I was with my cousin Joel yesterday and he asked why anyone would buy a rental property and pay the mortgage off.  There are a number of reasons that I could think of, but the best one involve the concept of a ‘forever income stream’. 

Most of us have income from different sources – our jobs, alimony, child support, retirement payments, and social security and so on.  However, these income streams all end within some finite number of years or upon our death, the maturation of children and so on.  For example, alimony stops if you remarry, child support usually stops when the child reaches the age of 18 years, retirement checks stop when you exhaust your benefits or upon death (yours and or your spouse).  

However, if you owned a $150,000 rental property with a net rental income of $1,000 per month and no mortgage, the income is ‘forever’ so long as the property is maintained, taxes paid, etc., and it remains rented.  Regardless of what is happening in your life (or your death) the income belongs to your estate.  So think about this concept.  You buy a $150,000 property when you are 30 years old and rent it out for 25 years on a mortgage that amortizes over the same 25 year period.  When you are 55 years old the property is completely paid for and the net rental income (after insurance and taxes, and fees) is yours – all $1,500 or whatever you raised the rent to along the way ($20 per month per year rental increases means you are at $1,500 per month).  If you live another 20 years to age 75, you enjoy $18,000 per year or a total of $360,000 net dollars assuming no further rent increases. 

But what if your will gives the property to your son upon your death.  The title and deed transfer to your son and the income stream continues for the remainder of your son’s lifetime.  If you son is just 30 years old when he inherits the property, and he lives to be 80 years old, he will receive the $18,000 per year or more over 50 additional years – another $900,000. 

If your son has a child (your grand child), the income stream can continue for another generation, and another, and another.  With proper planning, it can be a forever income stream for all your heirs.

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I was at settlement on Monday and the buyer asked me if he needed to buy the owner’s portion of the title insurance for a premium in excess of $1,000.   I explained to my buyer that the lender required that their portion be purchased (an additional $650).  The lender wanted the mortgage amount to be protected from any unknown defects in the title being conveyed.  The lender ignores the portion related to the buyer’s equity, so it did not require protection. 

My buyer was a little agitated because he viewed this cost as a waste of his money.  After all, the settlement company had just done a title search and found “no problems”.  There are many ways to discuss this issue but I like the simple one I have heard many times.  Let’s suppose you have a title problem when you go to sell – an unrecorded deed, an easement issue, a fraud claim or whatever.  You will have to hire a lawyer to straighten out the problem.  You will have to take your time to meet with the lawyer, to explain the issue and provide documentation.  The lawyer will spend time reviewing the case material, getting up to speed, doing research on the issues, chasing down documents, locating files in offices of title companies (some may now be closed), or at the courthouse.  All of this time is going to be on billed to you by the attorney at $200 to $350 per hour. 

If you have to go to court to resolve the dispute, defend a property title issue, or answer counter claims about the property, you will incur very large legal bills – perhaps $10,000 or more. 

Although the likelihood of a future title problem is small, they do occur, they are complicated, they take a long time to resolve and they are very annoying.  I think, therefore, that it is hard to beat a price of $1,000 for peace of mind over the life of your property ownership – say 25 years.  So I advised my buyer to think of it as $40 per year over his occupancy period – less than $4 a month.  I own several properties and I obtained title insurance for all of them.  I sleep easier at night knowing that my insurance agent is up worrying about all that could go wrong.

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My partner Kris Feldman has been a very successful buyer’s agent in the Bethesda area for over 25 yrs. Last week she gave our team a talk about working with buyers- I thought it was an interesting insight into the inner workings of a buyer-agent relationship, so I wanted to share some highlights:  

“Whenever I first meet new buyers, I try very hard to understand what characteristics they have set for the home of their dreams.  I am always surprised that the criteria for the home that they want to buy are not well defined.  Since everyone is usually prequalified for their mortgage, the buyer does seem to know what they can afford to pay for the property.  So at least we know a price range.  However, this is not true all the time so I start by prequalifying the buyers. 

Sometimes the area of interest is very clear because they have lived in the general vicinity.  But even this is not always clear in the minds of the buyers.  This makes my job much harder because I have to educate these buyers about neighborhoods and different types of property (single family homes, town homes, condos, coops, duplexes, low rise condos, mid-rise condos, high rise condos, and so on) and also establish their basic housing needs.  For example, are they only going to buy a single family house?  If yes, what style will they consider?  How about a colonial, a rambler, a cape cod, a Tudor style, or a contemporary?  Assuming we know the style of home you may want, what about floor plans?  Does there have to be two bathrooms upstairs, a half bath on the first floor, a family / recreation room, a basement, an attic?  How many bedrooms are required?  Does the master bedroom need to be on the first floor to accommodate a handicap, or can it be upstairs?    The list can be endless, and that is the point.  There is no need to pile into my car and begin touring properties if my buyers do not establish the basics for the tour.  Just like going to the grocery store, you need to prepare a list in advance of what you want to purchase.  And it is important to carry your list with you whenever you tour properties.  This will help clarify in your mind how to pick one property over another – check your criteria and see if they are met. 

Another great way to decide on a property when you finally get out and start looking is to compare the first property to the second and make a decision about which one is better for you (A versus B and you chose B).  Then you tour the third property (C) and compare it to the better of the first two you saw (B).  So you always have one property pitted against just one other.  That way, when you get to the end of my tour for you, it is easy to recognize which of the 10 properties you saw is the “best” according to your criteria.  That should be the property for which we write a contract.”

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Anytime you have a basement, there is a chance that record rainfall will produce a wet basement.  Water can collect below the concrete floor and then finds its way into your basement.  In older homes, water can also penetrate though joints in cinder block walls.   

The standard remedy is the creation of a “French drain” around the perimeter of the basement.  By this I mean that a contractor (water proofing company) will dig a trench about a foot wide and a foot deep all around the inside perimeter of the basement.  This trench is filled with gravel and PVC piping with holes and a water trap that fits against the cinder block walls to catch any wall leaks and then wraps under the stone.  The theory of the design is that as water floats up from below the concrete or down cinder block walls; it is channeled into the water trap and into the PVC piping.  As water fills the piping, it flows to a four foot pit with a plastic container designed to collect the water.  There is a pump in the pit and it is connected to PVC pipe that goes to the exterior of the home and away from the property.  The pump ejects the water out of the pit and into the PVC pipe to the outside.  So water continually goes from inside the home to outside the home without ever touching the living area of the basement. 

It is important to note that the pump used to eject water out of the pit in the basement floor to the outside uses electricity.  Any interruption in the power source will stop the pump and put the basement living area at risk.  This can be solved by using a battery back up system for the sump pump.  The system is fairly fool proof then. 

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I recently sold one of my clients’ homes in a

I wish that I had a dollar for every transaction where the seller did not want to negotiate away the various home inspection items requested by the buyer.  I would have quite the sum by now. However, we need to take a step back from the deal and look at the money involved and how to make everyone a winner. 

In the typical real estate transaction in a hot seller’s market, there may be no home inspection done at all.  After all, it is likely that there were multiple contracts and the rival bidders eliminated as many of the contract contingencies they could to make their offers more competitive in the seller’s eyes.  If you were the buyer, it was not material to the deal if there were potential hidden repair costs since you were bidding $10,000 or more over the asking price anyway.  So what if there were a few thousand dollars more of miscellaneous costs? 

However, in a buyer’s market, no stone is left unturned in various property inspections.  Sellers are often asked to repair / replace structural, electrical, mechanical, and plumbing items.  Often the buyer really does not want the seller to make the repairs or to have the repairs done.  The buyer prefers to have his own repair contractors do the work to the buyer’s satisfaction.  So a dollar amount is proposed to the seller in lieu of the repair list being completed. 

This starts a second round of negotiating (sale price for the property was first).  The buyer wants $15,000 and the seller wants to give only $8,000.  There is a counter offer at $12,000 from the buyer.  The seller only wants to give $10,000 but may not want to lose the deal over the difference ($2,000).  

How could we help the seller analyze the deal to see if it is time to take the buyer’s offer and be sure the deal is completed?  One approach is to determine the net proceeds of sale and look at the difference in the buyer and seller’s position as a percentage of the proceeds.  For example if the seller is netting $400,000 from the sale, the argument over $2,000 represents one half of one percent of the proceeds.  If the smaller amount of proceeds of sale ($400,000) are invested in a CD yielding 3%, ($12,000 per year), the seller need only invest the proceeds for a few months to recapture the ‘lost’ proceeds ($2,000).  It is definitely time to take the deal and secure the $400,000. 

It is important to help the sellers rid themselves of the emotions of the transaction and concentrate on the net proceeds and potential opportunity costs of not completing the deal.   

If you have any concerns about your sales transaction, send me an e-mail or call me to have a frank discussion of the potential loss or gain from your property sale decisions.

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 I would have to tell you that it would be their inability to analyze potential tenant markets.  What do I mean by this?  We’ll, it is simply the fact that new investors tend to always seek only the highest quality tenants for their property.  This is not a bad trait, but it does eliminate a lot of potential tenants who might have had some credit issues, employment issues, and resource issues but would nonetheless make excellent long term tenants. It also creates unnecessary vacancies and costs you money. Search for tenants who can pay market rent, who will occupy your property immediately and for a long time (so you can receive the economic benefits of owning that particular real estate for up to 10 years), tenants who will maintain the property except for normal wear and tear, who can pay increased rents over time, and who understand their lease and the penalty provisions within the lease. There is an entire segment of the potential tenant market that receives government vouchers for housing accommodations that often go over-looked by inexperienced landlords.  Their rationale is that these tenants will mess up their property, or they cannot get them out of the property, or they will not pay the rent, and so on.  In general, this is just not true.  These are irrational beliefs unsubstantiated by the facts. Through our investment group we have had a chance to experience and understand this program a little better. Here are some  basic points:  

o       First in most jurisdictions, the landlord needs to take a course from the county to qualify as a Section 8 landlord. 

o       Next, the property to be leased has to be registered with the Section 8 Administrative Office.  The property will be inspected by the Section 8 agency to be sure that the property meets minimum safety and housing requirements. 

 o       The Section 8 agency will notify eligible tenants of the availability of your property (lowering your advertising costs).  Potential tenants will need to have received a voucher from the Section 8 office that meets the landlord’s rental requirements.  o       It is the potential tenant’s responsibility to contact the landlord, and to bring the landlord the voucher and ask to be considered for the property.

  o       The landlord has a right to check the credit and the employment of the potential tenant.  The tenant pays for the credit check.  o       The Section 8 agency will contractually guarantee a portion of the rent and security deposit and pay the landlord promptly on the 1^st of the month.  Depending on the tenant’s status, the Section 8 agency may pay the entire rental amount. 

Also important is the fact that because of the economic status of the potential tenant, it is likely that accepting a Section 8 tenant will provide the landlord with a very long term tenant – 5 years to 15 years is not uncommon.  This gives the landlord an excellent opportunity to have a guaranteed income for the property and a long term increase in the equity of the property from appreciation. 

I would also tell you that rental amounts can be increase from year to year as taxes, insurance and capital improvements occur. As for property maintenance, the Section 8 staff requires an annual inspection of the property and they expect the tenant to do their part to maintain the condition of the interior of the apartment.  The tenant is always at risk of losing their housing voucher if they violate the Section 8 rules.  This is a very large motivating factor for tenants to behave in your property.  The Section 8 tenant can also be evicted just like any other tenant for failing to meet the terms and condition of the landlord’s lease. I am a big supporter of this program. 

We have renovated apartments and town home properties and immediately leased them to Section 8 tenants. We have also built modular single family properties and rented them to Section 8 tenants.   They have been among our best tenants despite their impaired credit history, and their lack of resources.  And we have long term Section 8 tenants in some of our investment properties today.  Investors need to learn about this program and take advantage of all it has to offer.  You will not be disappointed.

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With a few new condo buildings in the

Long term- think long term. I have been working with long term real estate investors for over 20 years.  These individuals and groups are not looking for a quick return.  Instead, they are looking for a viable option for a huge profit over a long period of time.  For example, a property that I sold to an investor in 1989 for $146,000 was sold by the same investor in 2005 for $1,350,000.  This long term investment required a large commitment to maintenance and periodic upgrades.   

Long term investors select properties in areas that they expect to provide long term appreciation, and where they can collect reasonable rents,   Rather than do the minimum necessary to rehabilitate a property and sell for a small quick profit, these investors create value by doing substantial upgrades and they patiently wait for appreciation to increase the underlying property value. 

However, these investors must deal with a host of issues.  First, they have to be able to deal with renters.  The investors also need to understand all the various tax implications of their investment.  They also need to have done their homework to be sure that the long term appreciation rate for the area is positive and likely to continue that way.  Finally, my investors need to have the capital and reserves to make the property cash flow, and remain in service.  A good real estate professional who is also a long term investor can help with this analysis. 

As the investment is maintained and improved over time, the investor can increase rents.  To do otherwise leads to long term vacancies, tenant dissatisfaction and a reduced property valuation.  It becomes cost efficient to repair small problems right away before they become much larger in scale with neglect.  My investors feel it is important to have a maintenance schedule for each property and a log of each repair.  The tenants appreciate a well maintained property, and they tend to remain in the property for longer periods of time than would otherwise occur. 

Appraisers, attorneys, real estate brokers, and other investors can be valuable contacts when it comes to making these investment decisions.  When it is time to sell, I am always available to my investors to advise them regarding the possibilities of a tax free exchange, or the implications of a sale and capital gains treatment of the proceeds.

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As a real estate professional, I sometimes meet buyers or renters who feel like they may have lost an opportunity to own or rent a home in the past because of discrimination.  My clients may be somewhat unsure about what happened, and they usually ask me “what should we do?” 

In a situation where someone believes their rights may have been violated, it is important that they contact their state and local fair housing center.  You can find the appropriate contact in the database of the National Fair Housing Alliance (202/898-1661, or www.nationalfairhousing.org ). 

Another source is the U.S. Department of Housing and Urban Development (1-800/669-9777, TDD # 1-800/927-9275 or www.hud.gov ).  You will be asked to provide your name and address, the name and address of the person your complaint is against, the address or other identification for the housing involved, a short description of the alleged violation, and the date(s) of the event that caused you to believe your rights were violated. 

When in doubt, talk to the experts. 

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