.
2) CAN EVERY DOOR ON MY PROPERTY ACCOMMODATE A SMART LOCK?
Smart locks are wonderful and convenient, that’s for sure. But that doesn’t mean every door on your property can or should accommodate one.
What about glass doors like those often found on commercial buildings? The vertical metal frame on each side of a glass door is known as a stile. To align with the sleek aesthetic of a glass door, these stiles are often too narrow to accommodate a connected smart lock. Instead, these doors often require hardwired access or a door system that’s hardwired into your property’s power supply, requiring its own panel and wiring to operate.
The same is true for high-traffic doors like main entrances at a commercial or residential building. The batteries in even the best smart lock would wear out quickly with this constant traffic, so hardwired access is the solution instead.
Because such solutions require a powered connection, they must be installed by an electrical professional. In fact, any hardwired door requires guidance and installation by an access control specialist.
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3) DO I NEED WEATHERPROOF HARDWARE AT ANY OF MY DOORS?
Just imagine buying and installing a smart lock only to find it doesn’t function when it rains heavily or freezes on very cold winter days. Remember, each area of the country has its own climate challenges requiring certain grades and types of smart locks.
Again, relying on expert guidance ensures you’ll find the right solution. Such professionals are well versed in lock grades (developed by the American National Standards Institute) and their corresponding applications.
4) HOW MANY PINS SHOULD MY SMART LOCKS HOLD?
It’s not uncommon for a property owner to become enthralled with a certain brand of smart lock, purchase their favorite, and then discover it only accommodates 100 PINs.
If your property has a full staff and hundreds of employees, you can very quickly run out of codes. So, be sure to check PIN code storage and err on the side of more PINs if you think your business will grow.
5) DO I NEED SOFTWARE TO MANAGE MY SMART LOCKS?
Many people don’t realize that features like remote control, integrations with property management systems and visibility tools are enabled by access control software, not the smart lock. A cloud based access control platform, like RemoteLock, makes your smart lock even smarter by centralizing all of your properties, doors and locks onto one dashboard, allowing you to remotely manage all your smart locks from your smart phone or laptop.
When looking for access control software, make sure you are selecting a solution that can grow with you over time. For instance, a solution like RemoteLock offers compatibility with a slew of the most popular lock brands and hardwired access systems, too. Even better, RemoteLock’s open API also connects you to 3rd-party software providers you already know and trust, with others added all the time. Software solutions that give you a choice when it comes to hardware and integrations with other software means your solution can evolve as your portfolio grows.
AVOID MISTAKES WITH THE HELP OF EXPERT GUIDANCE
Just like any other technology, smart locks and access control software are always evolving. That’s why it’s wise to ask for help. The experts at RemoteLock can help guide you through details like user experience, security, connection technology, lock grades and more. Having served thousands of customers in multifamily, vacation rental and commercial sectors, they understand that every property has unique needs. Reach out to RemoteLock today to discover your ideal access control solution.
Thank you for this article by KIM GARCIA, Director of Marketing RemoteLock (obtained from AAOA RENT Magazine)
Kim Garcia is the Director of Marketing for RemoteLock. She has over 17 years of strategic marketing management and sales experience in the security industry. She specializes in corporate communications and product marketing with specific expertise in wireless security, access control, and integrator perspectives. Prior to joining RemoteLock, she led marketing for PSA Security Network and Inovonics.
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Deciding between a 401k and real estate investment for retirement is a critical choice that will affect you now and in the future. Both have unique benefits and drawbacks and understanding them can help you navigate the path to a more secure financial future.
401K As a Retirement Vehicle
In short, a 401k is a tax-advantaged retirement savings plan offered by employers, allowing employees to invest a portion of their paycheck before taxes.
As one of the most common types of retirement accounts, there are both pros and cons.
Benefits of a 401k
- Tax advantages: Contributions are often made pre-tax, reducing your taxable income. Additionally, some employers offer matching contributions, which is essentially free money for your retirement.
- Diversification: Within a 401k, you can diversify across various stocks, bonds, and other investment vehicles, reducing the risk of being tied to a single asset.
- Ease of management: Once set up and contributions are automated, there’s minimal active management required.
- Protection: 401k accounts have certain legal protections against creditors.
Potential drawbacks and limitations of a 401k
- Limited access: You can’t access funds without penalty until age 59½, except in certain situations.
- Fees: Management and administrative fees can eat into your returns.
- Market volatility: Being tied to the stock market means your investments can be volatile.
- Contribution limits: For 2023, the 401(k) contribution limit for employees is $22,500, or $30,000 if you are age 50 or older.
Real Estate as a Retirement Investment
Real estate as a retirement investment can take on many forms, like residential and commercial rentals, raw land, real estate syndications, and real estate investment trusts (REITs).
Benefits of investing in real estate
- Tangible asset: Real estate is a physical asset, which can provide psychological security.
- Cash flow: Rental properties can generate monthly income, which can be especially beneficial during retirement.
- Tax benefits: Real estate offers various tax advantages, including depreciation and the potential for tax-free capital gains.
- Appreciation: Over time, real estate typically appreciates in value.
Potential challenges and risks with real estate
- Management: Investment properties require active management, maintenance, and potentially dealing with tenants.
- Liquidity: Selling real estate can be time-consuming, and it’s not as liquid as selling stocks or bonds.
- Market fluctuations: While real estate can be less volatile than stocks, local property markets can still experience downturns.
- Large upfront costs: Purchasing property requires significant capital, and there are ongoing costs like property taxes and insurance.
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Key Factors for Decision-Making
Now that you’ve compared a 401k vs. real estate for retirement purposes, it’s time to focus on key factors for decision-making. Understanding these factors will help you determine where to invest your money, as well as how much to invest.
Personal financial goals and risk tolerance
Your investment decisions should be rooted in your financial goals for retirement. Assessing your comfort with market fluctuations and potential losses is important. Tailor your investment strategy based on your unique goals and risk profile.
Time horizon and retirement age
The time you have until retirement affects the kind of risks you can afford to take. Shorter horizons may require more conservative investments, while longer ones can entertain greater risks for higher potential rewards. Your targeted retirement age should shape the assets you invest in and their expected maturity.
Diversification of retirement portfolio
Diversifying your investments can help spread and minimize risks. Relying on a single asset class can expose you to sharp downturns specific to that market. A mix of assets, like stocks and real estate, can offer both growth potential and stability.
Market conditions and economic factors
The broader economic landscape plays a significant role in investment outcomes. Being attuned to trends in both the real estate and stock markets can offer insights into where opportunities exist. External factors like interest rates, employment data, and geopolitical events can also influence asset performance.
Tax implications and legal considerations
Every investment type carries its own set of tax consequences, which can impact your net returns. Familiarizing yourself with the tax benefits, such as deductions or credits, is vital to maximizing your investments.
Combining 401k and Real Estate for Diversification
There’s no rule that you have to choose either a 401k or real estate for retirement savings. For most people, it’s best to diversify by taking advantage of both options.
A 401k, typically tied to the stock market, allows investors to benefit from market gains, company matches, and tax-advantaged growth. Its diverse range of investment options, from stocks and bonds to mutual funds, provides a layer of protection against specific sector downturns.
Conversely, real estate offers the tangible assurance of physical property, potential rental income, and appreciation benefits that are somewhat decoupled from stock market volatility.
By investing in real estate, you can establish steady cash flow, which is especially beneficial during the retirement years. You can also enjoy the long-term appreciation of property values.
Together, a 401k and real estate can provide the growth potential of equities and the stability and income of tangible properties. The end result is a comprehensive approach to securing your financial future.
So Is a 401k or Real Estate Better for Retirement?
The truth is that there’s no right or wrong answer to this question. Some people should invest solely in a 401k, while others are better off going all in on real estate.
However, for a well-rounded retirement strategy, you may find value in diversifying between these two assets. Compare the finer details, including the pros and cons, to ensure that you make the right decision.
Article obtained by Bigger Pockets. Chris Bibey is a single-family home investor and real estate and personal finance writer.
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Most rental owners have not taken advantage of one of the best things the government has ever provided to rental owners – cost segregation. That’s simply because they weren’t informed.
Q: What is cost segregation?
A:
It is an IRS-approved method of accelerating your depreciation and yields approximately $50,000 to $80,000 in cash per million dollars of building value.
Instead of depreciating your property as one unit over 27.5 years (or 39 years for commercial non residential property), cost segregation breaks down your property into its parts and pieces.
To put it into perspective, look at it like a Big Mac. When asked, most people would identify it as a hamburger. Not McDonald’s. To them it is “Two All Beef Patties, Special Sauce, Lettuce, Cheese, Pickles, Onions on a Sesame Seed Bun.” A cost segregation study does the same thing to your building. It separates its components, i.e., the flooring, wallpaper, crown molding/trim, cabinets, counter tops, landscaping, etc.
If you purchased or built a building after September 27, 2017, when the Tax Cuts and Jobs Act came into existence, you are allowed 100% bonus depreciation until January 1, 2023, when it drops to an 80% deduction on any identified personal property assets.
It drops by 20% per year until “bonus” depreciation is gone and it goes back to the original benefits of doing a cost segregation study. So, don’t miss out on using cost segregation on the extra cash benefits.
Assets that can be affected include hundreds of items and represent somewhere between 20-40% of your building that can be expensed, thereby reducing your taxable income.
Q: Shouldn’t my CPA do this?
A:
This is a separate function; cost segregation specialists are not accountants. Cost segregation specialists perform engineering-based studies and work hand in hand with your CPA/ER. When the study is complete, the cost segregation specialist hands off a one-line 481a adjustment for incorporation into your tax filing and should coordinate it with your CPA/ER.
Some tax professionals provide an “accounting study,” which usually only includes obvious items, like rugs and landscaping, whereas cost segregation specialists review hundreds of items including parking lot striping, wallpaper, specialty plumbing and wiring, etc.
Most tax professionals don’t have the expertise to conduct a comprehensive cost segregation study. Their job is to apply thousands of pages of tax code. Cost segregation experts only focus on one aspect of the tax code – cost segregation. They prepare an engineering-based study, which the IRS calls the “certain” method.
Q: Is the cost worth it?
A:
A good cost segregation firm prices each project individually, and it is based on the type of building and the complexity of the project. It is not a cookie cutter one price fits all process. The return on investment typically falls between 10:1 and 20:1.
Before you decide to start the cost segregation study, you will be provided with a return-on investment estimate. A company such as Cost Segregation Services, LLC (CSSI) can provide you with a complimentary analysis, a Net Present Value Schedule, and other materials to help you determine your value in doing a study. It has to be right for you!
A cost segregation study taps into the time value of money because you’re able to depreciate your property faster and take advantage of tax deductions now versus in the future.
QUESTIONS TO ILLUSTRATE THE TIME VALUE OF MONEY:
• If you won the lottery, would you take the payout today or spread it out over 27.5 or 39 years?
• Will you be alive 40 years from now to use future deductions?
• What will your dollar be worth in the future, given inflation? 75¢, 50¢? Isn’t it better to get to use the full value now?
Q: How do I know if my property qualifies for a cost segregation study?
A:
The following requirements must be met for a cost segregation study:
✓ It must be a property that was purchased, constructed, or remodeled/renovated after ’86.
✓ The property’s cost basis must be over $250,000 (renovations $100,000).
✓ It must be a property owned by a for-profit entity (not charities, churches, etc.).
✓ You must have a tax liability or there is no benefit.
The choice can be amazingly simple: keep your money or send it to the IRS. However, you need facts to judge the value of doing a study. CSSI’s predictive analysis will give you those facts so you can weigh your options and do whatever you think is best. You’re a savvy investor and you owe it to yourself to find out how much money is available to you.
TONY BONIFACIC, National Account Representative Cost Segregation Services (800) 344-7671 mq@costsegserve.com
As a former accountant Tony has been involved as a financial manager, sales manager, administrator, accounts receivable consultant, and trainer for thousands of clients. He has saved millions for his clients including everyone from mom and pops to NYSE companies. In 2007 he began promoting cost segregation to his clients and new contacts. Today he devotes all his time and his representatives’ time to cost segregation.
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Smart, informed people face a unique risk in their investments: getting too “clever” for their own good.
All too often, they succumb to the temptation of trying to time the market, pick individual stocks, or ride the wave of the cryptocurrency du jour. And sometimes it even works—which makes it even harder to avoid next time.
Every time I’ve gotten cute or clever or smug about an investment strategy, it’s come back to bite me. I would like to think I’ve finally eaten enough humble pie to learn my lesson.
So, how do I invest today? Boringly, with wide diversification and small, regular investments like clockwork.
What Is Dollar-Cost Averaging?
Dollar-cost averaging (or DCA for money nerds like me) is the practice of making regular investments in the same broad basket of investments.
Investors most commonly practice DCA with passively managed index funds. For example, they may invest $300 each week in SPY, an index fund that mimics the S&P 500.
The market rises, the market falls, the market throws temper tantrums. You just keep investing through it all, week in and week out.
In the short term, you might lose money if the market dips. But over the long term, you’ll simply earn the average return for that index or sector or whatever you’re investing in. For instance, the S&P 500 has achieved an average annual return of 12.11% over the last 30 years.
Robo-advisors make this particularly easy. I use Charles Schwab’s free robo-advisor, which I set to withdraw money from my checking account every week. It invests the money based on my investment profile settings, spreading money among stocks in all sectors, market caps, and regions of the globe. It even rebalances my account periodically and harvests tax losses.
A human financial advisor could do this for you, too, but they don’t work for free the way some robo-advisors do.
Why Smart Investors Practice Dollar-Cost Averaging
To begin with, dollar-cost averaging ensures that you earn the long-term average return rather than underperforming the market by investing at a market peak or selling at a market low.
I know, I know. You think you’re smarter than everyone else and that you can time the market. So does everyone—and they get burned because of it. As I documented a few weeks ago in the math to becoming a millionaire, the average stock investor dramatically underperforms the market at large.
Dollar-cost averaging also prevents you from trying to get clever by picking individual stocks. You just invest in a broad mix of ETFs to diversify your portfolio across the entire market—or at least a huge swath of it.
Even the smartest, best-informed stock investors are wrong more often than they’re right. It’s why actively managed mutual funds usually underperform the broader market. If these high-paid professionals can’t time the market or pick stocks, you certainly can’t. Dollar-cost averaging saves you from yourself and your bloated ego.
Best of all, dollar-cost averaging is both simple and easy. I spent five minutes setting up my robo-advisor account many years ago. Today, I don’t have to worry about my stock investments at all; they just run on autopilot. In a word, it makes my stock investments completely passive.
How to Practice Dollar-Cost Averaging With Real Estate
Now that I’ve beaten that point to death, it raises a question for us as real estate investors: How can you possibly dollar-cost average real estate investments?
After all, real estate is expensive. Whether you invest in rental properties or passive real estate syndications, each investment requires tens of thousands of dollars. That makes it hard to invest small amounts steadily each month.
Consider these options to dollar-cost average your real estate investments, month in and month out.
Public REITs
Some investors love public REITs. I’m not one of them because they share far too much correlation with the stock market, which largely defeats the purpose of diversifying away from stocks.
But if you like publicly-traded REITs, they offer one of the easiest ways to dollar-cost average your real estate investments. Many REITs trade at $10 to $30 per share, so you can invest in shares every single week if you like.
Private REITs
Some real estate crowdfunding platforms offer private real estate investment trusts. They still pay out 90%-plus of their profits in dividends and often own many properties across the country. They don’t offer the same liquidity as public REITs, but they don’t have the same volatility either.
For a reputable example, check out Fundrise, which allows you to invest with as low as $10, making it easy to invest every week or month. I’ve invested personally in Fundrise, and while it’s had a bad 2023, that’s what markets do: Sometimes they go down.
Property-secured loans
Alternatively, you can invest small amounts in loans secured by real property.
My favorite two platforms for this type of investment are Groundfloor and Concreit. While Groundfloor has a minimum initial account balance of $1,000, you can invest $10 apiece in individual loans.
Every week, my Groundfloor account invests automatically in new loans as they become available. I’ve earned an average long-term return of 9% on these investments, and Groundfloor also offers notes currently paying 6.5% to 10.25% interest.
Concreit works differently, offering a pooled fund that pays 6.5% interest in weekly dividends. You can invest as little as $1 and withdraw your funds at any time.
Again, these simply offer one more way to dollar-cost average real estate investments. But I have thousands of my own dollars invested in both.
Fractional ownership in SFRs
Several platforms have popped up over the last few years that let you invest in fractional shares of single-family rental properties.
My two favorites are Arrived and Ark7. They let you invest between $20 to $100 per share in rental properties, and both offer short-term rentals in addition to classic long-term rentals.
As a fractional owner, you get both rental cash flow and your share of the profits on sale. The tax benefits carry over to you as well.
And yes, I’ve invested personally in properties on both of these platforms as well. I particularly like that Ark7 features a secondary market for selling shares at any time after the initial one-year holding period.
Fractional investing in syndications
Most syndications require a minimum investment of $50,000 to $100,000, which makes them impractical for dollar-cost averaging. That is unless you invest as a member of a real estate investment club, where you all go in on these together.
I know two investment clubs that operate this way, and they each work differently. One is my own company, SparkRental’s Co-Investing Club, where non-accredited investors can invest $5,000 apiece in deals vetted together by the club each month. The other is Left Field Investors, which is more geared toward accredited investors investing $10,000 to $50,000 per deal.
Don’t get me wrong: $5,000 isn’t chump change, and not everyone can invest that much each month. But even if you invest in deals every two or three months, it still offers a way to invest relatively small amounts on a regular basis while targeting the high (15%-plus) returns, cash flow, and tax benefits of passive real estate syndications.
The upshot? I own a fractional interest in thousands of units across dozens of cities, and the total I’ve invested is less than some people invest in a single property.
Boring Performs Better
Sure, it’s fun to brag at cocktail parties that you timed the market perfectly or picked the perfect property or stock investment and beat the market. You get to pat yourself on the back and feel clever—that one time out of five that it actually works out that way. In most cases, you’ll just underperform the market at large.
Aim to be wise rather than clever in your investments. Invest slowly and steadily in stocks and real estate, with small amounts every single week or month rather than occasional large chunks.
This is because investing shouldn’t be “fun” or a hobby unless you’re an active investor who loves renovating properties yourself. Investing should be boring. It should happen in the background, freeing you to enjoy your actual hobbies.
Nowadays, I only invest small amounts in diverse passive investments, exactly as I’ve outlined. And my returns have dramatically improved since I started investing this way.
G. Brian Davis Bigger Pockets
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With the large number of catastrophic loss events in recent years we have seen insurance companies leaving markets like Florida, and California, and the resulting higher cost of property insurance has become a big drain on NOI and property values for commercial real estate.
Given that property insurance premiums are increasing by as much as 300% in some markets, investors are struggling to determine whether the high cost of insurance is temporarily (and therefore creates a buying opportunity), or whether this is a systemic repricing of risk which will reset property values going forward.
To better understand the dramatic increase in insurance costs we need to dive into the factors that have driven the massive insurance losses of the last few years. Certainly, climate change plays a role in the increased frequency and severity of storms, wildfires, and other weather-related losses. Higher global temperatures are fueling stronger and more frequent storm systems.
Additionally, post pandemic inflation and a sluggish supply chain drove up replacement and repair costs faster than insurance companies could catch up. This is compounded by a systemic shortage of trades labor in the US, which continues to drive up the cost of skilled labor and increases the cost of repairs after a loss event.
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These factors have compounded, resulting in insurance companies underpricing the risk of loss events. This was further complicated by an overly competitive reinsurance market, as a result of the trillions of dollars governments around the world dumped into the economy, flowing through to the investment markets. Today capital in the reinsurance market has all but dried up, as the outflows of capital reimbursing losses has exposed the insurance market to the fact that they had severely underpriced the risk.
Normally the fact that real estate investments are backed by tangible assets is an advantage that protects investors from the volatility seen in intangible assets. However, the risk with tangible assets is that they can be physically damaged or destroyed, and insurance hedges against this risk.
Since insurance hedges the risk of damage or loss for everything – from properties, vehicles, businesses, health care, and almost anything else you can think of – it is insurance that underpins the value of assets, and of the economy as a whole. Material repricing of this risk is a repricing of the entire real economy.
So, where does this leave us? It is tough to say with certainty. Insurance markets have historically been cyclical. Capital tends to flow out when large losses are made, and capital tends to flow back in when large profits are made. And given the increasing premiums that insurance companies are now charging, we would expect their profits to be significant in 2023 (absent any major new catastrophes).
But maybe things are different this time. Climate change appears to be having a profound impact on the level of risk and inflation may be here to stay for a few years yet. There is a good chance that higher insurance costs are here to stay, and that real estate located in coastal markets, or markets with higher catastrophic risk, will see material devaluation due to increased insurance costs.
That being said, demand for housing in coastal markets remains strong as these are still very popular markets and are still experiencing positive net migration.
A dynamic market creates opportunities for the astute buyer. It will be interesting to see how these factors play out over the next few years.
Source: Equity Yield Group AAOA
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Thank you for this informative article provided by TurboTenant.
According to a recent GOBankingRates survey, 43.72% of Americans have had trouble paying utility bills over the last six to 12 months – and nearly 78% saw a rise in their household utility bills in 2022.
If you typically cover the heat as part of your lease agreement, this hike in pricing probably has you wondering if you can legally forbid your tenant from changing the temperature. The short answer is yes, but it’ll require some forethought and a signed contract.
Key Takeaways
- You must provide your tenants with access to heat unless your lease explicitly says otherwise.
- Your state and city laws dictate the minimum temperature a rental unit can be.
- Conducting an annual energy audit along with regular inspections will help you manage the energy bill.
Before we get into the age-old debate of who’s allowed to touch the thermostat, let’s clarify your role as a landlord.
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What Landlords Must Provide for Tenants
As a housing provider, you are held accountable for your tenant’s implied warranty of habitability. In other words, landlords are required to provide safe, livable conditions for their tenants since paying rent is conditional on the landlord’s duty to maintain a habitable living space, says Cornell’s Legal Information Institute.
While specific rules and regulations dictating habitability vary by city and state, ApartmentGuide highlights that landlords are typically responsible for:
- “Maintaining the structure of the building’s interior and exterior
- Keeping hallways, stairways, and common areas clean and well-maintained
- Operating plumbing, sewage, and ventilation
- Checking for environmental hazards
- Exterminating rodents and insects
- Supplying cold and hot water in appropriate quantities and at reasonable times
- Providing heat in appropriate quantities and during reasonable times”
Their article also quotes Samuel Evan Goldberg, a lawyer with Goldberg & Lindenberg, who noted that the “landlord must provide heat and hot water to tenants. The hot water must be a minimum of 120 degrees Fahrenheit. Landlords are required to provide heat during the months of October 31st through May 31st.
If the outside temperature is 55 degrees or below between 6:00 am and 10:00 pm, it must be at least 68 degrees in the apartment building, and the inside temperature must be 62 degrees [between 10:00 pm and 6 am].”
In short, landlords must provide access to heat – but your responsibilities don’t end there. If you’ve agreed to provide heat or other basic utilities, Pine Tree Legal Assistance lists four situations that would likely break the law:
- “The temperature in your rental is so low that it ‘injures the health’ of anyone living there. (This rule does not apply to someone who is so sick that he cannot stay healthy with a normal amount of heat.)
- The heating system is not able to heat the unit to at least 68 degrees when it is down to 20 degrees below zero (-20 F) outside.
- The heating system doesn’t keep the building’s systems (like water pipes) from freezing.
- Other basic utilities in the unit don’t work, making it unsafe or unfit.”
If you’re not sure whether your heating system can warm the unit to at least 68 degrees, test it “by setting a thermometer at least 3 feet away from an outside wall and about 5 feet above the floor.” Note that the reading doesn’t count if it’s closer to the floor or wall.
Pro Tip:Be sure you know your state and city’s requirements regarding minimum and maximum temperatures your unit(s) can be! If you see conflicting information between your local laws, follow the stricter ordinance. And don’t be afraid to ask a legal representative or your city code enforcement office for help as needed.
Controlling the Temperature in Your Rental
Though the best rule of thumb is to ensure that your rental can maintain at least 68 degrees when the temperature drops outside, you may have more control over the temperature settings – if you and your tenant(s) have signed a lease agreement that supports your position.
Your residential lease agreement should note which party is responsible for paying the heat bill and any other stipulations regarding energy use. So, if you and your tenant signed an agreement stating that they wouldn’t have access to the thermostat, you can decide which temperature to set your unit(s) – but be careful. Assuming that level of control means you need to be on top of the weather forecast to ensure your units are properly heated and your tenants stay safe.
If you give your tenants access to the thermostat, they can adjust the heat without needing to bother you. If the idea of giving your tenants access to the thermostat sends a chill down your spine, here are a couple of thoughts to consider:
- Preparing your rental unit for colder months will help keep energy costs low. Check out our comprehensive article if you need help winterizing your rentals.
- If you currently foot the heating bill, consider passing the expense – and the control – to your tenant(s) at their next lease renewal or through a lease addendum.
Did You Know?It’s most common that single-family rentals have thermostats that the renters can control whereas multifamily properties may have only a single thermostat for the whole building.
How to Reduce Your Rental Unit Heating Costs
Whether you decide to let your tenant control the heating or continue carrying the responsibility yourself, there are certain steps the U.S. Department of Energy recommends to help lower heating costs this winter, such as:
- Conducting a yearly energy assessment, which entails checking insulation levels, inspecting heating equipment, and locating leaks
- Advising your tenants to open curtains and shades during the day to let sunlight warm the rooms
- Recommending that any unused rooms stay closed (as applicable)
- Performing seasonal inspections to check for drafty windows, broken vents, and air duct leaks
- Upgrading your unit’s heating system as newer high-efficiency heating systems can run at 90-98.5% fuel efficiency ratings compared to older systems, which run at 56-70% fuel efficiency ratings, according to CNET
You should also consider investing in smart technology as a way to lower the energy bill.
Get Smart: Using Technology to Cut the Energy Bill
Smart technology has come a long way since its inception – which is great news for those looking to save money on their energy bill. According to Reviews.org, “almost half of the cost of the utility bill comes from your cooling and heating system.”
That’s where smart thermometers come in.
Whether you elect to control the temperature as agreed in your lease or allow your tenant full range, having a smart thermometer enables the unit to hone routines that support energy conservation.
For example, your tenant could program the thermometer to hold the unit’s temperature at 68 degrees while they’re at work, then kick up to 70 degrees at 5 pm when they return home. That way, the unit isn’t eating up energy while no one is home – without your tenant having to sacrifice their comfort.
Smart thermometers range in price, starting around $140.
Bottom Line
If your signed lease agreement says that your tenant won’t have access to the thermostat, then you get to dictate the temperature within the unit – but be sure to appreciate the great power that comes with this responsibility. Keep up with the weather forecast, and plan ahead to ensure your tenants are warm and safe within your rental property.
When in doubt, maintain a comfortable 68 degrees (or at least above the minimum temperature dictated by your local laws), and don’t hesitate to check in on your tenants when particularly bad weather is ahead. Reaching out to make sure they’re safe, well-stocked, and prepared for the storm will save you from getting frantic calls once the snow falls – and it helps your landlord-tenant relationship thrive, no matter the weather!
TurboTenant, Inc does not provide legal advice. This material has been prepared for informational purposes only and TurboTenant assumes no responsibility or liability for any errors or omissions in the content of this material. All users are advised to check all applicable local, state, and federal laws and consult legal counsel should questions arise.
Written By: Krista Reuther
Krista Reuther is the Senior Content Marketing Writer at TurboTenant where she writes data-driven, actionable material to help landlords and renters alike.
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As U.S. Lenders Chase An Increasing Number Of Delinquent Mortgages In 2023
According to ATTOM’s newly released fourth-quarter 2023 Vacant Property and Zombie Foreclosure Report, almost 1.3 million (1,294,505) residential properties in the United States are vacant. That figure represents 1.27 percent, or one in 78 homes, across the nation – virtually the same as in the third quarter of this year.
The report analyzes publicly recorded real estate data collected by ATTOM — including foreclosure status, equity and owner-occupancy status — matched against monthly updated vacancy data. (See full methodology below).
The report also reveals that 320,765 residential properties in the U.S. are in the process of foreclosure in the fourth quarter of this year, up 1.7 percent from the third quarter of 2023 and up 12.8 percent from the fourth quarter of 2022. A growing number of homeowners have faced possible foreclosure following the nationwide moratorium on lenders pursuing delinquent homeowners was imposed after the Coronavirus pandemic hit in early 2020 and was lifted in the middle of 2021.
Among those pre-foreclosure properties, about 8,900 sit vacant as zombie foreclosures (pre-foreclosure properties abandoned by owners) in the fourth quarter of 2023. That figure also is up slightly from the prior quarter, by 1.4 percent, and up 15.3 percent from a year ago. The latest increase marks the seventh straight quarterly rise.
However, the fourth-quarter count of zombie properties represents only a tiny portion of the nation’s total housing stock – just one of every 11,412 homes around the U.S.
“The ongoing strength of the U.S. housing market continues to benefit neighborhoods around the country in so many ways, with the near-total lack of zombie foreclosures standing out as one striking example,” said Rob Barber, CEO for ATTOM. “Rising equity flowing from rising home values has not only kept foreclosure cases from spiking since the moratorium was lifted. It also keeps giving delinquent homeowners a valuable resource they can use to either stave off eviction or sell their homes and move on. As a result, we continue to see none of the widespread abandonment that followed the housing market crash after the Great Recession of the late 2000s.”
The stable number of zombie properties in the fourth quarter has come as the U.S. housing market has rebounded from a temporary setback last year.
The nationwide median home value grew 11 percent during the Spring-Summer buying season this year, hitting a new record of $350,000. Those gains followed an 8 percent decline from mid-2022 into early 2023. The growth in values has helped keep homeowner wealth at historic highs, with 95 percent of mortgaged owners having at least some equity built up and about 50 percent owing less than half the estimated value of their properties.
Zombie foreclosures rise in half of states but remain mostly absent around nation
A total of 8,903 residential properties facing possible foreclosure have been vacated by their owners nationwide in the fourth quarter of 2023, up from 8,782 in the third quarter of 2023 and from 7,722 in the fourth quarter of 2022. The number of zombie properties has decreased or stayed the same quarterly in 24 states and annually in 21.
While most neighborhoods around the U.S. have few or no zombie foreclosures, the biggest increases from the third quarter of 2023 to the fourth quarter of 2023 in states with at least 50 zombie properties are in Kentucky (zombie properties up 15 percent, from 53 to 61), Connecticut (up 15 percent, from 87 to 100), Maryland (up 13 percent, from 229 to 258), Texas (up 13 percent, from 112 to 126) and California (up 12 percent, from 244 to 274).
The largest quarterly decreases among states with at least 50 zombie foreclosures are in New Mexico (zombie properties down 15 percent, from 95 to 81), New Jersey (down 8 percent, from 205 to 188), Maine (down 7 percent, from 56 to 52), Nevada (down 7 percent, from 99 to 92) and Georgia (down 4 percent, from 85 to 82).
New York continues, among the 50 states, to have the highest ratio of zombie homes to all residential properties (one of every 2,115 homes), followed by Ohio (one in 3,690), Illinois (one in 4,338), Iowa (one in 4,380) and Indiana (one in 6,114).
Overall vacancy rates also hold steady
The vacancy rate for all residential properties in the U.S. has remained virtually the same for the sixth quarter in a row. It stands at 1.27 percent (one in 78 properties), which is virtually the same as the 1.26 percent rate in both the third quarter of 2023 and the fourth quarter of last year.
States with the largest vacancy rates for all residential properties are Oklahoma (2.26 percent, or one in 44 homes, during the fourth quarter of this year), Kansas (2.18 percent, or one in 46), Michigan (2.07 percent, or one in 48), Alabama (2.04 percent, or one in 49) and Indiana (2.03 percent, or one in 49).
Those with the smallest overall vacancy rates are New Hampshire (0.33 percent, or one in 302, in the fourth quarter of this year), New Jersey (0.36 percent, or one in 280), Vermont (0.39 percent, or one in 259), Idaho (0.45 percent, or one in 221) and North Dakota (0.63 percent, or one in 158).
Other high-level findings from the fourth quarter of 2023:
- Among 166 metropolitan statistical areas in the U.S. with at least 100,000 residential properties in the fourth quarter of 2023, those with at least 100 properties facing possible foreclosure and the highest zombie foreclosure rates are Peoria, IL (12.4 percent of properties in the foreclosure process are vacant); Indianapolis, IN (9.9 percent); Cedar Rapids, IA (9 percent); Fort Wayne, IN (8.6 percent) and South Bend, IN (7.9 percent).
- Aside from Indianapolis, the highest zombie-foreclosure rates in major metro areas with at least 500,000 residential properties and at least 100 homes facing foreclosure in the fourth quarter of 2023 are in Cleveland, OH (7.3 percent of homes in the foreclosure process are vacant); Baltimore, MD (6.7 percent); St. Louis, MO (6.1 percent) and Pittsburgh, PA (6 percent).
- Among the 23.6 million investor-owned homes throughout the U.S. in the fourth quarter of 2023, about 842,400 sit vacant, or 3.6 percent. The highest levels of vacant investor-owned homes are in Indiana (6.9 percent vacant), Illinois (6.1 percent), Oklahoma (6 percent), Alabama (6 percent) and Ohio (6 percent).
- Among the roughly 15,000 foreclosed, bank-owned homes in the U.S. during the fourth quarter of 2023, 15.9 percent sit vacant. In states with at least 50 bank-owned homes, the largest vacancy rates are in Kansas (30.8 percent vacant), Michigan (25.9 percent), Ohio (24.5 percent), Missouri (23.8 percent) and Wyoming (22.6 percent).
- The highest zombie-foreclosure rates in U.S. counties with at least 500 properties in the foreclosure process during the fourth quarter of 2023 are in Peoria County, IL (15.6 percent of homes in the foreclosure process are vacant); Baltimore City, MD (14 percent); Marion County (Indianapolis), IN (13.1 percent); Broome County (Binghamton), NY (11.4 percent) and Cuyahoga County (Cleveland), OH (8.2 percent).
- Among zip codes with enough data to analyze, 82 of the top 100 where zombie properties represent the largest portions of all homes are in New York, Ohio and Illinois, including 10 in Cleveland, OH. The largest portions are in zip codes 10993 in Rockland County (West Haverstraw), NY (one in 191 homes); 73554 in Greer County (Mangum), OK (one in 222); 44108 in Cuyahoga County (Cleveland), OH (one in 223); 61605 in Peoria County, IL (one in 229) and 44112 in Cleveland, OH (one in 236).
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A federal jury has decided that several brokerage firms colluded with the National Association of Realtors (NAR) to enforce inflated commission rates. According to the plaintiffs, the conspiracy was evident through a written rule that requires sellers’ agents to offer a set rate of compensation to the buyer’s agent when listing a property on an MLS.
The ruling came last Tuesday after just a few hours of deliberation. Sellers of hundreds of thousands of homes in Kansas, Illinois, and Missouri, the plaintiffs in the Sitzer/Burnett lawsuit, were awarded $1.785 billion in damages. That amount may be trebled to greater than $5 billion. And the copycat lawsuits have already begun.
The verdict alone could have a ripple effect on the real estate industry. It could lead to lower commissions through negotiations between sellers and agents or even leave buyers to foot the bill for their own agents.
Brokerages are likely to prioritize pro-competitive policies to avoid future litigation, and that could mean clear opportunities for discussions about commission rates. According to the NAR, commissions are always negotiable under its rules—but in practice, most real estate agents won’t budge on their rates, according to a report from the Consumer Federation of America.
What the Defendants Have to Say
In a written update on its website, the NAR indicated plans to appeal the verdict. Keller Williams and HomeServices of America are also reportedly considering appeals. RE/MAX and Anywhere (the parent company of Sotheby’s, Coldwell Banker, and Century 21) previously agreed to settlements in the Sitzer/Burnett case and similar Moehrl lawsuit.
Regardless of the outcome of those appeals, it will take time for a judge to issue an order. That injunction could also include a requirement to change NAR rules or brokerage practices.
“We disagree with the verdict but respect the jurors who decided the case based on the issues in front of them,” said Darryl Frost, spokesperson for Keller Williams, in a statement provided to BiggerPockets. “We are disappointed that before the jury decided this case, the court did not allow them to hear crucial evidence that cooperative compensation is permitted under Missouri law.”
For example, Missouri law states that a seller may authorize a broker to share the seller’s compensation with another broker.
“This is not the end,” continued Frost. “Keller Williams followed the law regarding cooperative compensation and stands by the evidence presented on the 100-year-old practice of sellers’ agents offering commissions to other agents who help market and sell homes. Looking forward, we will consider all options as we assess the verdict and trial record, including avenues of appeal.”
That 100-year-old practice was commonplace before the NAR mandate was made, in large part because cooperative compensation may be the best tool sellers’ agents have to attract buyers. It’s practical for sellers’ agents to offer compensation to buyers’ agents in exchange for their marketing efforts, which brings more offers to the listing. That could be why the practice still continues in areas where cooperative compensation isn’t required. For example, Northwest MLS eliminated the requirement while also allowing brokers to publicly list compensation offers, with no noticeable market changes.
BiggerPockets also contacted the NAR and HomeServices of America for comment, but as of this publication, they have not responded.
The Journey to a Ruling
After deliberation, the jury answered yes to four questions. They agreed that there was a conspiracy between the brokerages and the NAR, that the conspiracy increased or stabilized commission rates, that the defendants willingly joined the conspiracy with knowledge of its goals, and that the plaintiffs overpaid for real estate services as a result of the conspiracy.
At issue in the case was NAR’s cooperative compensation rule, which requires sellers’ agents to offer compensation to buyers’ agents when listing a home on a local MLS. The blanket offer is made without knowledge of the time or effort the buyer’s agent will bring to the deal.
The plaintiffs argue that homebuyers aren’t privy to the offer of compensation, so buyers’ agents can steer homebuyers toward the homes with the highest payout. To ensure that buyers’ agents show the home to their clients, sellers’ agents are therefore incentivized to offer a competitive rate. That keeps commission rates artificially high.
One witness for the plaintiffs compared the current commission system in the U.S. to other countries, where commission rates are significantly lower, arguing that the NAR and the brokerages were responsible for keeping U.S. rates elevated. Commission rates remain stuck, even as internet resources have shifted much of the work of finding a home to the homebuyer, and home prices have skyrocketed. However, that same witness denied evidence of a conspiracy.
But Michael Ketchmark, the plaintiffs’ lead attorney, argued the written rule itself constituted a conspiracy. The defendant brokerage firms required their agents to join the NAR and follow their rules. They were, therefore, colluding with the NAR to enforce high commission rates, a form of price fixing, the plaintiffs argued.
In his closing remarks, Ketchmark positioned the case as a fight between consumers and corporations, saying: “Our system doesn’t have to forget people. You can hold corporations accountable.”
A World Without Cooperative Compensation
Economist Lawrence Wu testified that homebuyers in Australia typically don’t rely on buyers’ agents—their services are instead handled by lawyers and CPAs. That might be preferable, given the surfeit of inexperienced agents in the U.S., but someone must pay for those services. In the absence of cooperative compensation, whether a buyer pays for legal services or real estate services, their upfront costs may be greater.
It’s also possible that the sellers’ agent would still charge 6% for doing the buyer’s agent’s share of the work. So was the testimony of Jen Davis, vice president of MAPS Coaching at Keller Williams. That outcome could mean real estate transactions get more expensive for everyone involved.
That scenario would be particularly tough on real estate investors, who often rely on the guidance of qualified agents to navigate markets they may be unfamiliar with.
On the other hand, it’s also possible that changes to the industry could lead to more negotiation between consumers and real estate agents in general.
Sellers might ask for reduced rates in exchange for reduced marketing efforts in a hot market. Buyers might pay a flat fee for limited real estate services, and the mortgage industry might evolve to allow those services to be financed. The reduced commission burden on the seller may be reflected in lower home prices. If all of those outcomes came to pass, everyone would win.
The NAR has been central to real estate transactions for so long that it’s difficult to guess what the industry would look like without the association’s influence, and other countries don’t necessarily provide an apples-to-apples comparison.
The NAR’s Reputation
Whether or not you believe a conspiracy was taking place between the NAR and the named brokerage firms, the NAR faces several reputational threats that may be a catalyst for change within the trade association and the industry. Between the antitrust lawsuits, Redfin’s breakup with the NAR, the accusations of sexual harassment, and the subsequent resignation of president Kenny Parcell and another high-profile resignation of its CEO, Bob Goldberg, just this week, the NAR has good reason to update its policies.
To gain the trust of its members and consumers’ respect for the Realtor membership mark, the NAR will need to reinvent itself as a pro-consumer organization and take clear action to prevent intimidation and harassment of its employees. Those policy changes could impact the way homes are bought and sold. Likewise, if the NAR fails to maintain its powerful influence, that could open the door for swift changes to the industry.
The NAR has always maintained that its policies are consumer-friendly. “NAR doesn’t tell people what to charge or to receive a commission,” the association wrote in an update on the trial. “NAR rules are very intentionally pro-consumer and pro-business competitive, and buyer brokers exist because consumer protection agencies thought they were important.”
Still, the trade organization has fallen short of requiring local MLSs to publish commission rates publicly or mandating the removal of cooperative compensation requirements. That could change. And the climate of real estate transactions could shift due to the Sitzer/Burnett jury verdict—where home sellers were once afraid to discuss commission rates with their agents, they may more courageously negotiate pricing in the future.
The Bottom Line
Whether the outcome of the lawsuit leads to lower average sell-side agent commissions remains to be seen. How it will affect buyers and buyer agents is also up in the air. And whether the effect of shaking up the industry will have a net positive or negative effect on consumers depends on who you ask.
Still, the case is far from over, with appeals expected and the details of the judge’s order uncertain. We’ll provide updates as the situation unfolds.
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Thank you to Spark Rental for writing this informative article
If you’re new to real estate investing—and especially as you grow your portfolio of rental properties—sooner or later you’ll be faced with a choice about how to structure your business. As an individual you can own a rental property and operate the real estate business out of your personal checking account, but that gets messy in a hurry.
Many experienced real estate investors in the United States use a limited liability company (LLC) to hold their properties and operate their businesses. Holding your real estate assets this way helps protect you from potential lawsuits from tenants and offers favorable tax treatment on your rental income.
Forming an LLC is deceptively simple, and transferring property into one takes only a few steps. But they must be done correctly and in full view of your mortgage lender, insurance provider, and of course the tax man.
Let’s review the benefits, tax implications, and pros and cons of transferring rental property to an LLC. Then, we’ll run through the step-by-step process.
- Why Real Estate Investors Love LLCs
- Tax Implications
- Federal Income Taxes
- State Business Taxes
- Transfer Taxes & Transaction Fees
- Potential Cost Triggers
- Deducting Business Expenses
- Pros and Cons of Holding Property in an LLC
- Pros of Transferring Rental Property to an LLC
- Cons of Transferring Rental Property to an LLC
- How Many Rental Properties Should I Put in 1 LLC?
- Steps to Transfer Rental Property to an LLC
- Step 1: Do Your Homework
- Step 2: Contact Your Mortgage Lender
- Step 3: Form the LLC
- Step 4: Transfer Ownership
- Step 5: Update Insurance Policies and Lease Agreements
- Final Thoughts
Why Real Estate Investors Love LLCs
A limited liability company (LLC) is a business structure that effectively creates a private business entity. This structure protects the business’ owners from personal responsibility for its debts and other liabilities.
Many small business owners and freelancers choose to form LLCs through which to conduct their business’ operations and finances. That way, if the business falls into debt or faces a legal settlement, creditors can’t come after your personal assets such as your home, car, and financial accounts. Hence the “limited liability” in limited liability company.
For real estate investors, transferring rental property to an LLC bestows some notable advantages.
To begin with, holding your rental property within an LLC shields your other personal assets from potential lawsuits or legal claims arising from your property. A litigious tenant who decides to sue the property owner will end up coming after the LLC’s assets, but your personal assets remain completely separate if you’ve set things up correctly. Yes, your LLC owns the property—maybe several properties—that could be targeted by a lawsuit seeking damages, but it won’t include your family’s home, your car, or your retirement account.
Holding rental property in an LLC also gives you tax flexibility and pass-through taxation—one of the primary benefits of an LLC over other business structures. The IRS does not recognize LLCs as separate tax entities, so income and losses pass through to your personal income tax returns. This allows real estate investors to avoid double taxation (once on the business’ income and then again on the personal income the business pays out to you). You can also write off many ordinary business expenses as deductions, while still taking the standard deduction on your personal income tax return.
Operating rental properties through an LLC ensures a clear distinction between your personal finances and the property’s financial dealings, enhancing transparency and reducing potential confusion during tax season. If you work with partners or co-owners, an LLC can formally define your property’s ownership structure and streamline ownership transitions as well.
Tax Implications
Before you jump headfirst into transferring your rental property to an LLC, you must understand the significant tax implications of the move—some good, others not so much.
Federal Income Taxes
Good news! The IRS treats LLCs as pass-through entities, meaning the income and losses from LLCs pass through to the members’ personal tax returns. Unlike with a corporation, with an LLC you don’t pay a separate federal corporate tax rate on your business profits and then get taxed again on any income you draw from the business. In other words, you pay federal income taxes on your profits as though it was direct personal income. Clean. Simple.
State Business Taxes
At the state level, the tax picture gets muddier. Like, “consult an attorney or accountant” muddier. You’ll hear this mantra a lot in the paragraphs ahead.
For starters, every state taxes businesses at a different tax rate. Because your LLC is a business, in most states you’ll pay the state’s business tax rate on your profits. It’s still generally the same or better than the personal income tax rate you’d pay to the state, but some states are much friendlier to small businesses than others. Find your state’s current marginal corporate tax rates to see what you’ll be expected to pay.
Transfer Taxes & Transaction Fees
Because LLCs are formed at the state level, each state carries its own rules and regulations for transferring property into these business structures. Many states find ways to charge upfront or ongoing fees or levy special taxes on real estate investors trying to take advantage of the benefits LLCs offer.
For example, New York imposes a real estate transfer tax of 0.4% for properties valued up to $3 million and 0.65% for properties above $3 million. Florida imposes a documentary stamp tax of $0.70 per $100 in property value when you file certain documents during this process.
Oof. When you’re talking about a piece of rental property, these small percentages can add up to a sizable expense. Make sure you know what to expect in your state.
Once again, consult an attorney or tax professional familiar with real estate regulations in your state to get a full sense of the taxes, fees, and other charges that might affect you when you transfer your property to an LLC.
Potential Cost Triggers
Transferring real estate to an LLC may trigger potential costs associated with the property technically changing hands from you (the individual) to you (the LLC member).
Transferring property to an LLC may trigger capital gains tax if the property’s value has appreciated since acquisition. And if you have claimed depreciation deductions on the property, transferring it to an LLC may result in recapturing some of those deductions.
If you plan to do a 1031 exchange in the future, transferring the property to an LLC may impact your eligibility for this strategy. Put simply, the law excludes LLC ownership interests from eligibility for 1031 exchanges.
If you’ve used other tax-saving strategies with the property in the past or you think you might want to in the future—you guessed it—consult a real estate attorney or tax professional in your state to help you fully understand the implications of moving the property into an LLC.
Deducting Business Expenses
The news isn’t all bad, though. Owning your rental property and conducting your business through an LLC allows you to deduct property expenses and ordinary business expenses from your taxable income.
It’s hard to overstate the power of being able to write off business expenses as tax deductions, especially when your business periodically involves five-figure repairs to your property. These deductions can make a huge impact on the amount of taxable income you report, and thus the taxes you owe.
For example, if you earn $50,000 of income from your rental property but have to pay $20,000 to replace a roof, your taxable income from the business for the year becomes $30,000—and your tax bill drops by thousands of dollars.
Pros and Cons of Holding Property in an LLC
Transferring rental property to an LLC has its pluses and minuses. Many real estate investors find that the benefits outweigh the headaches for them, but your mileage may vary, especially depending on your state’s tax laws.
Pros of Transferring Rental Property to an LLC
1. Personal Liability Protection: Transferring rental property to an LLC can safeguard your personal assets from potential lawsuits and claims related to the property. You never know what can happen, so holding your rental property in an LLC limits the amount of damage a potential lawsuit could do to you and the assets you’ve worked your whole life to accrue.
2. Tax Flexibility and Pass-through Taxation: LLCs offer pass-through taxation, allowing you to avoid double taxation and report rental income and expenses directly on your personal tax return. You’ll typically enjoy a more favorable tax rate on business income and have the option to deduct many everyday business expenses, lowering your overall tax burden.
3. Simplified Ownership Structure: LLCs allow for multiple owners and facilitates transfers of ownership interests if you work with co-owners or wish to sell shares of your rental business. It’s also helpful if you decide to bring on employees, such as a property manager, because the LLC can pay them rather than you paying them personally.
Cons of Transferring Rental Property to an LLC
Despite these advantages, transferring property to an LLC carries a few trade-offs and considerations worth noting before you pull the trigger.
1. Initial Costs and Taxes: Setting up an LLC involves formation costs, including state filing fees and legal expenses. The cost to file an LLC with the state is often negligible, but plan to also engage the services of a real estate attorney or accountant to help you execute a property transfer correctly. Additionally, many states charge taxes in one form or another whenever you transfer property.
2. May Invalidate Your Current Loan and Insurance Policies: Transferring your property to an LLC can invalidate the mortgage loan and owner’s title insurance policy you signed in your name. Many mortgages include a “due on sale” clause that can force you to pay the full mortgage amount immediately if you transfer the property incorrectly, so make sure you involve your lender in the process before you initiate the transfer. You’ll also need a new insurance policy in the LLC’s name. And because your brand new LLC doesn’t have the credit history you do, you may not be offered the same rates on new loans or insurance.
3. Difficulty Refinancing: Fannie Mae and Freddie Mac, the federally backed mortgage institutions, only guarantee loans issued to individuals, not to business entities. That discourages most residential mortgage lenders from working with you. You have options for financing LLC-owned rental properties, including refinancing with a commercial or portfolio lender, but these providers tend to offer less favorable rates and shorter terms lengths compared to residential mortgage lenders. Additionally, lenders may require a personal guarantee, which puts you personally on the hook to repay the loan in case of a default.
How Many Rental Properties Should I Put in 1 LLC?
There’s no one right answer to that question. You have to find a balance between liability protection versus cost and inconvenience.
You could create a new LLC for every single rental property. But those costs add up quickly, and you have to open separate bank accounts for each LLC, complete tax returns for each LLC, and so forth.
On the opposite extreme, you could create just one LLC to hold a dozen or more properties.
To strike a balance, I’ve known some real estate investors to put two to four properties in each LLC. That segments the risk to small portfolios — if you get hit with a nasty lawsuit, theoretically you contain the risk to just that small portfolio of properties.
How many properties you put into a single LLC also depends on the size of the property. If you buy inexpensive single-family rental properties, you might put a handful into a single LLC. If you buy a 20-unit apartment building, you probably want a separate LLC for it.
Find your own balance between protection, hassle, and cost.
Steps to Transfer Rental Property to an LLC
If you’ve decided this approach is right for you, great! Next we’ll walk you through how to move your investment properties into an LLC. Transferring a rental property to an LLC must be executed correctly to avoid any costly surprises. Follow these steps to make sure you don’t miss anything.
Step 1: Do Your Homework
At the risk of sounding like a broken record, before you make any decisions about how and where to establish your LLC, you should consult with a local real estate attorney and/or tax professional to understand the tax implications and for legal advice specific to your situation.
Seek professional advice to review your existing mortgages, loans, and contracts to decide whether moving your property to an LLC is the best approach for your situation and, if so, to ensure a smooth transfer to the LLC.
When choosing a state in which to form your LLC, consider factors like corporate tax rates, filing fees, and ongoing compliance requirements.
Step 2: Contact Your Mortgage Lender
Avoid the risk of tripping a due on sale clause by contacting your mortgage lender and discussing your intention to transfer the property to an LLC. They’ll let you know whether you can transfer the property title under your existing mortgage and what fees or interest rate adjustments, if any, you’ll incur.
While I’m not saying it’s a good idea, I’ve known real estate investors to create an LLC named after themselves, such as “Jim Cirigliano LLC,” in hopes that the mortgage lender simply won’t notice the subtle change in ownership. While I’ve seen it work, there’s no guarantee, and you risk the mortgage company calling the loan.
Step 3: Form the LLC
Register your LLC with the state government, usually with the Secretary of State’s office. During this process you’ll choose a unique name for your LLC and register it with the state by filling out some forms and paying a registration fee, often around $100.
Upon completion, your new LLC will receive an employee identification number (EIN), a unique ID akin to a Social Security number you’ll use to file your LLC’s taxes and open a bank account.
Remember, once you create this new business entity, you have to keep your LLC compliant by maintaining separate bank accounts from your personal finances and keeping detailed records of your business income and expenses to protect your limited liability status.
Step 4: Transfer Ownership
To move your property into your shiny new LLC, you need to obtain a deed form, which you can find online.
In most cases, if you’re transferring property you already own to an LLC you also own, you can get by with a quitclaim deed, which simply transfers ownership without making any guarantee that the title is free and clear and that you rightly own the property. If you’re working alongside partners or co-owners who might need to verify this information, you can use a warranty deed instead.
Complete these forms using your legal name and your LLC’s information exactly as registered with the state. If you have questions, a local title company can help you through any of the specifics that apply to you in your state. In some cases you might need to have a third party, such as a registered agent, sign on behalf of the LLC, and you may need to sign the paperwork in the presence of a notary.
File the paperwork with the county clerk or county recorder’s office to transfer the title and record the new deed. Congratulations, it’s official!
Step 5: Update Insurance Policies and Lease Agreements
Once the property belongs to the LLC, you need to update several stakeholders to whom this change matters.
For example, you’ll have to notify your insurance company about the transfer to the LLC and ensure that the property is adequately insured under the new legal entity. You should also update any contracts or utility accounts you have in your name to that of the LLC.
Finally, make sure to notify your tenants about the ownership change and have them sign updated lease agreements under the LLC’s name.
Final Thoughts
Transferring rental property to an LLC offers real estate investors protection for their personal property, tax flexibility, and organizational clarity. The drawbacks include potential costs and less flexibility when it comes to financing and selling the property. Unfortunately the rules vary so much from state to state that it’s impossible to cover them all here to provide a one-size-fits-all recommendation, other than to consult with a real estate attorney or accounting professional in your state who understands the tax laws that apply to you.
That said, as long as you play by the right rules, investors who successfully transition their real estate assets to an LLC enjoy many benefits that will serve you well in the long run.
We published a podcast ALL about how to determine if holding your rental property in an LLC is right for you.
Check out episode 16 to listen!
We appreciate this article written by AAOA.
It seems like there are stories published every day about how expensive multifamily insurance premiums are getting. With such large increases, it might be tempting to put off updating your existing policies or even cancelling them.
But the question remains, do you want to risk not having enough coverage should there be a devastating natural disaster or massive damage to your property? Do you not want to recover losses due to theft and injury? What if an employee sues you for wrongful termination or sexual harassment?
Although it is not required by law, insurance is your protection from such catastrophes. Nothing beats excellent coverage by a reputable company when you need it the most.
But it’s getting so expensive!
One of the primary threats to multifamily investment returns is rising insurance costs. Insurance premiums for this industry have significantly increased over the last two years, dating back to early 2021 and intensifying in 2022. And the trend will continue into 2024.
Multifamily investors have reported 40-50% increases in premiums and in certain cases, insurance premiums have doubled. In addition, apartment owners are also faced with increased deductibles and self-insurance limits.
Not only are apartment owners realizing a lower net operating income, but they may also face the inability to secure financing for new investments. Higher deductibles will require larger capital reserves, forcing some property owners to sell.
What is Multifamily Insurance and why is it so important?
When buying insurance, any residence larger than a single-family home and which can accommodate more than one family is considered multifamily. Multifamily rentals often have individualized standards for risk and coverage, which can be covered with multifamily property insurance.
Multifamily insurance, sometimes known as apartment insurance, should protect you from potential liability claims, such as lawsuits, and cover you for lost rent income that you may experience after a loss covered by your insurance.
Such losses may include:
- Vandalism
- Theft
- Natural disasters, such as fires and storms
- Loss of income from rentals
- Advertising liability claims
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There are several different types of multifamily insurance:
Property Insurance
Property insurance protects against damage to the physical structure of the property.
Coverage can be obtained per building if there are multiple structures on the property where each building has its own separate coverages and deductible(s). This can be helpful for big-ticket items like mold.
Or, coverage can be obtained under a whole property policy that covers everything, regardless of the number of buildings. In either case, the actual face value of the policy will depend on the size and value of the property.
General Liability Insurance
General Liability insurance protects against claims for bodily injury and third-party property damage. For example, if a tenant is injured due to your negligence, you will be covered for damages, including medical expenses, lawyer’s fees and lost wages.
Umbrella Liability Policy
An Umbrella Liability policy is one that provides additional coverage over the stated business owner limits in order to ensure that there are no gaps in the General Liability coverage. For instance, this policy will provide coverage for acts of terrorism that may not be covered in a General Liability policy.
Business Income Coverage
When a property suffers damage that causes an interruption in the flow of normal business income, this coverage can provide protection. It can help you recover lost revenue and pay your expenses during the time it takes to repair your property and prepare it for the return of your tenants.
Based on various considerations, such as business income, sustained loss, waiting period and payroll limit, the amount of the policy may vary significantly from one property to another.
Employment Practices Liability Insurance (EPLI)
EPLI provides coverage to employers against claims made by employees alleging discrimination based on sex, race, age or disability as well as wrongful termination.
Flood Insurance
Depending on your property’s location, flood insurance may be a necessary type of coverage to consider. Standard property insurance policies typically do not cover damage caused by flooding, which can be a significant risk for multifamily properties located in flood-prone areas.
Workers’ Compensation Insurance
If you have employees working on your multifamily property, workers’ compensation insurance may be required by law in your state. This type of coverage can provide compensation for medical bills and lost wages if an employee is injured or becomes ill while on the job.
What is a small multifamily investor to do?
The small investor needs to have multifamily insurance almost more than the larger property owners who may have greater access to funds should a disaster occur. “Mom and Pop” landlords should work with their accountants to find the means to cover the needed insurance premiums.
There are economies you can take to lower your operating costs that will not affect your bottom line, such as carefully screening your potential tenants with an AAOA tenant credit check. Bad tenants will cost you in the long run with rental property damage, late rent payment, evictions, and vacancies.
The value of excellent insurance cannot be over-emphasized. This is one area where you should not shop by price. You want to choose a company that will respond quickly and work with you to get your building back to operating condition as quickly as possible.
As emphasized in Forbes, “Insurance is a must for commercial multifamily properties. The amounts and types needed are unique to the property and the market in which it is located…You should work closely with an experienced agent to determine coverages and deductibles.”
To learn more about rental property insurance for all residential types, check out our podcast, The Nuts and Bolts of Residential Rental Property Insurance.