Renting mobile homes and taxes - Posted by MikeB

Real Estate Investing
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Posted by David S on April 09, 1999 at 08:39:59:

Mike, Your idea to qualify the parks by “your” standards will cost you a TON of money.
It’s a mindset thing… most of the people that live in the ‘less than desireable’ parks are there because they WANT to be there; it’s the only way of life they have ever known. Many are 2nd, 3rd, 4th generation park dwellers.

These people are organized! They know who takes care of the kids, when each runs to the market, who to ask for help, who’s shoulder to cry on, etc. They are a family and travel together.
The key is knowing how to keep them and work them into good paying tenents/buyers that will take care of your property.

David S

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Renting mobile homes and taxes - Posted by MikeB

Posted by MikeB on April 07, 1999 at 14:58:04:

Hello all,

I have just started a business where I will be buying mobile homes and renting them out. I plan on reinvesting all cash flow from rental income into buying more MHs.

For example, I purchase two MH’s now for $12,000 and rent them out. If all goes well, in 12 months or so I have enough from rents to buy a third MH for five or six thousand. Then in about 7 months I have the money for another, then in 6 months another, 5 months another, etc, ect, until I have accumulated 18 or 20.

I keep reinvesting the earnings from rent buying more trailers, and after 4 years, or so, I have approx. $40,000 per year cash flow coming in. Then I will have the cash flow to invest in other areas such as mobile home parks, mutual funds, whatever.

What do you all think of this strategy?

My other question is when do I pay taxes on the rental income? Do I pay taxes only when I take a salary from the business activity? In other words, If I never take a salary and just keep reinvesting the money in more and more trailers, what taxes do I owe on this money from rental incomes? Do I have to pay both income tax and self employment tax even though I have a full time job?

Am I wrong in assuming that as long as I never take any personal salary out of this business, and just keep reinvesting the money back into the business, I will never owe any taxes on the rental incomes?

Thanks in advance for any comments.

Mike

P.S. I have read Lonnie’s book so I know about Lonnie deals. I may do some, but I’d like my main income to come from renting the mobile homes.

3

An interesting idea…but - Posted by Dirk Roach

Posted by Dirk Roach on April 08, 1999 at 04:31:09:

Hi Mike,
After reading your post(s) I can see where you’re coming from. However a couple of questions came into my mind about it, your plan.
Do you have an existing park or private lot where you are going to rent these mobiles out?
99.999% of the parks in my market (of course will be different than yours) do not allow rentals at all. The ones that do are rented out buy the park themselves, and have no interest in haveing an outside intity landlord them in their park. Do to they have no control on saftey, health and insurance issues. Also more importantly from their perspective, they don’t want a bunch of renter mentality people in their park. Mobile home rentals drive down the value of the park.
It seems to me that Landlording can be a major headache in dealing with mobile home buyers. Now I’m not being snooty, but I am being realistic, from my experiences in this feild.
I would not want to try to police a bunch of renters.
Also in my opinion I think that you could rework your purchase numbers. Your buy prices seem a little high.
Mike, I’m not trying to shoot holes into your plan, just want to maybe address some issues which you may have overlooked.
I do know some people who rent mobile homes and do okay with it. However they own the park and useally the park is a resivar for older homes which they pull out of a nicer park, to make room for newer homes.
In my experice I can see where the numbers are attractive, if this is the case.
Anyhow just wanted to peep in,
Dirk

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Re: Renting mobile homes and taxes - Posted by David Alexander

Posted by David Alexander on April 08, 1999 at 24:35:13:

Even when you sell the homes, some of the people still have a rental mentality. In fact I just got sued and lost a court case because the people told the judge they were renting and I didn’t fix the home. The judge never even looked at my paperwork(Note, Sales Agreement, etc.) or the fact that they didn’t pay the lot rent, or insurance. He ruled in their favor. What I learned from that is that I better make sure that everyone I sell to understands that they are now the New Owners. Have another buyer that called me up and asked me if he could have some friends stay over, as they were having bad times. I said as long as the park ok’s it and you send me timely payments thats your decision.

Me, I just gonna keep sellin’ em’. I only want One Job, and that’s to go to my Eagal Postal Mailbox and pick up my checks. Don’t want to be called to fix toilets.

Good Luck

David Alexander

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Are Rented Mobile Homes Considered Rental Real Estate? - Posted by John Katitus

Posted by John Katitus on April 08, 1999 at 24:13:11:

Are they listed on Schedule E and depreciated over 27.5 years, as single family houses are?

6

the tax man commeth - Posted by Nancy in NC

Posted by Nancy in NC on April 07, 1999 at 20:33:26:

You always have to pay taxes on income.

I am not sure what type of “business” you have created.

However, in any business–rental income is passive income and that has some advantages.

What makes the income tax bite less serious is that you get credit for your rental expenses, like personal property tax, repairs, insurance, and advertising. Get a copy of schedule e, form 1040. Also your get to deduct depreciation. A mobile home used for residential rental purposes is depreciated at 27 1/2 years, so the amount is small.

Total annual rent - expenses - depreciation = amount subject to income tax.

Next business structure does affect picture, you talk about self-employment tax. That does not apply to rental income which is passive income.

You sound a little confused, and I am not a CPA nor legal advisor.

I rent some houses and some mobile homes. I hold title in a family limited partnership and the income or loss flows throught the partnership tax return to the personal tax return.

If you are renting now in your own name that is o.k.

Your plan will work, but not ALL of the rents will be reinvested. Some of the income goes to maintenance, local taxes, insurance, etc. (The cost of doing business.) If you borrow money to buy the homes, then you have to service the debt.

If these trailers are on rented lots, then you have lot rents to pay even if the trailers are vacant.

Trailers are a good way to make money, and I think they are easier and cheaper to remodel. But they also take a more managment time. You have to be very careful about the neighborhood you invest in and the type of tenant you are in the market for.

HAVE FUN AND REMEMBER TO KEEP A POSITIVE MENTAL ATTITUDE

Nancy

7

Re: Renting mobile homes and taxes - Posted by MC (CA)

Posted by MC (CA) on April 07, 1999 at 18:07:20:

You might want to check out Jeffery Taylor’s website - www.mrlandlord.com. He’s got a lot of great strategies for landlords. It’s worthwhile if you plan to take on so many properties.
My .02.

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man, I wish it worked like that - Posted by Gator

Posted by Gator on April 07, 1999 at 15:48:29:

Mike,
Your plan sounds wonderful. I don’t think it will work though. My accountant says the IRS and Mr. Clinton want their share of any profits I make whether I reinvest it, bury it behind the barn, or spend it on expensive women and cheap liquor (or vise versa). You are gonna spend an awful lot of time and money fixing things. Renters sometimes like to have a couple hundred friends over for a keg party and sometimes their pets mistake the carpet for a toilet, and then they think you ought to fix it. Gross income does not equal Net income. Lonnie deals get rid of the maintenance and lessens turnover. Just my humble opinion of Lonnie deals versus renting. Best wishes to you.

Gator

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Re: Renting mobile homes and taxes - Posted by Bobby(VA)

Posted by Bobby(VA) on April 07, 1999 at 15:08:00:

WHY?

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Re: Renting mobile homes and taxes - Posted by Steve Heller

Posted by Steve Heller on April 10, 1999 at 19:11:18:

Hi David,

I enjoyed your post. Could you explain your process on buying and selling mobiles. Are they allready in the park? Any RE material you would recommend?

Thanks,

Steve Heller

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Re: man, I wish it worked like that - Posted by MikeB

Posted by MikeB on April 07, 1999 at 16:20:36:

Gator,

Thanks for your input. The big problem that I see with Lonnie deals is that if you do more than 5 per year you need to have a dealer’s license, storefront, sign, etc.

I don’t see how you can get a decent cash flow by only doing 5 Lonnie deals a year. This is why I’ve kind of latched onto renting. This is a side business where it is possible to make a decent income without working at it fulltime.

But you’re right, I hadn’t figured in the cost for maintenance and repairs. As I’ve never been a landlord, I don’t have any idea how much work its going to be. I guess all I can do is get into it and see what happens. If nothing else, I’ll learn about the landlording business.

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Re: Renting mobile homes and taxes - Posted by MikeB

Posted by MikeB on April 07, 1999 at 15:30:56:

WHY what? Why do I ask? Why do I want to rent MH’s? Why do we pay taxes? Why did the chicken cross the road?

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Re: man, I wish it worked like that - Posted by Gator

Posted by Gator on April 08, 1999 at 08:53:18:

Mike,
I know this sounds like a bad idea but I don’t even know what the dealer requirements in my state are. I just do the deals. No one has ever said anything to me. I realize I run the risk of being fined someday but while ignorance of the law is no excuse, being ignorant can sometimes make you a lot of money. I have seen many post here by people that say they can’t do lonnie deals because of state regulations. I have yet to see anyone post that they did some lonnie deals and are now in prison. There are some ways around things such as never putting title in your name or getting a dealer to let you use his liscense. Others may be able to give you more help in those areas. I do not encourage you to break the law!!! Do only what you are comfortable with. In my humble opinion the laws on dealer status are not aimed at the typical small timer like myself. When these regulations were created I wonder if the lawmakers knew there were people out there doing lonnie deals.

If I did 5 deals a year, I think I would average about $3K for each home, sell for about $8K at 14% 60 months with always $1000 down. This is just typical for me, your area will probably be different. Figure the return on my average deal, multiply by 5, then multiply by 5 again to see how much money you can have coming in in 5 years. I havent calculated this myself because i am arithmatically challenged by I think you’ll see an impressive cash flow from only 5 deals per year.

Anyway start slow, do a lonnie deal. Then do a rental. See which you like the best.

By the way, I rent apartments and homes. Expect your expenses to be 30 - 50% for maintenance, vacancy,…
Also this is not a passive investment. Renting cheap property is difficult to do part time. In January you will be awakened at 4:00 AM with a phone call, “Mr. Gator, my pipes has froze and busted and water is shootin out from under the sink all the way down the hall into the livin room! What I do? What I do? Come quickly! Whats that you say Mr. Gator? Naw I didnt leave the sink cabinet doors open or the water tricklin like you said, I was so tired last nite I forgot all about it bein 20 degrees below zero and anyway if i left that water tricklin, it would have probably run my water bill up 25 cents or so. You just gotta come quick Mr. Gator, the water is floatin Buford Jr.'s crib out the back door, if you dont come quick he’s gonna be just like baby moses. Come quick Mr. Gator come quick!”

Of course Mike, you have to rescue Buford Jr and be at work by 8 AM. Get the picture? Best of luck.

Gator

14

What if they don’t pay? - Posted by raelynn mitchell

Posted by raelynn mitchell on April 07, 1999 at 21:59:34:

My reason for asking is this:

In California (not sure where you are) it is easier to repossess (from a buyer/owner) than to evict (a tenant); takes less time.

Just food for thought . . .

raelynn

15

Re: man, I wish it worked like that - Posted by MikeB

Posted by MikeB on April 08, 1999 at 13:28:04:

Gator,

I love reading your posts! You have a way of getting your point across in a humorous way. I’m sure all that about the busted pipes actually happened to you. Even with all the troubles that you mention, renting still must be worthwhile, because as you say you rent properties yourself.

There’s a couple large parks around here that allow rentals and they’re still pretty nice. Swimming pool, playground, etc. They are located close to colleges and military bases so I hope that if I screen my tenants carfully, I can minimize my problems.

And my plan is to concentrate on buying trailers in these two parks, which I’ve checked out and are nice. I’ve been shopping around and have looked at some “bagains” in some of the smaller parks. This has led to my first policy: I’m not going to try to rent anything in a crappy park, I don’t care how good a deal it is. What I do is ask myself “would I feel confortable living there”? If the answer is no, I’m looking elswhere.

One of the parks I’m looking at is a 300 lot park in a middle class area with on site managment, swimming pool, playground. Right accross the street is a high school. Less than five miles away is a navy base. The woman who owns 50% of the lots has some mid 80’s trailors for sale that are currently rented. I’m going to buy as many of these as I can afford. She’s willing to give me a long term lease, but I don’t think she’d kick me out even without one. Like I said I plan to screen tenants, but I know I’m still going to run into problems.

I can’t wait to get my feet wet and really start to learn about this business, but I’m never going to learn anything, or make any extra money if I don’t get into it and start doing it.

Thanks for your very informative posts, I’ll keep you posted on how everything goes.

Mike

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Re: man, I wish it worked like that - Posted by John(NH)

Posted by John(NH) on April 08, 1999 at 09:51:28:

For any newbie reading that post, those 4am calls are NOT unreal! I now try to buy properties that only have enough cash flow to easily afford a property manager (at about 8% of gross rents). I still keep an eye on the property, but let them handle all the crud.