Month: April 2024

Tax Returns

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Typically, I write a post around this time of year on how we handled submitting our taxes. This year, I’m going to focus on the return itself, and the concept that a large return is somehow “gaming” the system.

OUR TAX FILING

First, I’ll remind you of our process. I spend all year getting ready to do our taxes. This isn’t a last minute activity where I’m trying to find all the income and expenses and recreate data. I know more than one small business owner that constantly files for an extension because they’re not ready. Make it a routine all year to be organized. This way, once the year is over, you’re just verifying you have everything recorded, instead of compiling all paperwork and documentation for the first time. It’s less stress and you’re doing less work (because it’s still work to file the extension).

Most people have just their W2 income, maybe a little other income, and a standard deduction. However, if you have any more than that, you should make it a whole-year process. I have a spreadsheet that I keep for each rental property. I copy the template over each year for a new workbook, keeping the basics (rent income, routine utility costs, taxes, insurance, etc.) and deleting the extra maintenance costs that went into the houses (plumbing calls, HVAC repairs, etc.). As expenses occur through the year, I input them into the appropriate tab in the spreadsheet. At the end of the year, I verify I have all my receipts/invoices recorded.

Then Mr. ODA sits at his computer while I read off each house’s totals from my spreadsheets. This year, I think we hit a record in that it only took about 90 minutes to do our taxes! That’s probably the quickest we’ve done it since we’ve had all these houses. Actually, let me back track for one second there. I’ve spent all year preparing for tax season by inputting information as it happens. Then I spend about 2-3 hours reviewing all the data to ensure I haven’t erroneously recorded data, haven’t missed data, or haven’t omitted recording an expense or income. But the actual time that it took to go from spreadsheet into software and press file was 90 minutes.

“THE GOVERNMENT IS SAVING FOR ME”

A financial friend asked for “financial wins” recently on Instagram. Someone responded that they received a $5,000 tax return. He then said that he had several people comment that this isn’t a win, but he came to this person’s defense that some people need the government to do their savings for them. He said that, for some people, if they had an $100 each week of the year, they would have spent it frivolously.

I actually think that’s an excellent thought process. I see where he’s coming from there. Instead of someone thinking “let me set aside $100 this week to put towards debt,” it just becomes part of the pot of money that goes out with each pay check. That’s also easy to see as not worth putting towards a separate financial goal because it feels like not enough.

My frustration with the thought process of wanting a large return is that people think they’ve gamed the system and done something special to obtain (or earn) that amount, rather than realizing it was “their money” all along. You can project your tax burden for the year; it’s not a secret formula. Paycheck withholdings throughout the year simply allow you to work with your employer to gradually meet that tax burden as you earn your salary.

We project our tax burden each year. Sometimes Mr. ODA doesn’t listen to me on what our net for the rentals is going to be, and then we owe a lot come April, but that’s our own fault for not projecting with the right variables. For most people, the projection is a much simpler formula.

AIM FOR A $0 TAX RETURN

If you are someone who is going to put that $5,000 towards something productive, rather than frivolously spending it just as you would have all year, then that’s fine. However, I encourage a look at your opportunity costs.

Did you receive your tax return and go buy a 75″ tv? Was that a necessity? Did the money that went towards that tv have a better financial purpose?

Did you spend the whole year living paycheck to paycheck and worrying about the next bill to come in? Did you pay bills late because you needed funds from a future paycheck to cover the balance?

Did you spend the year carrying credit card debt, paying 26% interest on the balance, and then wait for your tax return to pay towards your balance? If you did, then maybe realize that the $5,000 you got in a lump sum could have saved you in interest costs had you just put $400 extra per month towards your credit card balance.

If you pay $200 per month (assuming a 26% interest rate):

If you pay $600 per month (that extra $100 per week that went into your taxes paid instead of into your pocket all year, causing a $5000 return):

You’ve paid off the balance in less than a year, and saved $1704 worth of interest payments. If you had paid $200 per month for a year and then used your tax return to pay off the balance, you’d have paid about $1,100 of interest, and then would be putting over $3800 of your tax return to pay it off. You also have the benefit of not having a bill hanging over your head at some point within that year, instead of worrying about meeting the minimum payments and continuing to accrue interest.

SUMMARY

So that’s my angst with the “financial win” of the tax return. Something as large as $5000 is an entirely different ball game than $500. Looking to get some money back and using the taxes as a ‘forced’ savings is an option. Perhaps you use that to take the only vacation in your year. But that should still be a reasonable vacation. Spend $1000 or $1500. You don’t need a $5000 vacation when struggling to pay bills or having debt that’s accruing interest.

So while I agree that the forced savings could be an excuse for a large refund, once someone receives a large refund, there should be an evaluation of their financial standing and an education on how that could be turned into a true, productive financial goal.

Lack of Rental Payment

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I was going to include this in a financial update post, but it was too long and complicated to include there. I really want this to be a lesson for anyone reading this – mostly on the renter end, but perhaps for a budding landlord as well. We tried really hard to work with the tenant, but we can’t work with someone who doesn’t communicate up front and doesn’t keep her word constantly. When using statements like “I need to keep the water and electricity on for my kids,” understand that the roof over their head isn’t a given. I’m a private landlord and be lenient, but an apartment complex type situation isn’t going to allow you to not pay for months on end; they’re going to file for eviction on the first day 6.

THE DETAILS

After this house was flooded by a tenant, we got it fixed up and on the market. The options at the time were limited; plenty of people were interested, but they weren’t qualified. The area called for $2,200, but I wanted it to move quickly, so we listed at $1600. The previous tenant was paying $1200, so this felt like a huge jump. No one qualified for the property. We had two options that were close enough to our requirements.

We chose a single mom who worked two jobs herself to be able to afford this place. Honestly, kudos to her for her effort. She lost both those jobs (we knew about one, but not both) and ran into some other troubles. She has worked hard to get herself back on track. I commend all that. She’s wonderful like that. Her communication (or lack thereof) was infuriating.

At the beginning of October, she said she’s back on track now with a steady income (replacing both jobs), but with all the outstanding bills, she’s going to need time to catch up. I’m a very understanding person and work with my tenants as long as they work with me. Instead of telling me WHEN I should expect to see payments, she left it open ended with “sometime in October.” I gave her the benefit of doubt. Then two Fridays passed with $0 paid. I asked for an update through our property manager.

On the 16th, she sent over $300 (after we had to ask for payment), and wrote, “I will be sending another payment this upcoming Friday and typically Fridays going forward.” Typically. She reiterated that October would be paid before the end of the month, and then she’d need about two weeks to pay November’s after that. She did pay $500 that following Friday, and then missed the next Friday.

My property manager had to follow up with her 3 times before she actually received an answer. The tenant claimed she had been too busy to respond. Excuse me, but keeping a roof over your head should be a priority in your life (this will be a theme). I asked for a payment plan instead of this open-ended concept of payment. On November 1st, she finally responded that she was going to pay $400-700 every Friday, going forward, unless she needed to pay other bills. Again. “I’ll pay you when I pay you, unless I don’t pay you.” This isn’t appropriate.

She paid $700, as goods and services, on November 3rd. All fees are the tenant’s responsibility, so now she owed another $15. She ended up sending $50 over that same day. At this point, it’s November 3rd, and she’s still $60+ short on October’s rent and $0 towards November. As expected, Friday November 10th came and went with no communication and no payment. She ended up sending an email in the early morning hours of the 11th stating she’s waiting on a deposit to clear, so she’ll pay something on Monday. She did pay that Monday. However, she had said she’d pay every Friday, and the 17th came and went with no payment. Again.

On the morning of the November 18th, I sent the notice of default. It said she had 5 days to pay the entire balance or we’d file for eviction. She threw a little tantrum, claiming she wanted to end her lease. It doesn’t work like that. My property manager had a good idea and was able to articulate our frustration sternly, yet professionally. The property manager said that “forgetting” and “life” getting in the way were not acceptable responses, and it was time to be responsible for herself and her bills, perhaps by setting alarms or utilizing her calendar for reminders. The offer included our waiving of December and January late fees ($160 each) if the tenant continued to pay every Friday without us having to follow up. I thought the incentive was great. The tenant then paid $700 on the 24th and $600 on 12/1. At that point, she was caught up on October and November (sans late fees though), while paying into December’s rent owed.

She paid the first two Fridays in December, missed the 22nd, and paid on the 29th. At the end of December, she had a balance owed of just over $500, which included all late fees, so that was a decent position. Then things went downhill again. She paid nothing until January 17th, and it was only $100 that day. She claimed an issue with the amount she was able to send over, but stopped trying. When we asked why she mentioned $400 in $50 increments, but only sent over $100, she acted like we did something wrong. Over the next week, she ended up sending $300. At the end of January, she owed $1,863.40.

TENANT VACATES THE PROPERTY

In mid-January, seeing that communication was getting worse, and payments weren’t even being made, we asked her to leave. I was really trying to get through February so that we’d have a more favorable market time to list it. She said she didn’t want to leave. That’s a bold statement from someone who owes a lot. On January 25th, we sent her the 5 day notice until eviction document, which showed her balance due. We offered her the ability to leave the house by the end of the month with minimal damages, and we’d just keep her security deposit. Her initial response was that she wants to finish interviews she has scheduled, and she didn’t want to leave.

Within 24 hours, she decided she did want to leave. For the first time in all of this, she fully explained her situation. She gave good reason to have until February 4th to leave (instead of the end of January). We allowed it, but she’d be responsible for those days of rent in February.

As a final goodbye, she told us she would be able “to make another payment that first week of February.” As I suspected, she meant the week of February 5th, and not the 1st or 2nd. She didn’t pay. On February 9th, she “kindly” asked for an extension for the final payment, since she was expecting her tax refund in the next two weeks.

I don’t need to tell you at this point – two weeks came and went. She did end up paying over $500 on 2/29 though. That was more than I ever expected. I don’t know how she arrived at her number (she did email an explanation, but the numbers didn’t add up), but I’m accepting it.

TURNOVER

She actually left the house in great condition. She had sticking LED light strips in a bedroom that said they were easily removed. However, when she removed them, paint came with it. I had to have someone touch that up. She bought blinds, but didn’t hang them, for ones that were damaged (she had asked us to pay for them when she first moved in, so that was a nice gesture to uphold the integrity of the request), so I had to have someone do that. Then I paid someone to clean the house, which is normal. Overall, she was difficult to communicate with, but I do believe she meant well.

BACKGROUND & EXPECTATIONS

I have a track record of being very lenient and very understanding. I promise. I can provide lots of examples where I’ve let people know to take their time, prioritize back to school necessities, waive the late fee, etc. I can not work with you if you don’t talk to me. I don’t know what you need. I don’t know you as a person and whether you’re “good for it.” I need to know your expectations, needs, and plan. Talk to me without me hunting you down for information. I don’t know where I’ve said this before in this blog, but I’m positive you can find that or a very similar statement made throughout. Understand that in nearly all other scenarios, a landlord is not going to be patient for 4 full months to try to get you to pay rent owed.

She said phrases to me that were generally that she has kids so keeping the water and electricity current is her priority (isn’t keeping a roof over their heads equally important?), or that she asked for grace and patience (what have I been doing? I could have issued you the first step of the eviction process on October 6th, and I didn’t, even though you didn’t pay a penny towards rent until the 16th). It’s things like that get under my skin and make my efforts feel unappreciated, making not want to work with you going forward. Take the time to acknowledge how gracious I HAVE been, that I have bills to pay in addition to you having bills to pay, that I deserve to be given regular updates and information without having to follow up and beg for information.

My property manager says “she’s young” and “she’s learning.” There have been learning opportunities, but it’s also not my role to mentor a tenant on how to be an upstanding citizen and uphold your commitments. There were two other late rent moments this summer where my property manager said that if there’s any issues with rental payment, we need to know ASAP, without us having to make phone calls or send emails. My property manager reiterated this expectation on October 31st over the phone – don’t miss a Friday rent payment, assume we know you’re not paying anything, and leave it at that (I already played the “benefit of doubt” game through October when we received $0 for half the month).

LESSON

Communicate with the landlord. Don’t put the landlord in a position where they’re having to keep track of your financials and whether you’re paying timely. Pay regularly or communicate up front. All of my leases state that rent is due without demand. My having to regularly ask for an update or why you haven’t paid a single penny halfway through a month is not in any realm an acceptable way of doing business.

Renters need to understand that landlords have bills to pay. Those bills (that mortgage) are not as lenient as I’m trying to be with you. If I don’t pay my mortgage, there’s a late fee and it’s immediately reported on my credit. They also don’t accept partial payments. If I don’t pay for long enough, it becomes a foreclosure. As a tenant, you don’t know if I have funds to cover that payment. Assume I don’t. If I don’t pay my mortgage, the house is foreclosed, and you’re kicked out anyway. You’re getting by without any credit hits, as you’re now two to four months behind on rent. I’m floating mortgage payments on your behalf. Lucky for you, I’m on top of my credit and paying these bills even if you’re not paying me, but that isn’t an assumption you should make.

Your actions have consequences. You can mitigate those consequences by upholding your word and keeping in regular communication on what’s happening (again, up front, not after the deadline passes).

April Financial Update

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I had this post mostly written by Wednesday, but we traveled earlier this week, and I haven’t kept track of the day very well. This is the first I’ve been able to update our net worth and get this done. Ironic, considering how I started this post when I expected it to be on time. And now..

This past month has been exhausting on me. I knew March was going to be busy. We had a bunch of sports schedules to manage, lots of kids birthday parties, hosting my dad for a long weekend that coincided with 3 family birthdays and the first anniversary of my mom’s passing, an assortment of Easter activities, a trip, and random other events. On top of managing these day-to-day things for our family, our deck replacement started, and we had to work on a massive turnover of a rental property. I’m in a perpetual state of tired these last few weeks.

DECK REPLACEMENT

On July 2nd of last year, a storm blew threw that destroyed our neighborhood. Honestly, we’re surprised by how little actual structure damage there was for our neighborhood because it looked like a war zone with the amount of trees down. A couple of houses had a tree fall on their roof, but only cause minimal damage that resulted in shingle replacement. We appeared to bear the brunt of the worst, which was a tree falling on our deck, crushing our furniture, moving all the supports, and cracking the concrete blow it. Another tree missed falling on one of our cars by centimeters, but that limb ended up cracking our driveway apron. We struggled communicating the extent of the damage with our insurance company, and they eventually realized what was needed and paid out on it five months after the incident. Our construction started on March 18th.

It hasn’t been an easy process. It’s emotionally draining on me because there were communication issues with our contractor that he wasn’t taking responsibility for. Then there were minor issues, but issues nonetheless. For instance, they installed waterproofing so the patio would be a dry area, but they cut through one of the barriers. Instead of realizing that was going to be an issue and fixing it themselves, I had to point it out. Then we went out there while it was raining to check it, only to see that there are 3 spots where water is just pouring through the seams. That just takes a lot out of me to have that conversation. They cracked off the top of our sewer cleanout, which not only made a mess in the yard, also caused a backup into our basement tub and toilet once it was glued back on because of a pressurizing issue (we think).

Then there are those hidden things that take energy, such as managing how to move money out of savings (while not exceeding the maximum of six transfers) and keeping track of all the bills, while ensuring the checking account has the right amount of money to cover the bills paid.

RENTAL PROPERTIES

Everyone paid rent on time! I had two technically pay on the 6th, but I sat waiting to see if it showed up before reaching out that morning. One of our tenants bought a house and vacated as of March 31st. They actually had left the house a little early, which was really helpful to us because the house needed a lot of work. The house had been flipped before we bought it. We knew everything was going to eventually need attention, but we hung on as long as possible. The neighborhood is really nice, so it was time to bring the state of the house up to a better standard. It had been “good enough” all these years, but there were definitely some items that should be replaced. This ended up being a huge overhaul, costing us over $10k. I’ll go into all the details in a future post.

NET WORTH

We’ve made a few substantial payments on the deck. We had been investing the money from the insurance company, while we waited for them to finish their estimates and then while waiting for the contractor to begin. Our taxable investment accounts have decreased a bit from that, and they’ll continue to decrease as this project finishes up in the next 2-3 weeks. The market is lower than it was a month ago, but our house values are starting their upward Spring trend, offsetting some of that loss. Overall, our net worth increased over the last month, but only by about $4,500 instead of the drastic increases we had been seeing month-to-month.

House 9 Turnover

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I recently posted “Lease Break Agreement,” where I went into the concepts we used to determine a lease break clause in our renewal with a tenant. The purpose of our fee structure was directly correlated to the time of year and probability of turning over the unit quickly. As I suspected, it took us an entire month to find a tenant. The lease break fee was one month’s rent, so we didn’t go without income during that time, but we also didn’t net a positive.

The tenant gave us notice on November 24th. Our property manager listed the property on November 26th at $1700. The higher price points are worrying me. While the market may claim that this is a fair rate, it doesn’t mean that we have a large pool of qualified candidates for this amount per month.

TURNOVER WORK

The house was painted before the current tenant moved in a few years prior. Unfortunately, some of the rooms were addressed, but not all of them. And the ware of time hit the walls all differently, so it looked like different colors of paint. I asked our property manager to get her painter over there and give all the walls a fresh coat. It looks great. That was $2,000.

I had a carpet cleaner come out and a cleaning company come out. The cleaners forgot about the refrigerator and had to come back. But otherwise everything looked great for less than $500 together.

The front porch was starting to sink. So while this wasn’t an activity done before someone moved in, we do have our handyman working on replacing the back deck, the trim around the back door, and the front porch (he jacked up the supports and is replacing the railing and stairs). I don’t even know what this final cost is yet, but it’s a lot.

APPLICANT #1

We had a lot of interest; hardly anyone qualified. After getting through some of the weeds, we did have a couple interested that appeared to be a good fit. They viewed the property twice over a week to be sure it was a good fit. The application was received on December 13, but it only listed one of the two adults who would be living there. We require all residents 18 years and older to complete a background check. We didn’t expect an issue with that since she works at a school, but it didn’t go well. Due to the holidays, their applications weren’t received until December 26th. She had several collections on her history. However, since he qualified on his own without her income, we agreed to overlook her lower credit score and collections history. I set up the lease with their names and sent them over.

We were excited because they wanted a January 1st rental, which meant we wouldn’t have any loss of income and would be able to put the lease break fee back into the house easily. They asked us if we would clean the carpets and clean the outside of the house. We agreed to the carpets and said that they outside of the house (mildew) would have to wait until warmer weather, but that we would address it.

Technically, all my tenants are supposed to clean the carpets and provide a receipt upon departure. However, I don’t hold this to anyone unless they were a real pain. A couple of hundred dollars out of my pocket and a happy ex-tenant is how I’d prefer to keep it (you’d be surprised at how many ex-tenant referrals we’ve had).

Suspiciously, they then withdrew their interest. I wish I knew why. I don’t know if their circumstances changed, if they were hiding information we hadn’t found on our own that caught up to them, or if something in the lease spooked them. If it was the lease, I wish they would have asked questions because we’re so easy going. I could have either explained why it’s there to protect them/us, or changed it.

So while we were a month ahead of schedule with being able to list the house, we now have a vacant house with no prospects. The goal is always to have the house ready to re-rent with little down time.

LISTING CHANGE

The market for the area called for $1600-1800 in rent. We originally listed it at $1700. It made me nervous. When the initial applicant backed out, I immediately adjusted the rent to $1650. We had plenty of interest at the $1700 amount, but it wasn’t worth weeding a few people out because they didn’t want to go that high. I decided to risk it with only a $50 decrease, since people would be able to see the decrease (and I try really hard to list it at the right price so I don’t have to do a price adjustment, but a December listing is hard to nail on the head). Again, we had a lot of interest, but few qualified.

APPLICANT #2

Two twenty-something men saw the property and asked to apply on January 11th. Neither of them had a job. Seriously. Neither had a single dime of true income, but wanted to commit to $1650/month in rent. Noteworthy was that they wanted us to consider that he had the potential to make $40k per year day trading stocks. We asked a few questions. They said they thought it better to find housing and then find a job. We suggested they try to find work and then live where they find a job (they had just moved ‘home’ from about an hour away).

APPLICANT #3

A woman showed interest who appeared to qualify on the surface. My broken record is to tell me things up front and be open with communication. I can’t help you if you don’t help me. Her information on paper looked fine. I’ve learned over the years to check the local jurisdiction court records myself, instead of relying on the background check. I’ve also tried to look things up before they submit their application; this way if there’s anything out there, they haven’t given us money for the application to not be used. During my search, I found several garnishment cases. Like a lot. An unreasonable amount of court records for a single person. We denied her interest form and did not pursue an application.

But on January 16, she asked for us to reconsider and explained the garnishment. There was one point deducted because the woman’s email asked if “he” as the landlord would reconsider her application (why can’t a friendly, reasonable woman be the landlord? 🙂 ). I didn’t appreciate that the garnishment wasn’t disclosed up front. However, she did explain what happened. It sounded like she was told that there was nothing due, made no payments, and then this debt showed up that she didn’t know she owed, but she’s been working a second job to pay it off. Honestly, the documentation didn’t clearly support the story, but my gut reaction was to believe her.

She also had three evictions recorded on top of this garnishment. The evictions appeared to be filed immediately upon unpaid rent by an apartment complex management company, and then the rent paid before the court date, thereby clearing the debt. I expect to have future issues with rent payments, but I suspect it won’t be anything more than I’m used to handling (e.g., where a tenant needs an extra week or so to make rent).

Our property manager appreciated the in-person interaction with this person, she was well written and well spoken when making her case to be accepted to apply, and overall it seemed worth giving her a chance. I’m also a sucker for giving borderline qualified individuals a chance. I think I’m 50/50 on it working out for me.

The lease was signed on January 18th. We agreed that she would pay the security deposit, first month’s rent, and last month’s rent. The last month’s rent was an additional way for us to hedge our bets with her unqualified application background. This is a “compensating factor.” Since she did not qualify according to our list of requirements, we’re taking an extra fee as insurance to our business interests in this property. We typically will work with someone on compensating factors so that they get a place to rent and we don’t lose out on too much in case our olive branch doesn’t work out.

She paid the security deposit with the lease agreement signature and paid first month’s rent on February 1st. We agreed to give her until February 17th for the last month’s rent. She was asking for a later move in date because she didn’t have all the money up front, but I didn’t want to cause extra stress on her moving plan/date over that.

FINAL THOUGHTS

I don’t even know how many people actually saw the property, since my property manager handled that. However, I know it was a good amount. I typically handle it where I set up an “open house” style visit window for people to come through (so many people claim they’ll show up to a scheduled appointment, and they don’t). I believe she tried to do this at the beginning, but it was taking so long to find a qualified applicant, that she ended up having to do one-on-one meetings.

She has them fill out an “initial interest” form after the showing. For the most part, I do that after the showings as well. However, it does help if you’re scheduling individual appointments to have people fill this out before hand. You want to know ahead of time if there’s even a chance of them qualifying. You don’t want to take time driving to/from an appointment and letting them looking around the house, only to find out they have a criminal background and/or less than favorable credit history.

THERE IS NO CHARGE FOR AN INTEREST FORM. If you are a tenant looking for a place to live, do not pay anyone anything until you’ve seen the property. There are a lot of scams out there where “landlords” are claiming they need an application before allowing you to see the property. They’re listing places “for rent,” that they have no vested interest in. People who recently sold their house, so pictures are available to use, are the ones finding out that people are driving by and looking around their house because someone claiming to be a landlord collected an “application fee,” with no intention of showing you the house or renting it to you.

So while this person didn’t expressly qualify based on our list of requirements to rent one of our properties, I felt like she deserved the chance. I feel bad when someone’s previous life choices immediately disqualify them, and I enjoy giving people a moment to voice their side of the story. Sometimes, their story is enough to solidify a denial from us. But sometimes, it appears worth giving them this opportunity to right their wrongs. I also feel good that I didn’t feel pressured into making a decision just to recoup vacant days on market, but that I made a logical decision. Now let’s see where we end up with this property in 18 months, and whether I still think it was a good decision!