Well chosen, well managed rental properties can become shining stars in an investor portfolio. The keys to success include doing your homework and making sure all the numbers work.

Real Estate Investment Considerations:

1. Taxes Incentives
Some investors can use deductions from rental properties to offset wage income and/or reduce taxes by showing rental income offset by appropriate expenses and deductions.

Actual financing, managing, and/or operating costs incurred can be deducted (e.g., mortgage interest, real estate taxes, insurance, maintenance, repairs, property management fees, travel, advertising and/or utilities). Additionally, depreciation, improvements, and/or other deductions-deferrals-exemptions may be deducted per tax code eligibilities.

2. Cash Flow
Positive cash flow is when revenues exceed total expenses paid (e.g., mortgage, taxes, insurance, maintenance and other carrying costs) and can be considered from either “pre” or “after” tax. A pretax positive cash flow gets treated as current income. A negative pretax flow can result in a positive after-tax cash flow, generally resulting from depreciation deductions. Other offsets to income and/or shelters are provided given certain eligibility tests are met.

Untimely payments and/or property damage are not desirable tenant qualities - conduct thorough credit, employment, and landlord checks/references - a strong lease and security deposit will also help keep all involved on the right track.

3. Leverage - OPM
OPM is “Other Peoples Money” and refers to when you borrow money to increase equity by preserving cash and borrowing to cover a major chunk of the purchase price - equity is the difference between market value today and outstanding mortgage owed.

For instance, consider the profit-to-investment ratio (total profit divided by total investment costs) - assume that a dollar invested returns $1.50, thus a 50% return - not bad right, but now consider if you had invested the same dollar with a seventy cent mortgage (i.e., you put down a 30 cent down payment) - you would have approximately 167% return (i.e., 50 cent total profit divided by 30 cents invested - note this example assumes no carrying costs but you can get the picture).

4. Equity Growth
Each mortgage payment you make is a payment of principal to yourself - you build as your mortgage principal shrinks.

5. What Makes a Good Property Good

• Fits comfortably with surroundings, typical not unusual, in a well maintained neighborhood
• Ready access to public transportation and/or highways
• With a style that appeals to most amount of renters in that price range
• Low maintenance or repairs, unless objective is fixer-upper
• One where carrying costs can be absorbed during temporary vacancies
• Undervalued with motivated sellers

6. A Checklist Reminder:

• Run the numbers
• Benchmark last rent increases and tax assessments
• Confirm insurance and utility fees
• Check with experts (accountants, attorneys, Realtors)
• Buyer Beware - inspect, inspect, inspect

When selling property in a market where homes are in demand and prices are high, sellers can become carried away by the chance to make a huge profit, and make the mistake of overpricing their homes.  Sellers may think, “what is wrong with making as much as I can on the sale of my home?”  The answer lies within the mortgage loan process.

Lenders who are financing a mortgage loan will have the property appraised to ensure that it is worth what they will be loaning the buyer to make the purchase.  If the appraisal comes in at less than a seller’s asking price, the lender associates a greater level of risk with the loan.  In case the buyer defaults, the lender will not be able to recover the loss. Many lenders refuse to make the loan if the appraisal does not match the offer.

Before you can list your property for sale you may want to have a professional appraiser determine its real value, so your asking price is reasonable.

Standard real estate purchase agreements usually contain language that releases the purchaser from an agreement if they are unable to get financing within a specified period of time, with a full return of their earnest money deposit.  If you are buying a home, you should read the financing clause carefully and be sure that you fully understand the terms of the agreement.

You are usually required to apply for your loan promptly and to comply with requests from the lender for any documentation needed to complete the loan application.  The contract will also set a time limit by which you must have loan approval.  If your lender cannot meet the financing deadline and needs additional time to complete the loan, you must ask the sellers for a written extension.

The IRS has given specific guidelines for structuring a reverse 1031 like-kind property exchange.  Because this type of transaction is complicated, it is important to seek assistance from qualified real estate, legal and tax experts before entering into such an arrangement.

The taxpayer may acquire their like-kind replacement property first and then sell the relinquished property later. A person selling one property can identify and purchase a replacement property, and then “park” it with an Exchange Accommodation Titleholder (EAT), who acquires and holds legal title to the taxpayer’s property on their behalf.

A Qualified Intermediary (QI) facilitates the 1031 tax-deferred, like-kind exchange.  It is recommended that the EAT and the QI be different entities, but it is not required.  Taxpayers must not have actual possession or control over their 1031 exchange funds during the exchange period.

The EAT may hold (park) title to either the replacement property or relinquished property, depending on a number of complex factors within each individual transaction. The most commonly used approach is called “Exchange Last”, where the EAT acquires and holds title to the taxpayer’s replacement property until the relinquished (original) property is sold.  The taxpayer must identify the relinquished property within 45 calendar days after transferring title of the replacement property to the EAT. The Reverse 1031 Exchange must be completed within 180 days.

When parking title to the replacement property with the Exchange Accommodation Titleholder (EAT) is not feasible, title to the relinquished property is parked with the EAT in the “Exchange First” method.  When the seller transfers the relinquished property to the EAT, they do not need to identify a replacement property immediately, because the simultaneous exchange takes place at the beginning of the transaction.  When they find a buyer for the relinquished property, the EAT direct deeds the property to the buyer and transfers any net sales proceeds to the seller. The Reverse 1031 Exchange must be completed within 180 days.

Fees for Reverse Exchanges are higher than fees for traditional “Forward Delayed” 1031 exchanges, because there is extensive documentation and additional risk assumed by the EAT in taking title to the “parked” property.  Sellers will also have to pay additional title insurance, environmental, loan, legal, property, casualty and liability insurance, and escrow/closing costs.

Although reverse 1031 exchanges are more expensive than traditional, “Forward Delayed” 1031 Exchanges, they can save taxpayers thousands of dollars in capital gains tax.

A real estate exchange under section 1031 of the IRS code is governed by strict guidelines that control how taxpayers may sell one property and defer taxes by acquiring another “replacement” property.

In most 1031 exchanges, referred to as “delayed” or “forward” exchanges, the taxpayer must identify the like kind replacement property within 45 days after the close of escrow on the relinquished property.

However, there is another type of 1031 exchange, called the “reverse” exchange, in which the taxpayer is allowed to acquire their replacement property before selling the relinquished property.

A reverse 1031 exchange is a tax deferred, like kind exchange that is especially useful in markets where the inventory of properties is low.

The taxpayer must complete the reverse exchange within 180 days after purchasing and “parking” the replacement property with an Exchange Accommodation Titleholder (EAT).

A reverse 1031 exchange can save you thousands of dollars in capital gains tax, but the legal requirements are very complex. Sellers wishing to make this kind of tax-deferred exchange should consult with an experienced real estate agent and tax attorney before proceeding.

Buyers walk into your home and fall in love with it. There is one problem–they will have to sell their home before they can buy yours. Their offer contains a contingency clause that makes their purchase dependent upon selling their present home. Should you accept such an offer?

Your decision should be based on several factors.

Is their home being professionally marketed at this time, or are they trying to sell it themselves (a risky proposition!)?

How long has it been on the market? If the house doesn’t sell, can the buyers take out a bridge loan or make other arrangements to complete the purchase?

How important is timing for you?

Will the buyers agree to let you continue marketing your home and accept a noncontingent contract (and void theirs) if their house does not sell?

There should be a release clause in your contract that allows you to accept a better offer should one come along.

Contingent contracts often work out well, but a professional realtor can help you weigh the pros and cons.

The laws have changed and now every American is entitled to one free credit report from either Experian, TransUnion or Equifax yearly, under the Fair and Accurate Credit Transactions Act.

Get your free report at www.annualcreditreport.com.

Alternatively, if you are uncomfortable giving out your social security number online, mail your request to Annual Credit Report Request Service, Box 105281, Atlanta Ga. 30348-5281 … or call them at 877.322 8228.

As fyi, a credit score determines how high your interest rate will be when you are borrowing. And, a good score is 850 – 720.

Always talk to a loan officer before shopping for a home. This will save you time during the house hunting process. The bank representative will tell you confidentially and without cost how you fair in the marketplace and can give you a letter of pre qualification.

This is critical in a strong housing market such as what we experience in the greater New York area. When you are bidding on a home, the seller wants to know “who said these people qualify for my home?”

If we get multiple bids the person with the qualification letter gets more attention because they have the credibility.

Principal, interest, taxes, insurance (PITI) - these are the four elements that make up the typical monthly mortgage payment - also known as “carrying charges.”

Here’s a do-it-yourself method for determining how much a lender might approve:

1. Calculate your monthly gross income - the amount you make before deductions - add spouses monthly gross income, if any, and then multiply the total monthly gross income by 36% - this is known as the debt ratio.

2. Subtract long term monthly debts (e.g., 12 months and over) such as alimony, car loan payments, child support, personal loans, regular payments toward a credit card balance - then subtract a monthly amount for anticipated taxes and homeowners’ insurance - the result is a ballpark monthly payment of PITI (principal, interest, taxes, insurance) you can afford to pay on a mortgage - this is generally how lenders determine what borrows can afford after a 10% down payment - some lenders vary ratios (e.g., 33% with a 5% down payment; 38% with a 20% down payment) - although lenders use PITI, it is wise to allow for maintenance, utility costs and any homeowners or condominium fees.

3. Often lenders calculate a housing ratio - typically, 28% of monthly gross income (does not include other debts) - and may be expressed as 28/36 - where the first number refers to the maximum mortgage payment you qualify for (e.g., 28% of gross income), and the second number is maximum total debt level (e.g., PITI plus monthly debts should not exceed 36% of gross income).

FYI - range of house you can afford is the combined qualified loan amount plus down payment; also, remember to set aside money for closing fees (e.g., points).