Secrets To Successful Residential Leasing

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‘Hard’ prepayment penalty. ‘Soft’ prepayment penalty. What’s the difference?

Pondering the purchase of a rental property? Here’s what to consider

Q: What’s the difference between a

BY CHARLES SCUTT CTW Features

“hard” prepayment penalty and a “soft” one?

While it’s tough to guarantee a specific payback and time frame to recoup dollars, green advocates say doing so will prove financially worthwhile. Moreover, some choices are no more expensive than their nongreen counterparts, says Laura Turner Seydel, daughter of media magnate Ted Turner, who with husband Rutherford built the first green home in the Southwest (Atlanta), to be certified by the green council Leadership in Energy & Environmental Design, which is dubbed EcoManor.

THINK YOU’VE GOT WHAT IT takes to be a successful landlord? This role requires more than simply knocking on doors every first of the month to collect the rent. If you’re considering the purchase of an apartment building or other residential property you’re looking to lease out, it’s important to know what’s required. The first thing to consider is your personality and tolerance for risk, says Tonja Demoff, founder of Tonja Demoff Companies, a real estate investment-strategy provider in Las Vegas. “Do you have the personality it takes to be a landlord? I would consider this to be the most important determining factor when making the decision to purchase any rental property,” she says.“Although as an owner you can hire a property manager, you will always need to be involved in your properties in order to have a profitable investment.” Demoff says the right candidate is an entrepreneurial-minded person with disposable income, a good chunk of cash reserves, and someone who can handle and will not overreact to wear and tear on the property. “This candidate would also be required to have a high degree of energy and strength, as it is very helpful during the process of staying in touch with your property and dealing with touch rental situations,” she says.“Asking for rent and serving a three-day notice to pay or quit isn’t always easy.” “The ability to start at square one – from marketing and leasing apartments to servicing the renters, handling funds and tracking rent payment and payables to taking care of immediate and preventive

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A: According to Carolyn Warren in the book “Mortgage Rip-Offs and Money Savers (Wiley, 2004), a “hard” prepayment penalty will be charged if you sell or refinance the property within a given period.A “soft” prepayment penalty will apply only if you refinance. In other words, you can sell without a penalty at any time. For specifics, ask your loan officer and check your Truth in Lending statement.

Q: Can you comment on quickie pay-down systems for home mortgages. Would you recommend them? A: I would not recommend any “program” involving third-party payments. It often pays to accelerate loan payoffs to reduce overall interest costs. For instance, a $150,000 fixedrate mortgage over 30 years at 6.25 percent will have a total potential interest cost of $182,487. Pay off the same loan in 15 years and the interest bill falls to $81,504 – a savings of more than $100,000. (In practice, savings would be larger because a 15-year mortgage would have a lower interest rate.) To get the benefit of that smaller interest cost, you would increase monthly payments from $924 to $1,286. Prepaying a mortgage raises several questions that borrowers should carefully review: • Can you prepay your loan in whole or in part without penalty? If yes, you can just increase your monthly payment and cut years off the mortgage term and, thus, big money off the interest bill. • Does it make sense to prepay a mortgage? Are there places where you can put your money and earn more interest with as little risk? Of course, you also can divide your surplus dollars, pay down your mortgage and invest in stocks, bonds or whatever. • If you’re considering a mortgage-cost reduction program, will you have to pay a fee to someone else? If the answer is yes, then the money you spend for such a “service” is money that is not being used to reduce your loan balance.

Why use the money for a program instead of on your loan?

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Secrets to Successful Residential Leasing

Blue green: Painting with low-VOC paint gives any room – of any color – a sense of green.

Green Machine Gaining Steam Bring your home up to speed in the age of eco-friendly BY BARBARA BALLINGER CTW Features

B

eing good to the planet has become a much more popular, mainstream trend, in part because there are so many easy ways to go green.You can recycle and make minimal changes in what you do every day: use less water when you shower, for instance, or buy green building materials, furnishings and products that consume fewer natural resources, are produced closer to home and are made in ways that are environmentally friendly. But another prime reason sustainability is surging is that being

environmentally smart is healthier for you, your family and pets because green items have few or no toxic chemicals, which means you pollute the environment less.You’re also helping future generations meet their own needs by preserving resources, says Jessica Jensen, co-founder of a Low Impact Living, a Webbased clearinghouse for all things green. Yet, concerns remain that taking this course initially will be more expensive, not offer a sufficient payback in the future and will be time-consuming to pursue. Wrong on all accounts.

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GREEN MACHINE Easy & eco-friendly CONTINUED FROM PAGE 1 William “Billy” Hallisky, vice president at Meridian Design Associates, an architecture and interior design firm in New York, concurs.“It really isn’t more expensive, but part of the reason people think it is, is because the process may seem mysterious,” he says.“It has to be demystified. Start with the right planning so you make smart choices from the start. Select items that don’t drive up costs. For example, I’m retaining gray water in a cistern for washing clothes and watering. I’m also saving money because of tax abatements since I’m generating my own power with solar cells.” Hallisky, who is building a green house in Florida, advises anyone building or remodeling to check their town, village or city’s Web site for possible incentives and rebates.“Everyone nowadays has a green page on their Web site,” he says. Costs also depend in part on where you live and how much heat, air conditioning and electricity you use, says Seydel.

LEASING The road to landlord CONTINUED FROM PAGE 1 maintenance needs – requires a wealth of experience and knowledge,” says Dennis Lee, principal of The Apogee Companies, a real estate management provider, in Boynton Beach, Fla.This job “requires a strong personal constitution to assure the ability to survive the varying difficult challenges that may be encountered.” Equally important as your personal disposition are the numbers involved, says Steven L. Daniels, attorney with Arnstein & Lehr law firm,West Palm Beach, Fla. Will the cash flow generated by the property be sufficient to cover the property’s “carry,” which consists of the mortgageloan principal and interest, real estate taxes, insurance, maintenance and miscellaneous expenses? “If the purchase is purely for income purposes, the numbers are very important,” Daniels says. “If it’s partly for long-term investment, a positive cash flow may not be as important to the purchaser as potential long-term increase in value.” Keep in mind that the greater the financial investment in the property, the lower the cash flow

Compact-fluorescent light bulbs are 66 percent more efficient than incandescents and can reduce the lighting portion of your electric bill by 75 percent, she says.They’ll also last as long as 10 years, which helps you pare trips to the hardware store to replace them and perhaps forgo an extra trip to the gas station. Moreover, as fuel costs get more expensive, your payback will be quicker, she says. Costs also can be lowered by your point of purchase. If you buy bricks from a local resource, for instance, your transportation costs will be less. Even the packaging can make a difference if it’s recyclable and doesn’t have to be trucked to a landfill.Ask what products are made of and what the company does with its packaging, says Hallisky. Finding items also has become easier, thanks to a growing host of green-oriented Web sites and retailers that have hopped on the bandwagon by stocking everything from organic sheets that contain no chemicals to shower aerators that conserve water, tankless water heaters that heat water on demand and low- or noVOC paints that have few or no toxic chemicals, which can cause

respiratory, skin and eye irritation, headaches, nausea, muscle weakness and other ailments, according to the GreenHomeGuide.com, another online resource for all things green.Another good resource is www.greenfeet.com. Green Web sites also offer specific recommendations. For wall treatments, for example, EcoManor recommends Benjamin Moore’s EcoSpec paint and AFM Safecoat paint and stain. Some products also have labels that indicate sustainability, says Seydel, such as Energy Star appliances, which use less water and energy, and Forest Stewardship Council wood, which is from forests that practice responsible management. Even some builders’ work comes with a sort of Good Housekeeping Seal of Approval through the EarthCraft House certification program, which is a voluntary green-building program that serves as a blueprint for homes to reduce utility. More recommendations are expected, since the International Code Council and the National Association of Home Builders announced an agreement to develop and publish a residential

green-building standard that reflects the architecture, geography and weather of the place where the home is built.The standard will be based on the NAHB’s Model Green Home Building Guidelines.According to the NAHB, by the end of 2007 more than half of its members, who build more than 80 percent of the homes in this country, will incorporate green practices into the development, design and construction of new homes. Going green also will put you ahead of the curve and give you a marketing edge if you sell. Some buyers already are seeking homes with green features such as energy-efficient heating and cooling systems and appliances, or going to green builders for new construction. There’s no better time than to start with a personal commitment than today.“Don’t drink from plastic cups; sleep on natural sheets; and use more real plants that contribute to your health,” Hallisky suggests. And when you finish this newspaper, remember to toss it in the recycle bin.

requirements, says Daniels.“If a buyer invests 20 percent in the purchase of a property, then the rent collected would only need to cover principal and interest on the remaining 80 percent, whereas a purchaser who only invests 5 percent of the purchase price will have a much larger cash flow burden.” Next, what you need to determine is what type of property you want to own, says Daniels. “Will it be a low- to middleincome or a middle- to highincome property, and what is the demand for rental units in each of those categories? You also need to evaluate whether there is an actual demand for rental at the rental rate needed to pay the carry.” Once you locate a prospective property, get ready to do some serious homework, says Lee. Closely analyze the property for physical condition, historical operating information and practicality of the units fulfilling the desired objectives. Scrutinize the surrounding marketplace for average comparable rental rates and occupancy, determine trends in the immediate neighborhood and take stock of the economic stability of the area. Additionally, Demoff adds, while conducting your due diligence be prepared to incur a variety of expenses – including the

hiring of a property-inspection service and professional appraiser (required by your lender). “Also, you should determine whether or not you are capable of maintaining the property by yourself,” says Daniels.“If you are not, you should begin establishing a network of maintenance people or retain a property manager to oversee the operation and maintenance of the property.” Demoff feels that this is a very personal choice.“If you don’t want to deal with tenants but have no issue demanding service from your managers, then I would say you are wise to pay for this service.” One of the big “don’ts” Daniels cautions against when pondering a rental-property purchase is not to fall in love with the property. “As long as the purchase is strictly a rental investment and not a long-term investment with the idea of ultimately living in the property, then the property is merely an asset.A less attractive property in a less affluent neighborhood may generate more net income than a more attractive property in a more upscale neighborhood.” Another “don’t” is to assume that all property is capable of being rented, Daniels says. “In today’s market, there are many condominium units and single-family homes that were

purchased by investors intending to either ‘flip’ the units or otherwise rent out all their units,” he says.“When the resale market nose-dived, there was a glut of empty units and rental rates dropped dramatically, thereby affecting the investor’s ability to generate enough income to meet their debt obligations.” Before you submit an offer on a residential rental property, talk to a tax adviser about the tax consequences of your investment, and get an attorney to review all contracts and agreements. Prior to shopping for lenders to finance your loan, aim to improve your credit rating. Don’t be surprised to learn that lenders often require larger down payments, higher interest rates and stronger finances when you’re purchasing rental property. Compare several different lenders, as well as the total costs of the loan carefully. When you’re ready to make an offer, base your bid on prices for similar rental units/buildings in the area, which can be obtained from a local real estate agent. Bear in mind that if you overpay for a rental property, it’s extremely difficult to recoup the money you could have saved if you pushed for a better bargain.

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Ask Our Broker CONTINUED FROM PAGE 1

•Will someone else either hold money for you or make payments to your lender? Either option is a bad idea: If a third party is late or doesn’t make a payment, it’s your credit that’s damaged and potentially your home that’s foreclosed. • Is someone proposing that you quickly prepay your loan by investing in the stock market, maintaining a money-market fund or buying lottery tickets? In theory, if an investment paid more than your mortgage interest rate you would be ahead, but the nature of investments is that returns vary and are not guaranteed. Meanwhile, the requirement to repay your loan is absolute. If you put money in an investment account and it does not produce promised returns after all costs – or if it actually results in a loss – then your mortgage-reduction goal will be shattered. Borrowers should never pay mortgage-reduction money to anyone other than their lender.Typically, this requires nothing more than filling in a payment coupon line and sending in a bigger check each month. For specifics, speak directly with your lender, avoid middlemen and don’t pay for “services” you don’t need.Also, keep your checks to assure that your account has been correctly credited.

Q: We’re thinking about buying a new house that sits below a dam. Will there be any negative aspects in trying to resell this home? A:You bet.A real estate purchaser in a given price range typically has many choices, so why would someone give a second look to a home that has a tainted location when the same dollars can buy a property not threatened by a potential dam failure? Is a dam failure likely? Not hardly, but that’s not the point.As flooding in New Orleans and elsewhere has shown, even one deluge can produce catastrophic results that can impact a household for years. If there is a dam failure somewhere, anywhere, then all dams can suffer from a negative public perception.That perception may be neither real nor fair with regard to individual dams, but if it takes hold it will surely impact property values, especially for a home that “sits below a dam.” Before going further, speak with local insurance brokers. Can you get coverage for such a property? At what cost? How does the insurance expense for this property compare with other homes of equal value in nonthreatened locations? Also ask about financing. Homes are “security” for mortgages, and many lenders may not want to finance a property with such an unusual potential for risk. Some may provide financing but only with a steep rate. CTW Features Need real estate advice? Peter G. Miller, author of “The Common-Sense Mortgage,” would love to hear from you. Send your questions to [email protected]