Some Questions & Answers

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Q1

I want to refinance my apartment building and need to know how to choose a mortgage broker with minimum risk of problems.

A1

The most important thing is to verify that the broker is properly licensed in your state. You should also check for violations. Mortgage broker regulations vary widely from state to state. Some states refer to mortgage brokers by different names while others license brokerage offices, but not individuals. Some states, California for example, allow real estate brokers to also be mortgage brokers. Some states impose significant educational requirements. Others demand proof of sound financial footing. A few states impose no regulations at all while others conduct background checks designed to weed out applicants convicted of fraud or other crimes, as well as those who have had their licenses revoked in other states. Be particularly careful about using a broker in another state, as you would likely have less protection than one licensed in your own state.

For a more detailed discussion about mortgage brokers see Lesson 4 of our “9 Professionals for Your Real Estate Investing Team” Mini Training Guide.

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Q2

I’m trying to collect a judgment for a case won in California, but now the debtor is in Texas. I won a judgment for $5,000 and have to pursue collecting it. How can I find his assets and collect my debt from him.

A2

Our ”Collecting Judgments” eCourse provides information regarding finding assets and collecting the judgment. Often, the first place to start for finding an ex-tenant is to utilize documentation you collected (or should have collected) when you rented the property to him. Such documentation includes ID verification, application form, and credit report. These items should provide information such as emergency contacts, employers, automobiles, etc. from which one can often track skips. Assuming that they signed an adequate permission statement when you originally took their application, you should be able to obtain a current credit report which may have a variety of clues to their current location.

Collecting a judgment in a state other than the issuing state requires you to file certain paperwork with the court of jurisdiction where he now resides. After you’ve determined the Texas residence of the ex-tenant, contact the Texas court of jurisdiction to obtain the details of their procedures.

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Q3

I have a tenant who has requested the outside of a few of his windows (ledges/sills) not be painted. The painters have been removing the chipped paint and painting all windows outside/around the building for the past 2 weeks. So, about 2 weeks ago, this tenant was notified (via email) that his particular windows would be done on a certain day and to keep some of his windows closed (it would not affect all of them). He said (all via email) that it was too hot to keep the windows closed and it would smell. This tenant has been verbally threatening me for months about keeping away from his unit as well as the building and he only communicates by email, not phone or in person. (I have not been in his unit since he 1st moved in). There were other issues about repair that he said was needed but would not let us in to see. So, to avoid more confrontation, I emailed back that we would not be painting his windows at that time. But the painter told me today that the wood needs to be protected from the elements and I want to notify him again that his windows would be painted this Friday. He threatened in the past that I cannot post anything on his front door, so how else can I notify him? Is email ok or posting on his mailbox and hallway wall in front of his unit? Do I even need to notify him if no one is entering his unit and he was already notified when the work first started?

A3

You are allowing a tenant to manage your property. You have the right to maintain your building, including having the painter finish the painting.

I would also be very concerned about not ever having access to the inside of this unit. You (or your contractor or other agent) should periodically (at least quarterly) thoroughly inspect the inside to be sure that there are not any minor problems that could become expensive problems.

For example, a leaky water supply valve under a sink involves a part costing a few dollars and can usually be repaired for $50 or less by a handyman or probably less than $100 by a licensed plumber. If not repaired, a tiny leak can eventually result in destruction of the cabinet bottom, even part of the sides and the floor underneath. It can also result in a mold problem. It will cost many hundreds of dollars to have the cabinet replaced, possibly close to a thousand dollars if it is a custom size or when it was once a stock cabinet type/size that is no longer available.

As another example, failure to maintain caulking around bathtubs and showers, that might cost a few dollars to occasionally touch up the caulk, can result in rotted wood and serious mold problems inside the walls and rotted floor boards if on a raised floor. Mold can result in expensive lawsuits, even by the very tenant who doesn’t want anyone to enter the property. In the worst case, the bathtub might eventually fall through a wooden floor. Replacing the bad wood and remediating the mold could cost several thousand dollars.

You and/or your agent have the right to enter a rental unit with the notice required by your lease (regular inspections should be a clause in the agreement) and/or state law. The minimum notice period is usually 48 hours.

If the tenant refuses to cooperate, you can enforce your rights through the court, including evicting the tenant. If you don’t want to actively manage your property, you should consider hiring a licensed property management firm. The benefits of professional management is often much greater than the costs. You could instead turn the matter over to a competent landlord-tenant law attorney who will be able to deal with this particular tenant with a letter that should get the tenant’s attention.

Finally, landlords should always communicate via written notices rather than via phone or email, as email may have no legal standing in court.

Again, I advise you to consult an attorney if you don’t feel that you can deal with this tenant.

Being Green Is Financially Rewarding

Energy conservation and use of renewable energy sources are becoming of ever greater priority because the price of energy has increased in recent years and is expected to continue increasing for the future. Furthermore, it is thought that the use of carbon fuels is affecting climate in ways that will significantly affect the world in the decades ahead. We’re being told to drive less, buy more fuel efficient vehicles, use fluorescent bulbs, and keep our homes warmer in summer and cooler in winter.

In addition to market forces which have caused increases in energy costs and will do so in the future, there are substantial national and global pressures to deal with predicted climate change by significantly increasing the cost of energy in order to reduce use. Whether this comes about via a straightforward tax on carbon (the word “tax” impedes this approach) or via a cumbersome cap-and-trade system as currently being proposed (providing Wall Street with trillions of dollars in future trading profits), energy cost are certain to rise substantially in the long-term.

Although much of the energy news is slanted toward the homeowners, all landlords will also be affected by potential climate change and most have been and will continue to be impacted by increasing energy costs. Accordingly, landlords should take serious looks at the ways in which they can reduce energy use by their properties.

Homeowners can usually justify spending thousands of dollars on capital improvements to their residences that will conserve energy or provide energy. This is partly because they are willing to wait the years required to receive payback via governmental tax credits, various rebates, and lower energy costs. It is also partly because most homeowners expect that the improvements will increase the value of their properties by a large percentage of the cost of the improvements and they expect to recoup most of their remaining investment upon eventual sale of their homes.

For a number of reasons, it is harder for most landlords to invest the required amounts in their rental properties. This is partly due to the fact that many landlords do not have capital available for reducing their properties’ energy usage because they have a relatively low cash flow from their properties. It is likely that it is also partly due to the fact that many landlords do not realize all the potential financial benefits of minimizing energy use.

Landlords should be concerned about long-term solutions to global energy issues because they are citizens of the world and hopefully want to be good citizens. However, they should also be concerned because they will be personally affected financially by what happens. They will pay the same high prices for gasoline and sources of energy for heating, cooling, and otherwise operating their homes as will others in this country.

Obviously, landlords should be interested in energy usage related to those items which they pay for the benefit of tenants – that is, common area utilities. However, landlords should also understand that reducing energy costs paid directly by tenants affects the amount of rent the tenant is willing or able to pay. Most tenants are on limited fixed incomes and the more the tenants must spend on energy, the less they can spend on rent. In other words, the rising costs of energy will increasingly limit the levels of market rents. Accordingly, minimizing energy costs paid by both the landlord and the tenants will improve net cash flow for the landlord.

Ways of reducing utility costs include the following:

1. Install tamperproof low-flow showerheads and faucet aerators.
2. Rebuild leaking toilets, replacing large tanked toilets (Can reduce water costs by thousands of dollars for large apartment complexes where owner pays for water). Adequately monitor units for water leakage in toilets, sinks, tubs, showers, and laundry facilities whether water is paid for by tenants or owner. In addition to saving on the cost of water for tenants and/or owner, adequate monitoring can minimize the risk of damages to sink cabinets, flooring, and wall bases.
3. Prevent the use of common area water for washing vehicles or paved areas can help keep the landlord’s water costs down.
4. Where owner pays for heat in complexes having central heating, a new boiler and insulated piping can save hundreds a year, even thousands for large complexes.
5. Having common area lighting on only when actually necessary, via timers, motion sensors, and/or photo cells can result in significant savings. Install mechanical or electronic timer or motion sensor switches in laundry rooms to avoid lights left on for long periods when rooms are not occupied.
6. Provide convenient ways to turn off exercise machines and TVs.
7. Replace incandescent bulbs with compact fluorescent bulbs. In 2007 Congress set energy standards that essentially ban incandescent bulbs by 2014, beginning with 100W bulbs in 2012 and ending with the 40W bulbs in 2014.
8. Replace outside faucets with caps or install locking faucets to eliminate use of water for washing vehicles and paved areas.
9. Where possible, convert from house water, gas, and electric meters to individually metered units. Where not mechanically cost effective to convert to separate metering, allocate costs among units using a fair and legally acceptable allocation method.
10. Install non-carbon energy systems such as solar water heating.

Regarding the item 9, tenants will almost always be more careful about wasting energy when they have to pay for what they use rather than have energy costs included within their rents. When the rent includes the landlord’s costs for energy, the tenant may not realize that he is paying for the “free utilities.”

The cost of separate water, gas, and electric meters being installed by the utility service provider depends on both location of the property and how the property is plumbed. The cost of the meters themselves can vary substantially, from nothing to more than a thousand dollars each. The cost of the necessary modifications and installations can also vary substantially, from a few hundred dollars to more than a thousand dollars per unit, depending on how the building is plumbed and wired.

If installing separate meters, where each tenant is responsible to the water provider for the unit’s bill, is not economically feasible because of the cost of the meters and their installation, landlords can consider sub-metering. With sub-metering, meters from other than the water provider are obtained at a significantly lower cost and tenants reimburse the landlord for their fraction of total usage as determined by the sub-meter compared to the existing meter for the entire building.

Unfortunately, it is not always financially feasible to convert to either individual metering or sub-metering because of the manner in which the water, gas, or electrical system is constructed within the walls, floors, or ceilings of a particular property, making the necessary changes prohibitive. The only way to determine the costs of the two approaches is to (1) get meter prices from both the water provider and sub-metering vendors, (2) check out the current plumbing to get a preliminary idea of modifications that will be necessary so that you can judge estimates from plumbing contractors, and (3) get estimates for the necessary plumbing modifications other installation costs from qualified contractors.

Another solution that is relatively low cost, though somewhat less desirable, is that the landord allocate water usage among the tenants in accordance with some quantifiable and equitable method.

One method often used for water is to allocate usage according to number of occupants. Since most water uses vary in proportion to occupants, this is usually considered more equitable than basing allocations on unit area or even number of bathrooms.

Allocating gas and electricity is somewhat more difficult because the amount of energy related to heating and cooling of units is less directly related to the number of occupants.

Landlords must keep in mind that, no matter which route they go, they would not be able to change the terms of a lease during the lease period. For month-to-month tenants this is usually 30 days.

Regarding item 10, federal and state governments often provide tax incentives and utility providers sometimes provide rebates for solar, wind, and other energy systems. However, owners must also be certain that their tax situations allow them to benefit from tax credits and that the payback period for a system at current system and conventional energy costs is cost effective. Such system conversions will likely become more beneficial as systems costs continue to decline and energy cost increase.

In summary, by making their properties more green landlords can both reduce their own energy-related operating expenses and make it possible to charge higher rents, both items contributing to better cash flow.

Should You Refinance Now?

So, your current rental property loan has an interest rate of 8 percent and you think that you can now refinance your property at 7 percent. How do you decide whether you should refinance now, taking into account loan costs, the income tax considerations, and the time it will take? If it isn’t advisable to refinance at 7 percent, how low of an interest rate is required before you do refinance?

Introduction                                        

Although there can be different factors involved in refinancing your personal residence compared to a rental property, the following analyses apply to either case for most issues.

Is it advantageous to refinance when rates drop by one-percent as many “experts” claim or is some lesser reduction enough or some greater reduction required?

There are several things to keep in mind when hearing that one-percent is the point at which to refinance. First, many of these experts work for mortgage companies and anticipate refinancing income when making the pronouncement. Second, many of those giving such advice do not take into account the income tax ramifications and those affect everyone differently. Third, knowing the rate drop alone is inadequate for making a decision.

Other factors that must affect the decision include the following:

• The cost of refinancing (including your own time).
• Expected future rates and costs.
• Do you want to pull out cash?
• How long you plan to own the property?
• Long-term goals and objectives, such as:
  • Do you want to maintain high leverage for maximum return on investment?
  • Are you planning to retire in fifteen years and want a free and clear property by then?
  • Your marginal income tax bracket (federal, state, and local), both in the near term and in the long term.

Our brief discussion will be divided into two parts – the short-term and the long-term. For short-term we’re most interested in knowing how long it takes for the reduced interest rate to pay the cost of refinancing. This is particularly important when the property might be sold in the near future, as there is usually no advantage to reducing interest costs for less time than it takes to recoup the costs of refinancing. For long-term, we’re interested in knowing the effect over a longer period of many years.

In order to do analyses one must be able to determine the values of various loan parameters for various points in the lives of loans having various interest rates and terms. This can be done by direct calculation, by utilizing printed amortization tables, or by using various computer calculators. The last method is the easiest and calculators are available on many web sites.

Short-Term

In the “old days” when loans could be transferred to a buyer without the lender’s permission, it was usually advantageous to refinance at even a slightly lower interest rate when one planned to sell the property in the near future, particularly if (1) the remaining term of the existing loan was relatively short and/or (2) interest rates were expected to rise by the time the property might be sold. There was the added advantage that it would open the market for your property to those whose financial statement and/or credit rating was significantly worse than your own. This was because the buyer could assume the existing loan or buy the property subject to that loan without the lender’s permission, without qualifying himself. and at little or no cost. The increased value and marketability of a property with the longer term and/or lower interest rate was significantly greater than the refinance costs.

Today, when almost all loans have enforceable due-on-sale clauses, a buyer assuming an existing loan can expect that the lender will want to adjust the interest rate as well as require loan fees, qualification of the buyer, and maybe even require a new appraisal. In other words, transferring an existing loan to the new buyer is sometimes just as hard and costly, or more so, as the buyer obtaining a new loan. Accordingly, the advantage of a lower rate existing loan is usually negligible or none at all.

So, now the only reason to refinance is because it will save you money during the period of ownership.

Unless interest rates have fallen quite substantially below the rate of your current loan, a first consideration is how long you expect to own the property. This is because you want the savings in interest paid during the remaining period of ownership to at least cover the costs of refinancing. In fact, you probably wouldn’t bother to refinance unless you were going to be significantly ahead of the game, since there is time and effort involved.

Long-Term

If you plan to own the property a long time, the number of months required to pay the costs of refinancing is usually of only secondary importance. Whether it requires 13 months or 33 months is not really as important as what the savings will be over a period of many years.

Summary

The analyses you undertake prior to deciding whether or not to refinance can be simple or complex. The complexity of the analyses depends on many factors. In future articles we will first look further at the basic principles involved in determining the time required to pay the costs of refinancing a property and work through an example analysis to demonstrate those principles.

Additional Information

For additional discussions regarding a wide variety of real estate investing and management issues see our eCourses and Mini Training Guides.