5 Financial Ratios Every Income Property Owner Should Know

Whether numbers are your forte or not, there are certain ratios and calculations every property manager should understand. Following is a look at five key ratios that apply to your property management business, how to obtain them, and what they tell you.

1) Vacancy Rate
Your vacancy rate demonstrates the number of units available or unoccupied versus the total number of units available for rent on a property. The lower your vacancy rates, the better. The formula for this is simple:

Vacancy rate = Total number of unoccupied units in a property ÷ Total number of units in a property

This total can then be converted into a percentage.

While average vacancy rates vary from region to region, according to a January 2011 article on MHN Online, “[President of Axiometrics, Inc. Ron] Johnsey’s forecasts call for the average vacancy rate to drop in 2011 to 5.8 percent—a solid statistic considering apartment properties aim for vacancy rates of 5 percent for optimal rent increases.”

Note that your occupancy rate can be easily determined by subtracting your vacancy rate from 100 percent. For example, with a vacancy rate of 7 percent:

100% – 7% (vacancy rate) = 93% (occupancy rate)


2) Depreciation
Depreciation helps you determine how much value your property has lost over time due to age and wear and tear. Depreciation is considered an expense and will come into play as a write-off when completing taxes. Note that depreciation is completed over a 27.5 year period and applies only to the actual building on the property, not the land. To calculate depreciation:

Purchase price – Land value = Building value

—then—

Annual depreciation = Building value ÷ 27.5


3) Operating Expense Ratio
The operating expense ratio is simply the ratio between total operating expenses and the gross income of your property. This total amount shows how much of your property’s income is being used to actually support and run the property. Operating expenses include those expenditures that support the operation and maintenance of a property. Gross income is the actual yearly income—this may include not only rent, but also income from things like laundry machines and parking fees.

Operating expense ratio = Operating expenses ÷ Gross income

This total can then be converted into a percentage.

4) Capitalization Rate
The capitalization rate (or cap rate) will help you determine the actual value of a potential investment property, beyond the actual property’s more straightforward appraisal value. In other words, how much can you really expect to make off of this property, once expenses and operating costs are accounted for? To obtain this figure, you’ll need both the operating income and recent sales prices for comparable properties. Once you have both of these amounts, you can figure the cap rate, which will help you determine exactly how valuable a potential investment property will be for you or the potential property owner.

Cap rate = Sales price of a comparable income property ÷ Net operating income of comparable income property

This total can then be converted into a percentage.

5) Net Operating Income
Like cap rates, calculating the net operating income (NOI) of a property will help you determine how valuable it will actually be. In order to determine this figure, you will need to calculate both your gross potential income and vacancy and credit loss (in other words, the realistic loss of rental revenue due to vacancies, etc. based on previous years’ statistics). You can then complete the following calculations.

Gross operating income = Gross potential income – Vacancy and credit loss

—then—

Net operating income = Gross operating income – Operating expenses

Whether you’re attempting to gain a better understanding of where an existing property currently stands or how much a potential property investment will ultimately pay off, the black and white numbers provided by the formulas above will help provide a clear picture of how your current (or future) properties are actually performing.

Painting Like a Pro

A sure-fire way to make your home look better, prolong the life of your siding and add resale value all at once is to give the exterior a fresh coat of paint. But with a contractor paint job running in the thousands of dollars, you may be considering undertaking the task on your own this summer. If so, here are some tips and a couple of tools that can help you get the job done quickly with professional results.

Proper Preparation

Proper preparation of the siding is absolutely essential to a good-quality, long-lasting paint job. Loose and peeling paint must be removed first and the edges of the remaining paint feathered down to create a smooth surface for the next coat. Painting over old paint that is not well-adhered is pretty much a guarantee that the new paint job will fail. There is no way around this less-than-enjoyable task, so just resign yourself to it.

But while you can’t avoid it, you can make it a little easier by using some power tools. One, you might want to consider is Wagner’s PaintEater. The PaintEater is a hand-held electric tool that is somewhat similar to a disc sander, but instead of using sandpaper, it uses a 3M disc made from spun fiber. The fiber disc is aggressive in removing paint, but its unique design prevents the old paint from clogging up the sanding surface, so you get a lot more work done without constantly replacing the paper.

The PaintEater removes loose paint quickly, and will also feather down the edges of the remaining paint for a better, smoother surface. It can be used on wood, masonry and cement, but be aware that the rotary motion and aggressive paint-removal disc make it unsuitable for siding shingles or textured siding.

In addition to a tool such as the PaintEater, you’ll also need a hand scraper and a sander to take care of the corners and the hard to reach areas. With any of these tools, be sure to wear eye protection to shield your eyes from flying paint chips — which can be surprisingly sharp and dangerous — as well as a dust mask or respirator to protect you against inhaling the dust.

When you’re done with the scraping, the bare surfaces need to be primed to protect the wood and provide good adhesion for the top coat. Use a good-quality exterior primer that’s compatible with your top coat, and apply one or two coats on all bare surfaces.

When preparing the siding on an older home, you need to be very aware of the possibility of lead paint. Even if the home has been repainted with latex, one or more of the underlying layers may contain lead. For more information about testing for and removing lead paint, contact the Environmental Protection Agency (EPA) online at www.epa.gov/lead, or by phone at 1-800-424-LEAD (424-5323)

Airless Painting

Professional painters rely on airless paint-spraying equipment to apply paint quickly and cleanly with minimal overspray. You can rent a professional-grade airless sprayer, but the occasional user might want to consider investing purchasing a airless sprayer such as Wagner's Paint Crew Plus.

Designed with homeowners in mind, the Paint Crew Plus has a 2800 PSI piston pump that’s driven by a 1/2-horsepower electric motor, so you have plenty of power for spraying a variety of finishes. The sprayer features a pressure selector that allows you to vary the pressure between 1000 and 2800 PSI, which is very helpful in choosing the best pressure for the finish you’re working with. Higher pressures are needed for spraying many of today’s exterior latex paints, and you can dial the sprayer down to a lower pressure to give you better control and less overspray when working with thinner materials.

The Paint Crew has wheels and a telescoping handle for easy transport, as well as a 2 1/2-gallon paint hopper that’s removable for easier cleaning. You also get a 25-foot high-pressure spray hose, a professional-grade metal spray gun and a reversible spray tip. A convenient hose wrap holds the hose when not in use, and there is a storage area for additional spray tips. Also included is a roller-arm assembly, which attaches to the hose in place of the spray gun, allowing for faster rolling of interior surfaces.

With this or any other type of airless sprayer, NEVER point it at anyone. The high-pressure pumps used with airless sprayers are capable of pushing paint through a person’s skin, so be sure you read and understand all of the safety precautions.

Repeal of Expanded 1099 Requirements

President Signs Repeal of Expanded 1099 Requirements


APRIL 14, 2011 from Journal of Accountancy
On Thursday, President Barack Obama signed into law the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 (HR 4; 1099 Act), which repeals both the expanded Form 1099 information reporting requirements mandated by last year’s health care legislation and also the 1099 reporting requirements imposed on taxpayers who receive rental income enacted as part of last year’s Small Business Jobs Act (PL 111-240). The Senate approved the bill on April 5, and the House voted in favor of it on March 3.

In March 2010, the Patient Protection and Affordable Care Act (PL 111-148) (part of the health care reform legislation) expanded the 1099 reporting requirements to include all payments from businesses aggregating $600 or more in a calendar year to a single payee, including corporations (other than a payee that is a tax-exempt corporation), and to include payments made for property, starting with payments in 2012. The 1099 Act repeals the expansion to payees that include corporations by removing IRC § 6041(i). It repeals the expansion to cover payments for property by removing the language “amounts in consideration for property,” and “gross proceeds” from section 6041(a). The act also removes IRC § 6041(j), which granted the Treasury secretary authority to issue regulations under section 6041, including “rules to prevent duplicative reporting of transactions.” These changes are effective for payments made after Dec. 31, 2011 (when the new rules were to take effect), and they revert those portions of section 6041 to how they were before the Patient Protection and Affordable Care Act.

The Small Business Jobs Act enacted a requirement that individuals who receive rental income issue Forms 1099 to service providers for payments of $600 or more. It did this by specifying that “a person receiving rental income from real estate shall be considered to be engaged in a trade or business of renting property.” The 1099 Act strikes IRC § 6041(h) in its entirety, effective for payments made after Dec. 31, 2010 (the original effective date of section 6041(h)), placing individuals who receive rental income in the same position as if the expanded information reporting requirements had never been enacted.

As a result of the repeal, the 1099 reporting rules continue unchanged: Namely, under IRC § 6041(a), “All persons engaged in a trade or business and making payment in the course of such trade or business to another person” of $600 or more must report the amount and the name and address of the recipient to the IRS and to the recipient. The Code applies this requirement to payments of “rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable gains, profits, and income,” and the Treasury regulations add, “commissions, fees, and other forms of compensation for services rendered aggregating $600 or more” as well as interest (including original issue discount), royalties and pensions (Treas. Reg. § 1.6041-1(a)(1)(i)).

This required information must be reported each calendar year for payments made during that calendar year.

The AICPA had advocated strongly for repeal of both provisions and as one of the only organizations advocating against the rental property requirement was a driving force in its repeal. When the Senate passed the bill on April 5 and sent it to President Obama for his signature, AICPA President and CEO Barry Melancon described the repeal as “a victory for taxpayers.”

Increased Penalties Not Repealed

The 1099 Act did not repeal the increase in the information reporting penalties that were mandated by the Small Business Jobs Act. The first-tier penalty under IRC § 6721 for failure to timely file an information return was increased from $15 to $30, and the calendar-year maximum from $75,000 to $250,000. The second-tier penalty was increased from $30 to $60, and the calendar-year maximum from $150,000 to $500,000. The third-tier penalty was increased from $50 to $100, and the calendar-year maximum from $250,000 to $1,500,000. For small business filers, the calendar-year maximum increased from $25,000 to $75,000 for the first-tier penalty; from $50,000 to $200,000 for the second-tier penalty; and from $100,000 to $500,000 for the third-tier penalty. The minimum penalty for each failure due to intentional disregard increased from $100 to $250.

The increased penalties will be adjusted for inflation every five years.

The Small Business Jobs Act also similarly increased the penalties for failure to provide correct payee statements in addition to the information reporting penalties (IRC § 6722).

The increased penalty amounts were effective Jan. 1, 2011, and remain in effect after the repeal of the expanded 1099 reporting requirements.

BED BUGS ARE BACK

There is little doubt that bed bugs are making a strong comeback. With this in mind I've taken a proactive approach to avoid the problem by educating my tenants before the flea market and yard sale season begins. I'm crossing my finger that an ounce of prevention in this set of circumstance will go along way. The following is the letter sent:


Dear Tenant,

Bed bugs are making a come back. Once thought to be eradicated from North America, the legendary little pests known as bed bugs have been making an unwelcome comeback in hotels and homes. Recently reports of bed bugs problems have already been reported throughout Salem and the North Shore. Because bed bugs are very efficient hitchhikers, infestations can easily occur and spread quickly. Typically, bed bugs are quite comfortable stowing away in luggage, clothing, beds, mattresses, furniture and other household items. To prevent the infestation of bedbugs it is important to inspect all goods before bring them into your home. Be especially mindfull of items you may pick up at yard sales and second hand stores. Moreover, since people tend to discard onto the curb infested property, often times furniture items left outside for rubbish removal is the greatest source of bedbugs.

The best way to avoid the problem of bed bugs is by a thorough inspection of property. Bed bugs are large enough to see by eye. They can live in almost any crevice or protected location. They tend to congregate in mass but it is not uncommon to find a single bug or eggs scattered here and there.

Enclosed is a phamplet entitled “Your Guide to Bed Bugs” published by Pest Control Technology media group. Please take the time to read this comprehensive brochure not only does it provide with useful information about understanding bed bugs but the illustrations are especially helpful in identifying bed bugs.

Home Office as a Deduction

The home office deduction is a confusing topic for many taxpayers. Can I only take it if I am self-employed? What if you’re not self-employed, but work at home frequently? And isn’t it true that the IRS is more likely to audit you if you take the deduction?
Because of these types of concerns and questions, many taxpayers that are entitled to this deduction do not take it.
The home office deduction may be taken by anybody who uses their home, or part of their home, for business purposes. The IRS does have strict regulations that must be met to qualify for the deduction.

Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly–
As your principal place of business. As a place to meet or deal with patients, clients, or customers in the normal course of your business. In any connection with your trade or business where the business portion of your home is a separate structure not attached to your home. "Exclusive” is a key term in determining if you qualify for the deduction. By exclusive, the IRS means that the part of your home you are deducting is used only for business. Because of the above two restrictions, it is usually much easier for self-employed workers to take the home office deduction, assuming they have properly set up an area of the house which would qualify. However, if you are an employee who works at home, there is also a chance that you may qualify. In order to qualify, you must meet the “convenience-of-employer” test. This essentially means that the work you do at home must be at the request or convenience of your employer. If this is the case, you may qualify for the deduction assuming all of the other rules regarding exclusivity and regularity are followed. There are two types of deductible expenses relating to the use of a portion of your home as a home office—direct and indirect expenses.

1. Direct expenses relate to the actual work space. This includes repairs and paint inside your home office.

2. Indirect expenses relate to the house that the office is inside and are only partially deductible. Utilities, insurance, and mortgage interest are examples of indirect expenses. These expenses are only deductible based on the square footage of your home office to your total home. For example, if your office is 20% the square footage of your entire house, you can deduct up to 20% of your indirect expense as a home office deduction.

Now some people argue that taking a home office deduction will lead to an audit. Subsequently, many taxpayers have decided that it is not worth the supposed risk. This could be a mistake. Any deduction you are entitled to, you should take. If you keep accurate records and meet all the IRS regulations for the deduction, you should discuss this deduction with your CPA.

IRS will be scrutinizing rental properties

Audit: IRS needs to better examine rental real estate
By Bernie Becker - 03/09/11 03:27 PM ET
The IRS needs to step up its examinations of tax returns that contain losses from rental real estate, a new audit has found.

A new report from the Treasury Department’s inspector general for tax administration found that, if the IRS’s compliance initiative program reviewed more returns dealing with rental real estate, the government could collect an additional $27.3 million over five years.

“Given the magnitude of underreporting in our voluntary system of tax compliance,” Russell George, the tax administration inspector general, said in a statement, “even small improvements in the IRS’s examination of tax returns with rental real estate activity could increase taxpayer compliance and generate substantial additional revenue to the federal government, helping reduce the tax gap.”

The inspector general looked into the matter because of a 2008 Government Accountability Office report that said that more than half of taxpayers who at least dabbled in rental real estate during the 2001 tax year misreported that activity, leading to $12.4 billion being wrongly reported. (According to the IRS, roughly 7 percent of 2001 individual tax forms contained rental real estate activity.)

For its part, the IRS did not agree with the $27 million figure computed by the inspector general. But it did agree with the audit’s recommendations, including one that called for revising a certain tax form.

The Markets: February 28, 2011

March 01, 2011
MARKET WEEK: FEBRUARY 28, 2011
The Markets

Despite three straight days of selling that included back-to-back triple-digit losses, the Dow managed to stay above 12,000; the S&P did the same with the 1300 mark. However, the domestic equity indexes lost anywhere from a quarter to a third of their year-to-date gains to profit-taking from the recent multi-week rally and unease about political conflict.

Market/Index 2010 Close Prior Week As of 2/25 Week Change YTD Change
DJIA 11577.51 12391.25 12130.45 -2.10% 4.78%
NASDAQ 2652.87 2833.95 2781.05 -1.87% 4.83%
S&P 500 1257.64 1343.01 1319.88 -1.72% 4.95%
Russell 2000 783.65 834.82 821.95 -1.54% 4.89%
Global Dow 2087.44 2241.29 2194.22 -2.10% 5.12%
Fed. Funds .25% .25% .25% 0 bps 0 bps
10-year Treasuries 3.30% 3.59% 3.42% -17 bps 12 bps
Last Week's Headlines

As the rebellion in Libya spiraled out of control, oil prices reached their highest level since fall 2008.
Home prices in the 20 cities tracked by the S&P/Case-Shiller index fell by an average of a full percent in December. Prices are now down 2.4% from the previous December, and average prices for the fourth quarter of 2010 were at roughly the same level as in the first quarter of 2003.
January sales of existing homes were up 2.7% from the previous month, according to the National Association of Realtors®. However, the Commerce Department said sales of new homes fell 2.4% in January compared to December.
The economy grew more slowly in the fourth quarter than the Commerce Department originally estimated. The 2.8% revised figure was down slightly from the original 3.2% estimate. The Bureau of Economic Analysis said higher consumer spending, exports, and residential investment were offset by a decline in nonresidential fixed investments, slower private inventory investments, and reduced federal, state, and local government spending.
Eye on the Week Ahead

Investors will keep a nervous eye on the conflict in Tripoli, assessing the potential impact that higher oil prices might have on the economy. Also watched will be the congressional conflict over the budget deficit as the March 4 deadline for raising the nation's debt ceiling approaches. Finally, Friday brings unemployment data.

Key dates and data releases: Personal income/spending, pending home sales (2/28); U.S. manufacturing, construction spending (3/1); Federal Reserve "beige book" report (3/2); labor productivity and costs, U.S. services sector (3/3); unemployment, factory orders (3/4).

Data source: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. Equities data reflect price change, not total return.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.