Thursday, December 1, 2016
Sunday, November 27, 2016
Saturday, October 29, 2016
5 Reasons Credit Reports Don't WorkBy John Nuzzolese
What??? Credit reports don't work? This must be a joke, right? Tenant credit reports are one of the most important screening tools in the rental housing industry.
In order to secure a good tenant for your rental, it is critical that we practice proper tenant screening. This includes verification of all the reference information on a detailed tenant rental application. A credit report is an important final step of verifying the tenant's financial history, or track record.
Credit reports contain important factors in evaluating a person's creditworthiness. Creditworthiness, of course, is what you are looking for if you plan to hand over your rental property to someone.
So What Are "5 Reasons Credit Reports Don't Work?"
- Making your decision based on how you feel about the prospect
- Relying soley on the credit score
- very little credit history? Believe it or not, some people have a great credit score with only one active account on their report. A single store credit card account, such as Macy's can give you a great credit score, but that is just not enough information to evaluate a tenant.
- closed negative accounts? It is not uncommon to see a good score along with closed accounts, even some old negative ones on a credit report.
- charged off accounts? It is possible to see a good score along with charged off accounts.
- crazy address history? A new address every 6 months for the last 5 years is a sign that this person can not stay put in one place very long. It could have to do with going from job to job, or possibly not getting along with his landlords.
- Forgetting that a credit report is only one of the deciding factors.
- Not verifying the identity of the applicant
- Not understanding how to read a credit report
It happens every day. You show your rental property to someone you really like. They seem so nice and you leave the appointment feeling like you've got this deal in the bag. It could be a nice friendly couple you seem to have hit it off with, or a friendly guy who seems too good to be true. They may ask questions like, "Is it OK if I plant a few flowers in the garden?", or "Do you mind if I fix small things that need fixing?"
Although it's great to find a tenant you like, that is only one factor. You still will need a good understanding of his or her credit history.
If you feel the person is untrustworthy, irresponsible or just a plain jerk, that is a major factor for you to consider, even if the credit report is good. You MUST MUST MUST verify the prospect's identity! Ask to see a driver's license and also get or make a copy of it. Always make sure the person you are screening is the same person on the credit report. If you don't understand the jargon and codes in an average credit report, don't feel bad. It's easy and the following link will help you understand and be able to analyze credit reports and make good screening decisions.
How to Read and Understand a Credit Report Step by Step
If you feel the person is untrustworthy, irresponsible or just a plain jerk, that is a major factor for you to consider, even if the credit report is good.
You MUST MUST MUST verify the prospect's identity! Ask to see a driver's license and also get or make a copy of it. Always make sure the person you are screening is the same person on the credit report.
If you don't understand the jargon and codes in an average credit report, don't feel bad. It's easy and the following link will help you understand and be able to analyze credit reports and make good screening decisions.
Credit reports do work and are one of the most effective financial screening tools in the real estate industry, but as with any other tool, such as a hammer, it must be understood and used properly to be most effective in tenant screening.
Screening Tools for Before the Credit Report
Tenant Finder ™ Pre-Screening Telephone Worksheet
or The LPA Pre-screening Prospect Card (with html code for Internet ads)
The LPA Rental Application
The Landlord Reference Qualifier
Credit Reporting Disclosure Notice
Tenant Finder ™ Qualifier Chart
Tuesday, October 18, 2016
Wednesday, October 12, 2016
There are many Real Estate Investors that are unsure whether they should establish a Corporate Entity or not. The primary purpose of having your Real Estate Investments, in a Corporate Entity, is to protect you personally. You want Asset Protection. Ideally, for Buy and Hold Investments, you would want to create a LLC, for each property. This may seem a daunting task; and you may be thinking how to manage all the bookkeeping. Depending on your area and the value of each property, you may want to consider grouping properties into a single LLC that does not exceed a total monetary threshold.
To better illustrate this concept, I will share my Company's Business Model. Each acquisition is placed in its own Clone LLC, with the only member of the Clone LLC being the Umbrella LLC. This funnels all net gains and losses, from each Clone LLC, to ACT Investment Properties, LLC that operates as the Umbrella LLC. This Business Model only requires two Bank Accounts: a Corporate Checking Account and a Corporate Savings Account.
For Buy and Hold Investors, why is a Corporate Entity important? What happens if one of your tenants has a slip and fall, on your property, or something else happens to them? You are on the hook and can be personally sued, for everything you own. Some people will say, "Take out a quality Liability Insurance Policy and you will be protected." Ambulance chasing attorneys know their way around and can legally navigate around Insurance Policies. Another downside is you loose on the advantages, of the Federal Tax Code, by not closing in the name of a LLC, or S Corporation.
I would strongly suggest you establishing a Corporate Entity such as a S Corp or a LLC. This is a relatively inexpensive process. I invite you to Google "Creating a LLC or S Corp in _____," "Division of Corporations in _____," or another phrase. The blank line is where you insert the name of the state, in which you want to establish the Corporate Entity. You can go to http://www.sunbiz.org and see how Florida does things, to give you and idea what to look for, in a website. I invite you to please consider the following, from a Federal Income Tax Filing Perspective. I cannot stress the importance of finding a very good Investor Friendly CPA. Below are some things you may wish to consider, as to which Corporate Enity is best, for your Business Model as well as your Real Estate Investment Goals and Objectives.
Flipping PropertiesIf the primary objective of your real estate business, or one of your real estate businesses, is to buy, potentially fix up an existing property and resell it within one year, the Internal Revenue Service can consider that to be an active trade or business. Unlike passive rental income, the income from an active trade or business is subject to self employment tax (a nasty 15% tax commonly referred to a "social security and medicare" by working folks). If your goal is to reduce that self-employment tax to a minimum, an S Corporation is the best entity to use. Why?
It is the only entity structure whose rules allow the business owner to take a "reasonable salary" (subject to social security and medicare) and then take the remaining profit (often as much as 50% of the remaining income) out as distributions not subject to self-employment taxes. Correspondingly, all business income taken from an LLC under similar circumstances is subject to self-employment taxes. For a business owner with $100,000 taxable annual income, the net tax savings for using an S Corporation instead of an LLC in taxes paid every year can be as high as $7,500.
Holding PropertiesWhen holding properties as a cash flow investor, the LLC (or LP) is generally the better choice because an LLC has more liberal distribution rules. The key here is flexibility. If you purchase a large piece of property and later decide to sub-divide it, you could distribute out a piece from an LLC without incurring a taxable event. LLC distributions come out of the LLC at cost basis. The members of an LLC are issued K-1 Form and have to pay taxes on all profits as though it were income, which could expose the owners to high employment taxes. Also, an LLC can elect to be taxed like an S Corporation.
While there is never only one answer that is correct for all circumstances, there is a general rule that is almost always the correct choice. So remember, for legal and tax planning, a good CPA will recommend that clients hold their properties in an LLC or Limited Partnership and run their businesses as S Corporations to avoid self-employment taxes.
I hope you found the above information valuable and would enjoy receiving your feedback.
Thomas J. Franklin
Website Link: Click here