Repairs vs Improvements for Rental Properties

Although this can be a tricky concept it’s well worth the time spent in understanding it. As described in IRS Publication 527, Residential Rental Property, each year when you file your tax forms you can deduct the cost of repairs to a rental property, but you cannot deduct the cost of improvements. You recover the costs of your improvements when you take depreciation for your property. The difference between the two concepts is easier to grasp by looking at some examples.

Repairs

A repair, as the name implies, fixes something that is broken. It doesn't add to the value of your property or extend its life. Examples of repairs include:

inside or outside painting
repairing gutters
fixing floors
fixing leaks
plastering
replacing broken windows

Improvements

Improvements add to the value of a house prolong its life, or adapts it to new uses. Examples of improvements include adding:

a porch, deck, patio, bedroom or bathroom
landscaping, a driveway a fence or a swimming pool
a heating system or air conditioner
a water heater, soft water system or filtration system
flooring, wall-to-wall carpeting of kitchen modernization
insulating attics walls, floor, pipes or ductwork

Improvement costs are capitalized, meaning that you recover the costs by taking depreciation over time.



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Two Safest Ways to Invest in Real Estate article on ChristianPF.COM

Here is an article entitled The Two Safest Ways to Invest in Real Estate that I wrote for the Christian Personal Finance Blog.

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Renting Better Than Buying?

Get Rich Slowly is a good website that I like to visit. One of the most popular, and interesting, blog conversations on the site is entitled Renting vs. Buying: The Realities of Home-Ownership. I found it fascinating and astonishing that of the 179 responses on that blog, the majority of people expressed the opinion that it is better to rent than own. Reasons for this opinion included, such comments as, "you pay too much in interest," "we’d rather put the monthly mortgage money in more profitable investments," and "we don’t want to pay for house repairs."

I was amazed because I think that buying a house is the one of the best investments available to the average person, second only to buying 2 or 3 houses. Sure, if you buy one house you pay a lot of money to the mortgage company only a small amount of which actually pays off the house. However, renters pay a lot of rent money, that only pays off the mortgage of the owner of the rental complex.

How much do renters benefit when property values go up? Zero. If you own a house you have an investment that consistently goes up. According too the U.S. Census Bureau, the housing market historically (1940-2000) rises 5% per year (adjusted for inflation). Home owners benefit from historical trends and renters don’t.

Some comments touted stocks as delivering a better return than real estate. The catch is, you can’t leverage stocks. As a simple example, if you want to purchase $10,000 of Google stocks, you pay $10,000.

With leverage (borrowed money), you can purchase a $200,000 house and just put $10,000 of your own money in. If the Google stock goes up in value 10%, you made $1,000. If you house goes up in value 10%, you made $20,000. Because of leverage, you doubled your investment in real estate, whereas you only received 10% on your stock investment.

The 500-lb gorilla in the room that was never mentioned is that eventually the home owner will pay off the mortgage on the house and never make another mortgage payment. The renter is doomed (as Darth Vader might say) to pay rent forever.

The big benefits of home ownership comes later. Let’s say you bought a house on a 30-year mortgage. Time passes. You want a bigger house. Do you sell your home? No, instead of selling your residence, you move into a new house and rent out the old one.

When you have a rental property, in addition to owning your residence, then the cash starts to flow to you. For the second house, instead of you paying the mortgage, the tenant pays it off, not only the mortgage, but also the taxes, the utilities, and on top of everything else, he/she pays you a few hundred bucks extra.

Then you do the same thing again and you have 3 houses, and more money coming in each month. In addition, the value of all houses is going up. A $200,000 is worth $300,000 in 10 years. If you own just 3 houses, you made $300,000.

Home ownership makes sense, and multiple home ownership makes dollars.

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A small grouting job in the bathroom

Sunday, work continued on the fixer-upper that we live in,
and plan to sell. There was a little grouting left to do in one of the
bathrooms, around the tiles that made a baseboard-type border abound
the bathroom floor.

Here are the tools I used - small bucket, white grout, a trowel, and a small "mud" (or joint compound) spatula (not pictured)












I mixed up a small amount of grout. Add water to the powder until you have grout the consistency of peanut butter.

When I mix grout, I wear a mask or kerchief to cover my mouth and nose. The grout mix contains cement, so if you breath in the powder it can scar your lungs.











I apply the grout with the small spatula.











Afterwards, I clean up tools with water.

After the grout has cured for three days, I apply grout sealer.

There are two pretty good books on floors and tiling published by
Home Depot, "Tiling 1-2-3" and "Flooring 1-2-3". I recommend "Flooring
1-2-3", if you just want to buy one book. It cover tiles about as well
as the other book, and also addresses how toinstall several other types of flooring. I used it as a guide to install both laminate flooring, and vinyl flooring.

As always, to make money in the fixer-upper business its best to do
everything yourself. You learn by doing. Start small but work up to
bigger projects.

Our first tiling project was in a small bathroom, a good place to learn the process. But since then, my wife and I have worked our way up to doing large bedrooms. We feel
comfortable tackling any tiling project now.

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Termites, a relentless foe

We discovered that we had termites in one of our bedrooms when my son bumped his foot against the floor trim and found that there was no longer any wood trim there. All that was left was the the shell of the paint in the form of the trim. The wood had been completely eaten by termites.

I usually like to do all fix-up type repairs myself, but this is a case where I let the exterminators (no relation to the California governor) do the work. The first few companies I called would not give me a quote over the phone. The one company that gave me a "rough estimate" came in at a budget busting $1500 to $2,000 for a 1600 sq.ft. house. The job must be based on the square footage of the house, so it's not rocket science to calculate the cost. It makes it impossible to compare companies if they all have to come to the house before they can give me an estimate! They think that after you invest the time to have them come over, you'll just fall for their sales pitch, rather than spend any more time finding the best deal (and at the same time you're concerned that your house is crumbling from the relentless termite onslaught).

So, I kept calling. After several more calls I connected with A-OK Termite and Pest Control and they really were "A-OK" because they gave me a bid of $650 without a house business. They did the job last Saturday.

Here in the desert southwest, we have subterranean termites, which I believe are the single most common type. They live in colonies deep within the ground, sometimes to depths of 25 feet. Termites work their way up through the soil from their nest and enter any wood they can. Termites can gain entrance by crawling up the sides of foundations, building mud shelter tubes to shield them from light, or they can go up hollow sections in block foundations or up cracks in the poured concrete foundations.

Every 48 hours or so termites must return to the soil to get moisture or they will die. The exterminator (again, no connection to Arnold) sets up a barrier of chemicals in the soil that the termites cannot pass through. They usually inject chlordane into the the soil every eighteen inches around the entire house. The same procedure can be done inside the house.

Even if only one part of the house is infested, the entire house must be termite-proofed or the termites will migrate to the untreated parts.

The time it takes termites to do serious damage varies from only a couple of years to 10 or more years. So, if you think you might have termites, don't put off taking care of them too long. If it's been 5 years since the last treatment it's time to have the house inspected.

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Refinishing Cabinets

Veterans Day my wife and I refinished the hall cabinets and painted bathroom and bedroom doors.

The permanent hall cabinets had been scratched up in the fixer-upper house that we are living in and repairing.













Steps in refinishing wood cabinets:



Step 1: Take off the cabinet doors.











Step 2: Remove the old paint or stain. I used 150 grit sandpaper.












Step 3: Apply stain. I used Watco Danish Oil, which is applied with a rag and is used to both protect wood as well as to stain it. Make sure you apply test patches of your stain to an inconspicuous area of the piece to be stained. Most stains dry a shade or two darker than the color you see.

You control the color by the length of time you let the stain penetrate the wood. If it gets too dark, moisten a clothe with the recommended thinner and wipe again to dilute and wash away some of the pigment. Since this stain is oil-based, make sure you either work outside or have plenty of ventilation.











If the wood is thirsty, it may take more than one coat to get a smooth finish. Wipe in the direction of the grain.












Step 4: I'll apply polyurethane after the last coat dries, for extra protection.



Angy expertly painting a bedroom door. She's using Behr's Ultra Pure White, Semi-Gloss Enamel (Wait, I'm not ready!).











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Make house repair a family affair

For the first fix-up house that my wife and I bought, our two boys were 4 and 7 years old. Some people might think that they couldn't do much at that age. My experience is that children can learn lot, and sometimes help you in the process, if you adjust the work to their level and let them do what is interesting to them. At that age they like to try out as many different activities as they can. My philosophy is let them hammer some nails, even if they bend them. Let them paint even if they spill a few drops (or gallons). Usually the paint ends up on their clothes, the ground, or sometimes the dog. One time, I took a picture of my kids painting a fence because they actually got some paint on the fence!

Let your kids cut tree branches even if the branches that they can cut are no bigger than a twig. (Of course, they'll need close supervision for some jobs.) In other words, include them in any activity that they want to be included in. They are learning. If they make mistakes, take it lightly and laugh a lot. Keep them interested by giving them a lot of different jobs to do. Make them feel good about themselves. In the long run, that's more important than all the fix-up houses in the world.


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Start by Meandering in the Direction that You Want To Go

If your circumstances are such that it is impossible for you to start investing in real estate today, you can start by just meandering in that direction, like a lazy mountain stream.

You can program your mind to pay attention to anything related to real estate. Cut articles out of the newspaper, buy books at book sales, ask friends and co-workers how they purchased their house, watch for free classes or seminars. You can be constantly learning and preparing for the day you will purchase your first fix-up property. As Paul and Sarah Edwards point out in Making it on Your Own, “virtually anything you need to know is available to you through books, tapes, workshops, seminars, public education programs, consultants and training programs."

I meandered for approximately 11 years before purchasing my first investment property. Now I wish I had started sooner, but you can’t begin until you have the desire and the knowledge. Sometimes, desire and knowledge can be acquired simply by observing someone else operating a successful business.


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Re-directing your career

Taking a new path toward earning money requires us “to give up what is familiar and secure,” as Marsha Sinetar says in her book "Do What You Love and the Money Will Follow." Sinetar feels that working at the “right” job involves “doing our best at what we do best.” Sinetar suggests that we periodically take stock of our true life’s purpose by asking the following questions:

1. What do I want to have accomplished when I look back upon my life in old age?

2.What habits would I need to cultivate and what would I have to delete from my present life to live out my true purpose?

3. What activities would I do if I lived as if my purpose meant something to me?

While you pay a price for following your dream, you also pay a price for staying where you are. You lose the opportunity to develop new life-coping skills that help you deal with unexpected crises or joblessness. You may suffer from depression by staying in a debilitating job. Sinetar, in "To Build the Life You Want, Create the Work You Love," says that excelling at a job that you love could be the best mental health insurance for people who feel depressed or anxious about their work. Americans spend $12.4 billion each year to treat clinical depression.



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