This is the question many of my clients and customers are asking me these days. One of them, a long time client, stopped by my Bethesda office a few days ago. He wanted to discuss the current real estate market.  Greg said to me that I must know where there is an upside to this down real estate market.  I thought about it for awhile and concluded that the real upside was in being a buyer with a long term horizon before that buyer needed to become a seller.

In other words, if Greg could buy a home today at depressed prices, and remain in the home for the next ten years – the typical real estate cycle period – then Greg had an excellent chance of seeing his purchase appreciate in value and he could recapture all the historical gain that has currently been lost.

Now, this works extremely well for investors.  As a buyer in today’s market, you are going to purchase at historically low levels for real estate values.  As an investor, you will obtain a mortgage at a very good interest rate today, and be able to lease the property for a positive cash flow, or very close to positive.  This is also a great upside to the market.  This type of market also creates higher demand for rental property.

Some of the best deals will be Bank short sales and foreclosures, followed by homeowners that must sell due to personal financial issues, work related issues (transfers), and family changes due to disability and death or a partner.

If I can help you with your investment decisions or the sale of your property, please e-mail me.

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I met my friend Gary for lunch in downtown Bethesda last week and he was concerned that he was now under water on his home in Bethesda.  Gary explained that he bought his home for $1,640,000 in August 2005 with $164,000 down payment and the balance ($1,476,000) in a fixed rate 30 year mortgage.  He thinks that in today’s market, his home is really only worth $1,350,000, a drop of $290,000.  Also, his home is worth $126,000 less than his mortgage. 

He was unsure what to do.  Gary felt that perhaps he should sell his home or even walk away from it.  These were two very bad emotional decisions.  I told him to do no such thing.  First, I said let’s look at your monthly payment.  You are paying nearly $1,400 per month in principal.  Gary was going to make up the shortfall in 7 years 6 months.  He would also get the tax advantages of home ownership and write off nearly $664,200 in interest over the same time period saving nearly $259,038 in income taxes if Gary was in the 39% Federal tax bracket. 

Finally, I told Gary that he needed to remember all the reasons that he bought his home – his wife loved it, his kids finally each had their own bedroom, there was a family room and a 2 car garage, and a big yard for their Bull Mastiff to roam around.  Being ‘under water’ was a short term situation with a lot of upside yet to come. 

This is a good example of why I encourage homeowners to look at all the aspects of their ownership carefully before they react to today’s crisis.  If I can help you analyze your property numbers, send me an e-mail.

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It’s also a more complicated time-as a real estate investor you are now seeking financing in a tight Bethesda credit market.  I met with a lender last week about financing investor properties in the Bethesda market.  It is a very different credit market than even six months ago.  Investors are going to have to come up with 20 to 25 % down payments.  Even in the Bethesda market, lenders are viewing properties as being in a declining area.

Investors are going to need six months of payment reserves for each property they own.  If an investor owned 3 or 4 properties, this could be a substantial sum.  Bethesda properties were no exception to the rule despite the heavy concentration of Federal employees and the high net worth of individuals in the area.

Extensive documentation of assets and liabilities is also going to be the rule.  This means tax returns, leases, bank checking and savings account balance statements, a good credit history, and high credit scores.

The lender indicated that these new requirements were for loans sold on the secondary financial market.

Another alternative available is to have investors seek out community banks, such as Monument Bank or Eagle Bank because they portfolio their loans.  The credit requirements remain nearly the same but there are other mitigating factors such as deposit relationships with the bank.  Generally, these banks are more knowledgeable about the local real estate market, property values and the financial strength of the borrower.

Nevertheless, one thing is certain, credit is not as free flowing as it once was, and it pays to have alternative sources of funding available.

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I was in my Bethesda gym a few days ago and there was a young man there who I had not met before.  As we made conversation the topic of today’s financial turmoil came up, and I was curious how he was weathering the changes.  Mark said a few things to me that were very insightful.  I was particularly taken with his answers because of his youth.  He was in his mid to late 30’s.

Mark was married and he and his wife each had good jobs.  He owned his home and he had a 30 year fixed rate mortgage.  He told me that when he and his wife bought the property, they purchased the home with the thought in mind that one of them might not be working in the future.  They did not stretch into a Bethesda home based on their two person income.  They went the conservative route.

I asked Mark a few more questions about their debt.  He explained to me that they did not have credit card debt because the two person income allowed for more cash purchases.  He said they had also been careful to purchase autos that they could afford and eventually they paid the vehicles off.

At this point, I wondered if they spent all that they earned.  I was pleased to learn that Mark and his wife had saved enough money so that if Mark or his wife lost their job, they could draw down savings for about seven months while they searched for a new job.

I really do not know many people like Mark, but his peace of mind was quite evident.  He was not worried about his financial future, and he knew that he was living well within his means.  I believe that we will eventually return to this type of conservative approach to spending and saving because the opposite approach has been disastrous for many families, and it is just too painful.  Like the period following the 1929 crash, most of us will remember 2008 and vow never to get burned again.

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I was visiting my friend Gail at her home outside Annapolis, Maryland.  What a beautiful home she and her husband had renovated from top to bottom.  It was a very peaceful setting by a wide expanse of river waterway. 

From inside the ranch style home, you were struck by the beautiful water views from everywhere in the home.  Not only was the home sited perfectly on the property to capture sunsets and water views, but these were all unobstructed views.

It was not until I returned home that I thought carefully about those perfect views.  I recalled that many homes I visited over the years had partial views, or obstructed views, or no view at all.  So why were Gail’s views so perfect? 

When I looked at my pictures from my visit, I noticed that the windows were wider than normal.  Gail had paid a little more to be sure that there were not a lot of vertical obstructions in the windows.  Gail had also purchased taller windows than standard home installation windows.  This meant that you could be standing and see outside without a horizontal break in your view.  She also created the illusion of very tall windows by adding smaller windows above the regular window.  This created an architectural effect  like you would see in older homes where there was a transom window above a door.  This allowed even more light to fill the rooms.  Finally, in the apex of the wall she added a square window tilted on a point of the square.  Now the wall had an unusual architectural feature and light filtered in first through this window as the sun set.

I think that Gail created added value to her charming home by bringing the beautiful outside views into the home through well designed and perfectly placed windows. This was made possible by careful planning ahead of time, observing the way the sun affected the property at different times of the day, and by creativity.  My hat is off to Gail!

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I get quite a few questions during the year about security deposits.  How much can I collect?  Do I have to pay interest on it?  Can I keep it in my own account?  Can I keep some of the security deposit to make repairs?  When do I need to give it back?

Let’s start with the basics.  First, check your lease documents.  The security deposit is usually one of the main paragraphs in the lease.  Local jurisdictions will regulate how much you can collect.  It may be one month rent, or two month rent.  It does not necessarily have to be exactly one month rent.  For example, the County may say you cannot collect more than two months rent as the security deposit.  So you could collect one month rent plus 20% of the second month rent for a total of 120% of the rent instead of 200%.

You need to check both the local jurisdiction and the State requirements regarding paying interest on the deposit.  You may have a fixed amount to pay, say 4%.  Note that this may be more than you can earn on the deposit, but if the law says this is what you must pay, then so be it.  Keep careful records of when the deposit was received and how much it was.

Most jurisdictions require that you not commingle the funds from your tenants with your personal funds.  In this case, you need a separate rental account for the security deposit(s). 

Your lease will state the circumstances under which you may keep part of the security deposit.  Generally, normal wear and tear is not a reason to keep tenant deposit funds.  You would normally paint the unit after a tenant leaves anyway.  However, if the window is broken, or there is a big hole in a wall, these are damages covered by the security deposit.

The lease will normally tell you when the security deposit needs to be returned.  Some jurisdictions say within 45 days of the end of the lease, and other jurisdictions say within 60 days.  Be sure to comply with this schedule or let the tenant(s) know why you need more time (to estimate damages, etc.).

If I can help you with specific tenant deposit questions, e-mail me.

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I have asked my husband David to be our guest blogger today. As a successful investor and remodeling expert, David receives many questions from past and current clients all the time. I’ll let him tell you about one of the most recent ones:

“ I spoke to my friend Scott last week and he was very upset to observe that the retaining wall behind his home had a rather large crack in it.  In fact, the bricks along the crack line had actually moved forward about one quarter of an inch.  Scott was angry because he had paid a contractor to install the wall 4 years earlier, and he thought it should last 30 years.  My friend wanted to know why the wall would move in such a way.  Scott invited me over to his property and I made some notes.

First, the wall is about 4 feet tall and it holds back a rising slope of dirt.  I did not observe any weep holes in the bottom of the brick retaining wall that would allow water to seep through and take the water pressure off the wall.  If the water cannot get through the wall, it will accumulate, soak the ground and freeze.  Then the earth expands and creates pressure on the wall.  Ultimately, as the pressure builds, it is finally relieved when the wall breaks up.

I also noticed that the cinder block behind the brick facing did not have any vertical reinforcing bars.  These steel ‘rebar’ give the wall added strength and help eliminate cracking if they are used.  The cinder blocks were also only filled with dirt.  I told Scott that this is even more trouble.  The blocks should have been filled with concrete.  The dirt got wet and it froze and eventually expanded and cracked the brick facing and the cinder block.

So I had lots of reasons ‘why’ the wall failed.  The strategy for a fix was not simple.  The broken component of the wall needed to be removed.  The cinder block needed to have the dirt fill removed.  The rebar needed to be inserted and tied into the bottom of the wall, and concrete needed to be poured into the block after weep holes were drilled through the block and filled with pvc pipe.  The block were going to need to be parged on the dirt side to impede moisture penetration into the new block and a gravel drain needed to service the weep holes behind the wall.

This was going to be an expensive lesson for Scott, but doing the job right the first time is always the best policy.  It is also critical to supervise these projects and to ask questions if you do not understand why something is being done.

Send us an e-mail if you have questions about a project you are doing on your home.”

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Every novice landlord seems to have a dreadful fear of having to perform an eviction.  It seems to be perceived by them as some kind of personal failure.  Nothing could be farther from the truth.  This is a result of mathematics!!  It is a result of the laws of large numbers to be specific.  Let me explain.

Experienced landlords and property management companies know that despite their best efforts (credit checks, calls to prior landlords, reference checks, advance rental payments), a certain small proportion of tenants will fail to meet their obligations under their lease.  For example, let’s suppose that you are leasing just one property.  In a year, you have 12 rental months.  In 5 years you have 60 rental months.  In ten years, you have experience with 120 rental months.  If the likelihood of nonpayment of rent is just 1 in 100, then you might expect 1 out of 100 months to be a problem for you.  Now imagine that you are building a rental business over 10 years and you have 5 properties and an apartment building with 8 units.  The rental months of potential exposure and risk explode to 1,560 (5 x 12 x 10 + 8 x 12 x 10).  Now even if the likelihood of nonpayment is 1 in 500, sooner or later you are going to have someone or several tenants fail to pay.

With this certainty in mind, I always advise my investor clients to anticipate evictions.  You need to realize it is just a matter of time if you understand the math.  Whenever you purchase rental property, your strategy should include a plan to act quickly in the event of nonpayment so you can reduce your loss.  It takes time to have an attorney serve notice on nonpaying tenants, to get a court date, and to follow up after a judgment in your favor to use the sheriff to repossess your property.  Why wait until you have a tenant problem.  Identify an attorney as soon as you are going to purchase the rental property.  Introduce yourself, learn the local eviction process, and create a relationship that you can draw upon as soon as you need it – not weeks after the problem surfaces.

This is a strategy that has worked for years for my investors.  Send me an e-mail if you have a tenant related problem or want to share your experience and how you resolved the situation.

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I am asked every day about the impact of the credit crunch on the ability of our buyers to borrow home purchase money, and on our home owners’ ability to refinance their current mortgages.  The answer is not immediately promising and a little complicated.  However, I expect credit to relax as borrowers improve their personal financial situations.

Some lenders are not doing any business at all.  Rather than make new loans, they are increasing their own capital and creating reserves in anticipation of borrowers failing to make their required payments.  The lenders are also reducing home equity lines of credit that borrowers may have in place.  Lenders are clearly into future risk management.

First, lenders are very concerned about borrowers’ ability to repay their loans.  Therefore, the natural tendency is for the lenders to document more, and to tighten criteria for reserves, down payment amounts (loan to value ratios), and income over and above normal living expenses.

Years ago the standard joke about Banks was that they would not loan you any money unless you did not need it.  Up to a year ago it seemed like if you had a pulse, you could borrow money – a lot of money.  Today, we are swinging back to those earlier years.  So the credit crunch is going to mean that more people who have limited resources, tarnished credit, or excess expenses are going to be pushed out of the housing marketplace. 

The FHA program will be the primary lender for individuals with small down payments (3%) and buyers will have to find sellers willing to help them with buyer related closing costs as opposed to just identifying the home of choice.  Not only will sellers have to satisfy FHA inspection findings, but our sellers will need to have sufficient equity to pay the buyer’s closing costs.  This gets even more complicated as home values fall and seller equity is reduced as more recent sales and appraisals using these comparables drive down seller equity.

Motivated sellers will always be able to sell, but not necessarily at their desired price.  Owners will be able to refinance, but for smaller amounts due to increased equity requirements.  The Banks have decided that since values can go down as well as up, the loan to value rations need to be lower as a hedge against down markets.  It is their money and they make the rules.

Please e-mail me if I can help you analyze your equity or contract issues.

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My brother-n-law, Bob, called me a few days ago.  He was a little annoyed that one of his tenants had called and asked him to replace the worn out carpet in Bob’s townhouse.  This was going to be a $1,600 expense that Bob really did not want to incur.  He wanted to know what I thought.  Well, I said, how long has the tenant been renting from you?  Bob told me that she had been there for the past 7 years.  I also said, has she paid the rent on time for the past 7 years?  Bob told me yes, and she was one of his better tenants.  I then asked Bob how much the mortgage balance was, and the rent and the interest rate on his loan.  With this information, I calculated that Bob was paying down the mortgage balance with this tenant’s funds at the rate of $232.80 per month.  So in a little less than 7 months, the tenant would have paid for the new $1,600 carpet.

Bob came to realize that this request was not unreasonable.  The carpet was quite worn.  If the tenant vacated, Bob would certainly replace it to obtain a new tenant.  If the carpet encouraged the tenant to stay another 7 years (84 months), Bob would receive more than $19,555.20 in principal payments on his loan ($232.80 x 84).  This was clearly an enticing sum and well worth the investment of $1,600 to make a good tenant happy.  Bob ordered the carpet and learned that there would be an extra charge for the installation since the townhouse was occupied and the delivery team would have to move tenant furniture around.  Bob complained about this too, so I suggested he call the tenant and see if they could move the furniture for the carpet installers in exchange for the new carpet.  The tenants were delighted to accommodate Bob and the installation was scheduled.

It is important to realize the value of a long term tenant that takes their responsibilities seriously.  It is equally important for landlords to maintain their property at high standards to attract and retain quality tenants.

If you have property maintenance questions, please e-mail them to me.

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