Posted by jimi on November 24, 2010 at 14:46:33:
Income derived from a master lease is passive income and not subject to Self-employment tax. See line 17 on the 1040 - Rental Real Estate/Schedule E.
What Can Go Wrong (Property Owner Horrors)? - Posted by jb
Posted by jb on November 19, 2010 at 16:07:59:
Hello,
I have a close family friend about to purchase between 4 and 6 rental units. They will most likely be in middle class neighborhoods,potentially one with a lot of college students. She will not use property management service, but has a contact with many references for maintenance issues (plumber, contractor, roof, etc.)
I want to make sure she gets into this business with her eyes wide open of all the potential risks, challenges, etc. that come with owning rental properties. She already has experience owning two rental units, but she has been incredibly lucky with those two units (e.g. very low turn over, very little maintenance issues, rent always on time etc).
I thought I would poll this group and see what you can add to my below list of things to be aware of (NOTE: if you wish to offer advice on how to mitigate these risks as well that would be great):
-tenants don’t make payments
-evictions
-damages to units by tenants
-demanding tenants
-unseen maintenance issues
-too small of a reserve
-???
thank you
jb
Re: What Can Go RIGHT - Posted by Keith (OH)
Posted by Keith (OH) on November 27, 2010 at 11:35:21:
Hey it aint all bad. An investor friend of mine bought a rehab right next to another property that was going to be rehabbed as well. The investor who owned the house next door sent his crews over to begin an extensive rehab on that property. The only problem was they started working ON THE WRONG HOUSE. By the time the investor went to check on things my friend ended up with a new roof, a new bathroom with jacuzzi tub and a few other bonuses as well.
So there are some perks here and there… 
Keith
Re: What Can Go Wrong (Property Owner Horrors)? - Posted by jb
Posted by jb on November 22, 2010 at 16:36:30:
Hello,
Thank you for the feedback (except Dave T: my family friend has asked me to help manage the properties).
The properties are part of a 1031 exchange, thus debt service should be low.
The one thing that is difficult is trying to find the right properties with the limited amount of time permitted under a 1031 exchange. It appears there is not wiggle room on the number of day.45 days to find 5 or 6 ideal properties will be tight.
Jason
Re: What Can Go Wrong (Property Owner Horrors)? - Posted by TKP, Houston
Posted by TKP, Houston on November 20, 2010 at 21:32:54:
Screen your tenants well. If you have problem tenants they probably did not become bad after they moved into your property, they probably were bad tenants where they lived before. These days I look for the monthly rent in a SFH to be at least 1.2% of what I have invested. That should give you a sufficient cushion.
TKP, Houston
Re: What Can Go Wrong (Property Owner Horrors)? - Posted by Dave T
Posted by Dave T on November 20, 2010 at 12:14:34:
Sound like your close family friend is experienced enough to already be aware of the potential risks of landlording. Your family friend must know what she is doing if she has good, long-term tenants and few maintenance issues.
Since she is already a successful landlord with a couple of properties in her rental portfolio, it is probably best for the close family friendship if you don’t interfere.
Re: What Can Go Wrong (Property Owner Horrors)? - Posted by BenT
Posted by BenT on November 19, 2010 at 23:29:47:
The idea with rentals is not to attempt to predict each and every thing that could ever happen to you. It is not possible anyway.
Rather, the idea is to make investments where your purhase price and cashflow account for the risks.
For instance, you should project your potential repair and maintenance costs, along with vacancy, and then subtract this number from your gross rent. Compare this to your debt service. Many people use a hypothetical number like 35%. Sometimes I use 50% especially if the property is an older property. Part of this percentage would be the set aside money that you will eventually have to spend to replace things like the roof or the HVAC.
I also like to buy cheap enough from the beginning that if I have to sell, I can sell without loss. What this means is that I have to buy low, allowing me room to rehab the property.
Then you need to implement effective screening procedures, and to require sufficient damage deposits. You cannot “trust” people. Being a landlord is not an easy business, but it’s alot easier if you follow some of the steps mentioned.
Ben
Re: What Can Go Wrong (Property Owner Horrors)? - Posted by michaela-CA
Posted by michaela-CA on November 19, 2010 at 17:12:37:
The thing is, you can try to think of everything there is that can possibly go wrong and there’s always something that you hadn’t thought of.
Re: What Can Go Wrong (Property Owner Horrors)? - Posted by Dave T
Posted by Dave T on November 22, 2010 at 23:47:49:
Are you going to manage these properties as an employee or charge a fee? If you plan to charge a fee, are you a licensed real estate broker?
If not, then you may run afoul of your state laws and the real estate commission.
Re: What Can Go Wrong (Property Owner Horrors)? - Posted by jimi
Posted by jimi on November 23, 2010 at 07:05:34:
If you are not a broker, a possible solution is a sandwich lease. Directly lease the property and then sub-lease it to an occupant tenant. In addition to avoiding the Realtor Cabal, the income is taxed as rental income rather than employment income, eliminating any self-employment tax requirements as you are a principal in the transaction rather than a hired hand.
Re: What Can Go Wrong (Property Owner Horrors)? - Posted by Dave T
Posted by Dave T on November 23, 2010 at 23:34:25:
I may be in the minority here, but I disagree. In my opinion, income from a sandwich lease business is ordinary self-employment income.