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Professional Property Managers Cut Vacancy Rates In Half

June 14, 2012 By

Survey reveals that professional property managers cut vacancy rates in half

By All Property Management

While increased ROI on rental properties is far from the only reason to hire a professional property manager, many property investors want to see clear economic benefits before taking the plunge and outsourcing this key responsibility. Based on All Property Management’s recent survey of 300 property managers from around the US, it’s clear that professional property managers pay for themselves based on vacancy reduction alone.

According to the US Census Bureau, the national average rental vacancy rate hovers around 9%, while our survey reveals that the average vacancy rate for professionally managed properties is about half that, coming in at 4.5%.*

To calculate what this reduction means for the average rental property owner’s bottom line, we took a look at what it would mean for the owner of a property valued at $150,000, with a monthly rent of $1,250, assuming a 10% monthly property management fee. We found that, when you take into account both lost rent and turnover costs, each 1% drop in vacancy rate saves the property owner about $1,900 over the course of a five-year period. Thus, a reduction of 4.5% equals a savings of about $9,500 over five years. Meanwhile, at 10% per month, professional property management would cost only $7,500 over the same period, resulting in a $2,000 profit, which represents a 30% ROI.

All Property Management’s survey also confirms that average turnover costs total about $2,000 – double that when there is an eviction, or similarly challenging tenant situation, involved. Pair this with other advantages of hiring professional property management, which include time savings, the ability to command higher rents, and improved maintenance at lower costs – just to name a few – we think payoff from using a professional property manager is clear. It’s the best investment for making a solid real estate investment.

*According to our survey, the median vacancy rate reported by our nationwide network of property managers was 4.5%. Reasons cited for this performance was a) local market knowledge b) screening for high-quality tenants c) superior customer care during tenancy d) swift action against delinquent tenants and e) longer lease periods.

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How to Get Financing for Rental Properties

May 5, 2012 By

By Leonard Baron

These days, many people hear in the news that it’s a good time to buy rental property, and so they’ve decided that they would like to get started in the property rental business, (a.k.a. being a landlord).

But, in order to get into the rental property investment business, how do you obtain mortgage financing to purchase your first rental property? It’s true that it has become a lot harder to get financing these days, but for people with decent credit and sufficient income there is still plenty of money available to borrow. For terminology purposes, when you borrow for a rental property, it is called non-owner occupant (NOO) financing. Let’s run through some financing issues, items and suggestions that may help you.

Buy as an owner-occupant

The best way to get into the landlord business is to buy a home that makes sense as a rental property, but you buy it as a personal residence, and live there for the required 12 months that an OO loan requires a borrower to do. As an owner-occupant, you get the best financing terms and you may be able to put down as little as 3.5 percent with FHA financing. The loan stays in place with the original terms when you move out and make it a rental. It’s the best way to go!

Other reasons this makes sense:

  • You move into the property and learn the property specifics, issues, kinks, etc. and have them fixed before you move out and make it a rental property.
  • You also do any renovations and upgrades you need while not making two housing payments like someone would do if they bought a property and were simply rehabbing it to rent it out.
  • Lastly, you are more selective and only buy properties that you are willing to live in, and that’s a smart way to go for investors; don’t buy properties that you wouldn’t live in.

Then, after 12, 24 or 36 months, buy your next owner-occupant property and rent out the original one. Then repeat, and repeat, and repeat again once every one to three years.

Buy as a straight rental property

Let’s say you just want to buy it as a straight rental property. First up, you need a 20-25 percent down payment for most lenders (Fannie Mae and/or Freddie Mac may have some 10 percent investor properties, so check those out, too). And that 20-25 percent, plus closing costs and renovation costs, might add up to 30-35 percent cash upfront to close escrow and get a property rental ready. So, for a $120,000 property, that could easily be $40,000 cash needed. That owner-occupied 3.5 percent FHA loan sounds pretty good right now, huh?

As noted above, you also need to have good credit and qualify for a bank’s financing for an investment property. One nice thing about rental properties is that the bank may include some estimated net rental income from the property to help your debt-to-income ratios, especially if you buy something with a tenant already in place. Discuss this with your lender.

Speaking of tenants already in place, there are some significant advantages therein, too! For example:

  • You get the security deposit from the seller at closing and some pro-rated rent
  • You probably collect the first month’s rent a month before your first mortgage payment is due
  • There is no vacancy, so you don’t need to find a tenant, and
  • You probably won’t have to rehab the property until they leave.

The negative could be a lower-than-market rental rate or a tenant who pays late, doesn’t pay, or doesn’t take care of the property. But he or she could be a great tenant, too! Once in escrow, do a little looking around the apartment and talk to the tenant to make a determination if you want to keep them or terminate their lease when it ends. Convey this to the listing agent so that agent can alert the tenants either way.

Rates, costs, fees on investment properties

The costs of doing any mortgage loan these days are much higher than they used to be just a few years ago. And non-owner-occupant (NOO) investment properties are even higher. Small dollar loans, like under $100,000, have very high fees as a percentage of the loan amount. Possibly up to 5 percent when you add in the loan origination points, fees, appraisal, underwriting, title insurance, escrow costs, etc. But the present rates are really very competitive and you can get NOO financing at 4.5 percent on a 30-year amortizing loan these days. And that is dirt cheap, locking in a 30-year low-interest-rate loan on a rental property.

Where can you find loans?

Right when you start you should meet with two to three lenders and see what NOO loan programs they have for what you plan to buy. Try a bank or two, plus a mortgage broker or correspondent lender, and an online lender. Different lenders have different programs, and a bank may reject you but a mortgage broker might have a program that works for your situation, so check around. Loan costs and rates will also vary, so get a couple of estimates and compare them to find the best deal.

How many properties can you buy? If you have the credit score (estimate your credit score), and the debt-to-income ratios (which change with each property you buy), you can pretty easily finance up to four properties. Once you go over four and up to 10, the number of lenders who can finance you gets much lower, but they are still out there. The underwriting criteria also may get much tougher, but still possible. Once you go over 10 loans, it’s really hard to find lenders who will finance, and the loan costs, interest rates, and terms will be less appealing, but still relatively reasonable. Lenders who do over 10 loans are called portfolio lenders.

In summary, this is a very good time to buy property, but you must educate yourself on rental property ownership, do your due diligence, and don’t think everything is going to be rosy and hassle-free, because real estate is hard work! Hopefully, the hard work you do and issues you have to handle over the years will just be distant memories when you retire with a nice rental property income stream.

(Note: Many thanks to Robin Hill who contributed her guidance for this article. Robin is a San Diego-based mortgage lender for First Cal. She specializes in residential purchases and refinances for owner-occupied and non-owner-occupied properties. She’s been in the mortgage business for the past 14 years).

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7 steps to soundproof your condo

January 24, 2012 By

Enjoy home theater without bothering neighbors

By Bill and Kevin Burnett

Q: I finally saved enough money to buy and install a home theater in my duplex condo. The picture on the big screen is amazing and the sound from the six speakers is even better. I have three front speakers and a subwoofer on the floor and two surround speakers mounted in the ceiling. I love it.

Unfortunately, my neighbor doesn’t feel the same way. Whenever a movie soundtrack gets a little loud, say the Martians attack or the earthquake and tidal wave hit, she pounds on the wall. Once she even came over and threatened to call the police.

What can I do? I want to be a good neighbor, but I also want to enjoy my new toy.

A: We doubt you’ll be able to fully soundproof your condo, at least not without hiring an engineer, a contractor and spending a whole lot of money. So we suggest you sell it and move to a single-family house on 5 acres of open land.

If that’s not an option, there are a few steps you can take to dampen the sound and keep your neighbor at bay. Some are relatively inexpensive; others are free.

What’s bugging your neighbor is vibrations from sound waves that strike your wall and ceiling, then reverberate through the wall and attic to her space. Your goal should be to isolate and reduce these vibrations.

First, you should build a new sound wall. This will be the most time-consuming and expensive job, but it’s pretty much mandatory, especially in a condo. Take these steps:

1. Build a standard 2-by-4 wall with top and bottom plates and studs on 16-inch centers. Make sure it’s parallel to the existing wall, leaving 1 to 2 inches of dead space between the two walls.

2. Reroute your power into the new wall. Installing a 2-inch flexible conduit will make it easier to run your wiring to components and speakers.

3. Install the insulation. Owens Corning manufactures fiberglass sound attenuation batts that are designed specifically for use in interior partition systems. You can find this product and lot of other good information on sound attenuation at this link.

4. Finish the wall with sound-dampening wallboard. Make sure any seams and cutouts for outlets are sealed up tight. You should use special sound-dampening products for this job. These materials will cost up to four times more than a standard drywall wall, but they’re absolutely worth the money. Bill did a similar project a couple years ago and was pleased with products from a company called QuietRock.

Once your wall is built, there are three more little jobs you’ll need to do:

5. Sound from your in-ceiling surround speakers is probably leaking into your neighbor’s space through the attic. Consider adding speaker enclosures here. A number of choices are available. Start by doing a Web search for “in-ceiling speaker enclosures.”

6. Low-frequency sounds from your subwoofer may be a major source of your neighbor’s headaches. If your sub is against the common wall, move it as far away as possible. No need to worry about this degrading the quality of your sound.

7. Finally, make certain your speakers — especially your subwoofer — do not sit directly on the floor. Use speaker stands or do a Web search for “sound isolation cones.”

These steps won’t solve your problem completely, but if your neighbor is at all reasonable, you should be able to coexist. Why not nuke up a batch of popcorn and invite her over for the next feature presentation?

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4 real estate lessons from the 1%

December 21, 2011 By

By Tara-Nicholle Nelson

While reading an article about the aggressive — and ostensibly legal — tax reduction strategies of Ronald S. Lauder (son of Estée), I was struck by this quote from University of Colorado law professor Victor Fleischer: “There’s real truth to the idea that the tax code for the 1 percent is different from the tax code for the 99 percent.”

The connotation? The super-rich have not only cash, but also elite access to loopholes and other advantages to which the 99 percent might aspire, but will never attain.

While the Occupy movement is on a mission to illuminate and shatter power imbalances between the 99 percent and the 1 percent, there’s another angle to take on the issue: Let’s call it the “If you can’t beat ‘em, learn from ‘em” school of thought.

Along those lines, here are four real estate lessons all of us can take from the 1 percent:

1. Take advantage of government programs/assistance. When the big banks — whose execs certainly belong to the 1 percent — began to experience the fallout of the subprime mortgage meltdown, they threw up their hands, pleaded their case, enrolled governmental advocates and got the bailouts we now know as the $700 billion Troubled Assets Relief Program, or TARP.

Yet many an individual American, whose personal finances have too much at stake to fail — at least as far as their household and local communities are concerned — struggle silently to make their monthly mortgage payment.

More than 20 million American households are upside down on their mortgages. The Obama administration’s foreclosure avoidance program, Home Affordable Refinance Program (HARP), was designed to help 5 million homeowners refinance into lower interest rates and payments.

At last count, earlier this fall, HARP had actually helped only 62,500 seriously underwater homeowners, and fewer than 900,000 homeowners total — a number so low Congressional Republicans sought to wind the program down. The Obama administration revised the program in hopes of helping more homeowners. (In 2009, the administration projected 4 million HARP refinances by fall 2011.)

The Main Street bailout is here and, whether you think it’s sufficient or not, it seems indisputable that it is vastly underutilized.

In an effort to get more help to the homeowners who need it, the Obama administration loosened up qualifying criteria; the revised guidelines just kicked in on Dec. 1, 2011. The 1 percent looks to the government when they are down on their luck; so should you.

2. Take full advantage of the tax code. Many members of the 99 percent have decried the complexity of the tax code and its loopholes that favor the rich. Lauder’s son, for example, has reportedly deferred or avoided tens of millions in federal taxes by donating art to his own foundations, deducting of property taxes on an extensive real estate portfolio, making massive charitable donations, and derivative stock transfers — deductions accessible only to those rich enough to own such assets in the first place!

Besides the better-known federal mortgage interest and property tax write-offs, there are numerous, less well-known deductions of which “99 percent-ers” should take full advantage.

Some areas allow renters to take a property tax credit. Similarly, homeowners who switch to solar or installing a tankless water heater can get the federal government to help pay via tax credits, some of which expire soon, others of which will be longer lived. It won’t line your pocket with millions, but every little bit helps.

3. Pay for professional advice when it counts. You’d be amazed at the number of buyers, sellers and homeowners I’ve heard reference real estate advice they received from their parents, their mechanic and the other moms at day care — and that doesn’t even begin to count the folks who try to distill insights just from a headline in the national nightly news or from a story they overheard at the hairdresser about the amazing deal they were able to negotiate (and, by the by, everyone exaggerates at the hairdresser!).

I assure you, Mr. Lauder pays a virtual army of attorneys and accountants a pretty penny for his tax advice. And the rest of us should make the appropriate investment in obtaining experienced, local, professional advice when it comes to making potentially life-changing real estate, mortgage and tax decisions.

4. Don’t let emotion cloud your decisions. Members of the 99 percent often stay emotionally committed to a home or a list price despite the fact that it is absolutely a losing battle, the data completely contradicts our commitment, or that the living situation no longer works for the people who live in the household.

The 1 percent, on the other hand, will divest of a home or slash even millions of dollars off the list price of their home in a New York minute, if it makes business sense.

Obviously, it’s a bit easier to be detached from an asset when it’s not the only asset you have. As well, sometimes the 1 percent is a little too hasty to detach from all sorts of relationships that most of us in the 99 percent hold dear — from homeownership to marriage and beyond.

But we 99 percent-ers might do well to take a page from the 1 percent playbook when it comes to holding onto assets that have become toxic. Sometimes, it makes sense to short-sell the house, divest of it via a deed-in-lieu of foreclosure, or simply slash the list price, in the service of the household’s greater, long-term financial good.

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Renting vs. Owning: The Rent Ratio

November 28, 2011 By

By Marc Courtenay

The buy-versus-rent question is particularly relevant right now as we see home prices continuing to decline and interest rates on new mortgages also going down to the lowest levels in 60 years.

Back in April of 2010 The New York Times did an impressive job of explaining the ratio that helps define whether it is economically more sensible for residents to buy or rent their housing. Part of the purpose of the article was to help those looking for housing to decide. http://www.nytimes.com/interactive/2010/04/20/business/20100420-rent-ratios-table.html

The Times analysis is based on comparing the costs of buying and renting a similar home, using data from Moody’s Economy.com, a research firm, and from real estate agents. This kind of comparison can never tell someone for sure what the best financial move will be. However, it does show whether a buyer will need a big jump in future prices to cover all the costs of owning — including the down payment, closing costs, property taxes, mortgage interest, repairs and co-op fees.

A simple way to do the comparison is to look at something called the rent ratio: the purchase price of a house divided by the annual cost of renting a similar one. The number 20 provides a useful rule of thumb. When you do the math, you discover that a ratio above 20 means you should at least consider renting, especially if you may move again in the next five years or so. When the ratio is well below 20, the case for buying becomes a lot stronger.

In many large metropolitan areas, including New York, Los Angeles, Chicago, Houston, Dallas, Atlanta and South Florida, the average ratio is now 16 or lower. It was more than 25 in several of these places at the peak of the bubble, about five years ago. Recently The Times asked Mark Zandi the chief economist at Moody’s Analytics about the chances of yet another housing crash happening and his current analysis of “The Rent Ratio”. His answers are revealing:

Q. I’m struck by how much higher the rent ratio still is in many places, relative to its average from 1990 to 2010. It’s about 18 in Washington (relative to a 1990-2010 average of 13), about 17 in Boston (relative to 15) and 15 across all metropolitan areas (relative to 11). Is there any reason to think the ratio should remain higher in the future than it was in the not-too-distant past? Or should we expect the ratio to continue falling in coming years, either through further house-price declines or through rent increases?

Mr. Zandi: I expect the house-price-to-rent ratio to continue falling at least through the remainder of this year and next. National house prices are set to decline by 5 percent this year, and apartment rents are on track to rise by about 5 percent. I do expect home prices to stabilize in 2012, but rents will continue to rise strongly. Supporting the strong rent growth is declining apartment vacancy rates. Apartment demand is healthy given the better job market and accelerating household formation, particularly among younger households that generally rent, and the ongoing foreclosure crisis which is forcing families from home ownership into renting. Apartment construction is also especially low by historical standards. If this script roughly holds, the house-price-to-rent ratio will be back close to its long-run average in most areas of the country by 2013.

Q. When we were talking earlier, you mentioned that a straight comparison of rents and home prices argues for renting in most places — but that once you consider other factors, the issue becomes a closer call. Can you explain what you meant?

Mr. Zandi: A literal interpretation of the current house-price-to-rent ratio argues that it is still better for most households to rent rather than buy. This suggests that a prospective home buyer might want to wait until house prices fall even more before buying, but there are several important things to consider. Most of the coming house price declines will be for distressed properties — foreclosures and short sales. And timing the precise bottom of house prices is an intrepid affair, and may not the best strategy if the homeowner plans to live in their home for more than a couple of years, as most homeowners do. It is also important to keep in mind that mortgage rates are extraordinarily low, with the rate on a 30-year fixed rate mortgage currently well below 5 percent. Rates could go lower, but it is unlikely. As the economy continues to gain traction and the Federal Reserve ends its zero interest rate policy, mortgage rates will move higher. Indeed, in a well-functioning economy fixed mortgage rates will be closer to 6 percent.

The entire interview can be found at http://economix.blogs.nytimes.com/2011/05/11/is-another-housing-crash-coming/?scp=6&sq=rent%20ratio&st=Search The still high price-to-rent ratio means that home buyers shouldn’t be in a rush to buy a home, but owning is quickly looking more attractive, and it won’t be long before owning is once again more financially attractive than renting.

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Take advantage of expiring tax deductions

November 23, 2011 By

By Stephen Fishman

There are several tax credits and deductions set to expire at the end of the year, and given the federal deficit problem, there’s a good chance they won’t be extended. If you want to take advantage of them, you need to act before Jan. 1, 2012.

Mortgage insurance premium deduction

If you itemize deductions, you may deduct the premiums you pay for mortgage insurance, just like you do mortgage interest. However, this deduction is phased out if your income exceeds certain levels. To qualify for the full deduction, a couple or a single taxpayer must have an adjusted gross income of $100,000 or less. The deduction is phased out completely if AGI exceeds $109,000.

This deduction, which was first enacted for 2007, is scheduled to expire at the end of 2011. Thus, your payments are deductible only if you pay them during 2011; a payment after 2011 is not deductible.

Education expenses deduction

A deduction of up to $4,000 for qualified education expenses is available for 2011. All or part of the amount you pay can be for classes beginning in 2012. But you must make your payments during 2011, because the deduction expires at the end of the year. This deduction is not available if your modified adjusted gross income is more than $80,000 ($160,000 if filing a joint return). Nor is it available if any of education tax credits are claimed.

Home energy credit

First, any homeowner may qualify for an energy credit of up to $500. You can qualify for the credit if you purchase during 2011 solar panels to generate electricity or for water heating, or install wind energy equipment, a geothermal heat pump, or certain types of fuel cells to generate electricity. The credit is up to 30 percent of the amount you spend, up to the $500 limit. This credit is not available for purchases in 2012.

Sales tax deduction

If you itemize, you can deduct either your state and local taxes or your sales taxes paid during the year. This deduction is a boon for people who live in states with no or low income taxes. However, the deduction for sales and use taxes instead of state income taxes is scheduled to expire at the end of 2011. To maximize this deduction, you should make any large purchases before the end of the year.

Adoption credit

A tax credit for adoption expenses (adoption fees, court costs, attorney fees, travel, etc.) has been available for many years. However, an enhanced adoption credit is available for adoptions finalized before 2012. The credit is up to $13,360 of adoption expenses. For 2011, this is a nonrefundable credit, meaning you qualify for it even if it exceeds the amount of your 2011 tax liability. This means that you could qualify for a tax refund even if you did not have federal income tax withheld.

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Some real estate sellers better off as landlords

October 13, 2011 By

By Dian Hymer

Hopes of a housing recovery in the second half of 2011 were dashed when low consumer confidence, high unemployment and the debt crisis debacle were exacerbated by Standard & Poor’s downgrade of the United States’ credit rating. In August, S&P demoted the U.S., Freddie Mac and Fannie Mae (two government-sponsored mortgage entities) from AAA ratings to AA+.

The first-ever downgrade of the U.S. was expected to cause interest rates to rise. Instead, it had the opposite effect. Low interest rates have set off a new surge in refinance applications, but it has done little to help most homebuyers who can’t qualify under current strict lender requirements.

Nationally, home prices declined approximately 5 percent between March 2010 and March 2011, according to Fiserv, a company that provides data analysis for the financial services industry. Fiserv expects home prices to decline another 3.1 percent by March 2012 and possibly increase 2.7 percent nationally in the first quarter of 2013.

It’s not a great time for home sellers. That is, unless you’re a homeowner who in lives in Tacoma, Wash., where Fiserv expects prices to increase nearly 25 percent by March 2013, or near Silicon Valley in the San Francisco Bay Area, which is generating jobs at a rapid pace. Otherwise, what should you do if you want or need to move now?

One option is to sell your home, even though the market is soft. But before going to the expense of preparing your home for sale, find out what your chances are of selling in your local market.

Some sellers in hot niche markets are breaking even, depending on when they bought. Others are bringing cash to closing because they can’t sell for enough to cover the loan payoff and closing costs. Others can’t sell at all without discounting the price significantly.

Find out how many homes like yours in the neighborhood have sold recently, along with the sale prices and how long it took to sell. If the market is still declining in your area, plan on selling your home for less than the most recent sale.

How many homes like yours are currently for sale? If there are few and buyer demand is high, the odds are in your favor. Keep in mind that listings that sell in this market are usually in move-in condition. If your home isn’t in great shape or doesn’t show well, are you willing and able to do the improvements that will be necessary to sell?

HOUSE HUNTING TIP: While you’re researching selling, consider whether it makes sense to rent the property rather than sell at this time. The rental market is hot in some spots. Even so, make allowances for tenant turnover, vacancies and the possibility of lower rents in the future.

A major consideration should be whether the prospective rent will cover the costs of carrying the property. Will you need to pay each month to make up the shortfall, or will the property generate cash? If you’ll take a beating on price by selling but you’ll receive a good income from renting, then renting it out might be the best option.

To make sure your property is properly maintained, consider hiring a property manager if you can’t manage the property yourself. Find out if there are any rent control ordinances and how they might affect you.

Consider the tax consequences of converting a primary residence into an investment property. Consult with your financial adviser and accountant to understand how this will impact you tax-wise, particularly if the rent does not cover your carrying costs. And, ask you financial consultants for advice on whether it’s better for you to sell or rent.

THE CLOSING: Finally, if you’re interested in renting only for the short term, you might be better off selling today. The market may stabilize in 2012 or 2013, but it could take a lot longer.

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Six Mistakes Housing Investors Make

September 16, 2011 By

By Karen Blumenthal

(The Wall Street Journal) — Traditional investments are delivering low returns, and home prices are at bargain levels. Is it time to consider buying some rental housing?

Investing in real estate right now can be surprisingly profitable, if everything goes well. Rents are climbing in many areas, and more properties may be coming on the market. Last month, the Obama administration asked for proposals on how to convert at least some of Fannie Mae’s and Freddie Mac’s bulging inventories of foreclosed homes into affordable rentals.

Investors used to aim for rents that were 1% of the purchase price, or $1,000 a month for a $100,000 home—an annual gross return of 12%—says Michael McCreary. His firm, McCreary Realty, manages about 300 properties in the Atlanta area. Today, he says, some of his investors are getting as much as 2% of the purchase price.

In general, though, average returns after expenses are far less, more like 5% to 6% of the property value, says Ingo Winzer, president of Local Market Monitor, a real-estate forecasting firm. But that still is well above what many other investments yield.

Before you start scouring for deals, keep in mind that owning rental properties is time-consuming, expensive and fraught with challenges, and many investors lose money. You will want to avoid falling into one of these common traps.

• Mistake 1: Confusing a cheap deal for a good deal.

It is true that you can buy some homes for ridiculously low prices—but that doesn’t mean you can rent them out. Homes in deserted subdivisions aren’t any more appealing to renters than they are to buyers. The same is true for less-attractive properties or those in less-desirable school districts.

Investors from the San Francisco area often look at the Sacramento market assuming they can get Bay Area-like rents, and end up overpaying, says Robert A. Machado of HomePointe Property Management. He uses several resources, including the website FinestExpert.com, to estimate rents. Other experts suggest canvassing apartments nearby to see not just their rates, but whether they are offering special deals, like a couple of months of free rent.

• Mistake 2: Overlooking key costs.

Knowing the potential rent isn’t enough. Before you buy a property, you should also factor in closing costs of 3% to 6%, the costs to fix up the place and maintain it, and your holding costs. Then add the profit you expect to make (and more closing costs, if you intend to turn around and sell it). Only then can you figure out what you can afford to pay.

• Mistake 3: Forgetting that time is money.

In real estate, “time is your biggest enemy,” says David Hicks, co-president of HomeVestors of America, a franchiser whose motto is “We Buy Ugly Houses.” You lose money when your property is empty, whether you are painting it or between tenants. You also lose if you buy in the fall and can’t replace the roof until spring. You may be better off accepting a lower rent than waiting for a higher-paying tenant.

• Mistake 4: Assuming you will sit back and watch the rent roll in.

“When you become a landlord, you become a rent collector,” says Mark Kreditor of Get There First Realty, which manages 1,600 rentals in the Dallas-Fort Worth area.

Just like homeowners who can’t pay the mortgage, tenants lose their jobs and stop paying the rent. Evicting them can take several weeks, and some steal appliances or other property. Mr. Kreditor says that once or twice a month, a tenant removes a home’s copper tubing on the way out the door to sell the copper for its meltdown value.

You will need to screen prospective tenants carefully—or pay someone to do it for you.

• Mistake 5: Underestimating repair costs.

As with all homes, you will be making lots of repairs. You may find wood rot or mold when you remove that cracked bathtub. Carpet in rental homes typically must be replaced every five years, and you may have to repaint after every tenant. Tony A. Drost, president of the National Association of Residential Property Managers, or Narpm, suggests setting aside six months of expenses so that you will have funds if a major repair is needed.

• Mistake 6: Assuming that owning a rental is the same as owning a home.

You might put up with flaws in a home that a renter wouldn’t tolerate. In addition, many states and communities have strict (and complex) laws for landlords, even if you own only one property. A property manager can handle most of the headaches, but you should expect to pay one up to a month of rent for finding and screening tenants—and up to 10% of the monthly rent for management fees.

You can find property managers through the websites of trade groups Narpm and the Institute of Real Estate Management. In addition, many communities have local Real Estate Investor Associations, which can provide support.

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Cashing in on rental property

September 15, 2011 By

By Jeff Wallach

(MONEY Magazine) — Most of the news lately about real estate has been dismal: Home prices are swooning, foreclosures ballooning.

There is, however, one bright spot: the rental market, where demand is up and rents are rising. That’s partly because those foreclosures have turned more than 4 million former homeowners into renters, but also because many other prospective homeowners, worried about losing their jobs or housing prices falling a lot further still, are reluctant to buy now.

As with many investments, the best time to get in is when most others are sitting on the sidelines. To figure out whether you can benefit by investing in rental property, here’s what you need to know.

THE CASE FOR BUYING NOW

Many factors make this a great time to invest. Mortgage rates are at a 40-year low, and homes in many areas are ultra-cheap. Meanwhile, demand for rentals has risen in more than 500 cities, according to recent Census data. That, in turn, has enabled landlords to charge more. Hotpads.com, a real estate research firm, reports that rents nationwide jumped 11.6% in 2010, to $1,320 a month.

You’ll need that rental income to tide you over until home prices bounce back; in fact, the typical investor today plans to hold for 10 years, according to a survey by the National Association of Realtors.

If you can hang on that long, you’ve got a good shot at solid gains, especially if you’re financing the home purchase. “Whereas leverage is dangerous when buying stocks, it can be a good long-term strategy with real estate,” notes real estate investor and Columbia University adjunct finance professor Marshall Sonenshine.

The big catch: “Can you afford to hold the property that long and not need the equity for your kid’s college fund?” says Sonenshine. Or whatever other pressing need might crop up.

You’ll also face some tough financing rules. Most banks now require a down payment of at least 20% to 25% and evidence you have enough cash to cover six months’ worth of mortgage, tax, and insurance payments.

HOW TO FIND A GOOD DEAL

Investment real estate is like produce: It’s best bought locally. “Buy something you can get to in 10 minutes,” says Seattle real estate investor Bill Snyder.

Familiarity with the neighborhood also limits nasty surprises like a noisy bar or a nearby development competing for renters.

Work with a local realtor who has experience with rentals and can help you assess how attractive a given home will be to tenants.

And while prices on multifamily dwellings haven’t dropped as much as they have on single-family homes, don’t ignore plexes: Intake from a few rents instead of just one will boost your cash flow; a single vacancy won’t hurt as much; and you could benefit from economies of scale for things like appliances and painting. But stick to buildings with four units or fewer to avoid stricter financing requirements, such as a bigger down payment and higher mortgage rates.

Once you’ve identified candidates, crunch the numbers. The goal: to make sure your rental income will at least cover your loan payments, plus a 20% cushion to handle repairs, vacancies, and property management.

To figure out what you’ll garner in rent, ask sellers for recent leases, says Snyder, and double-check their numbers by perusing sites like Rentometer and Craigslist for similar rentals in the neighborhood.

Assume your mortgage rate will be at least a half-point higher than rates on owner-occupied properties. Factor in insurance and property taxes, and bank on a 5% vacancy rate. Otherwise, “one empty month can kill you,” says Ellie Berlin, a broker with Houlihan Lawrence in Larchmont, N.Y.

KNOW WHAT YOU’RE IN FOR

Brush up on your people skills: Owning rentals also means responding to tenant complaints, like the 2 a.m. phone call about a broken toilet. Want to palm off the grunt work? You can hire a handyman (around $45 an hour) or a management company (8% to 10% of monthly income plus a half-month’s rent for filling vacancies), but the luxury will eat into cash flow.

To find your own tenants, creative ads on Craigslist are your best bet. Run credit and reference checks (National Tenant Network, at ntnonline.com, can help). And invest in small touches to make your place stand out, such as cool lighting fixtures or antique door hardware. Those will pay off when it’s time to sell too.

Filed Under: Blog, Leasing, Property Management, Tips and Advice Tagged With: , ,

Not all homeownership expenses are tax-deductible

September 10, 2011 By

By Stephen Fishman

Most people know that homeownership comes with great tax breaks: home mortgage interest and property taxes are deductible from federal income tax as itemized deductions. The value of these deductions should always be factored in when determining the true cost of homeownership.

However, homebuyers should be aware many of the costs of buying and owning a home are not deductible.

You cannot deduct any of the following items:

  • insurance (other than mortgage insurance premiums), including fire, title and homeowners insurance;
  • rent for occupying the home before closing;
  • wages you pay for domestic help;
  • depreciation;
  • the cost of utilities, such as gas, electricity, or water; or
  • forfeited deposits, down payments, or earnest money.

Real estate taxes

Homeowners can deduct property taxes based on the assessed value of their real property. However, not all charges imposed on homeowners by local taxing authorities are deductible. These nondeductible charges include charges for services.

The Internal Revenue Service says that an itemized charge for services to specific property or people is not considered tax, even if it is paid to the taxing authority. You cannot deduct a charge as a real estate tax if it is:

  • a unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use);
  • a periodic charge for a residential service (such as a $20 per month or $240 annual fee charged for trash collection); or
  • a flat fee charged for a single service provided by your local government (such as a $30 charge for mowing your lawn because it had grown higher than permitted under a local ordinance).

You must look at your real estate tax bill to decide if any nondeductible itemized charges are included in the bill. If your taxing authority (or lender) does not furnish you a copy of your real estate tax bill, ask for it.

Assessments for local benefits

You also cannot deduct amounts you pay for local benefits that tend to increase the value of your property, such as assessments for the construction of streets, sidewalks, or water and sewer systems. You must add these amounts to the basis of your property.

You can, however, deduct assessments (or taxes) for local benefits if they are for maintenance, repair, or interest charges related to those benefits. An example is a charge to repair an existing sidewalk and any interest included in that charge.

If only a part of the assessment is for maintenance, repair or interest charges, you must be able to show the amount of that part to claim the deduction. If you cannot show what part of the assessment is for maintenance, repair or interest charges, you cannot deduct any of it.

An assessment for a local benefit may be listed as an item in your real estate tax bill. If so, use the rules in this section to find how much of it, if any, you can deduct.

Homeowners association assessments

You cannot deduct homeowners association assessments because the homeowners association, rather than a state or local government, imposes them.

The interest paid on a mortgage or mortgages of up to $1 million for a principal residence and/or second home is deductible as an itemized deduction.

Home loans

In addition, homeowners can borrow up to $100,000 against the equity in their home and deduct the interest as an itemized deduction. However, lender charges connected with getting or refinancing a mortgage loan are not deductible, including:

  • loan assumption fees;
  • cost of a credit report, and fee for an appraisal required by a lender;
  • notary fees; and
  • preparation costs for the mortgage note or deed of trust.

Settlement costs

The following settlement costs are not deductible, but may be added to the home’s basis. This will reduce the amount of any taxable profit when the home is sold:

  • abstract fees (abstract of title fees);
  • charges for installing utility services;
  • legal fees (including fees for the title search and preparation of the sales contract and deed);
  • recording fees;
  • surveys;
  • transfer or stamp taxes;
  • owner’s title insurance; and
  • any amount the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, cost for improvements or repairs, and sales commissions.
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