RNB 2010 Rental Forecast Brief

When looking for rentals, today’s renters first evaluate their wants versus their needs. As the economy struggles with high unemployment rates and the future brings economic uncertainties, renters are looking to downsize into the best deal on the market. Renters are no longer willing to rent overpriced, oversized homes coupled with hefty utility bills. Many renters feel they need to take a more conservative approach toward saving more money by spending more time researching local rental rates to negotiate the best deal.

For the past two years, rents and home prices have declined, and investors are capitalizing on this downward trend by purchasing heavily discounted foreclosures. Naturally these investment properties increase Placer County’s rental housing supply, forcing landlords to compete in a rental market with an 8% vacancy rate. As the foreclosure rate slows so will the supply threat, especially because we have seen almost no new construction. Rental rates are directly connected with vacancy and unemployment rates; when the unemployment rate goes down, then vacancy rates go down because more jobs mean more people in the community. A higher population equates to more renters and less housing supply which in turn drives up rental prices (supply & demand).

Until we see the US economy bounce back, rents will continue to remain very low. So what can we do now? Tenants are looking to save as much as possible and willing to downsize. Larger homes on the market (4 to 5 bedrooms) are taking the largest hit, losing anywhere from $100 - $300 per month compared to the last two years. These homes need to be priced right and show in pristine condition. Many landlords believe that an abundance of upgrades will increase their property’s rental value, when in fact, we have found that very few renters are willing to pay a premium for the upgraded homes. Instead, we have found that when compared to a similar sized home with less upgrades, the upgraded home will rent for the same price - but will rent much faster.

Renters are aware of the recession and declining rental prices and have begun to negotiate more and more. Landlords with larger rentals have been hit the hardest as opposed to Landlords who own 3 bedroom 2 bath bread-and-butter properties. These smaller properties still remain attractive and are renting fairly easily. Every day a property sits vacant on the market is money lost. Landlords need to be aware of the current market rents and can supersede negotiations by correctly pricing their properties.

RNB Property Management specializes in the management of single family residential homes. Our agents have the experience and expertise to help you evaluate and accurately price your property so that you can maximize your cash flow.

By Robert A. Ortiz, President/CEO
For more information regarding
RNB Property Management, Inc. please call 916.435.2424 or visit us online at www.RNB2day.com

Legal Issues Landlords Should Consider, to Avoid Lawsuits and Prevent Liability

By R. Brooks Whitehead, JD-MBA, Esq., The Burton Law Firm

Whether you are a seasoned Landlord, or looking to lease your property for the first time, you know it is important to stay up to date on legal issues affecting your rental. However, it is likely that some duties, obligations, and strategies will escape you, even when you try your best to stay current. Even lawyers will acknowledge that the sheer amount of information to learn, know, and retain can be intimidating. Rather than explore one topic in depth, this article will discuss a broad range of legal issues you may want to consider at different stages of the rental process.

Stage 1: Prepping the Property for Rent

So you have a house, condo, or other property – let’s put it on the rental market! Not so fast. There is actually a lot to consider before even listing your property. Do you have adequate insurance? Not just fire and casualty, but depending on the area, flood insurance may be advisable. Is the structure up to code, including those do-it-yourself projects you completed last summer? There is no better way to have your renter rightfully refuse to pay their rent than habitability issues. Have you had your home screened for asbestos or other hazardous materials? Nothing says “landlord liability” like toxic materials used in the construction of homes. In conclusion, make sure to cover your bases before actually putting the property up for rent – it can literally be a lifesaver.

Stage 2: Getting a Tenant

Now that the property is ready to go, should you lease to the first person to call? No – not a good strategy. Even though you may be anxious to get a lease signed and see those rent checks coming in, nothing will cause you bigger headaches than renting to a problematic tenant. It is important to select your new tenant only after a thorough screening process that includes a detailed questionnaire and background check. Make sure to hit important points such as credit, eviction reports, rental history, income, etc. At the same time, be sure to familiarize yourself with the requirements of the Fair Housing Act (and similar laws) to ensure that you do not step on the rights of potential tenants. In addition, make sure you have an appropriate lease agreement that is fair, but protective of your rights. If that sounds like a lot to know and do, that’s because it is. Involving an attorney or hiring a professional property management company may be a better route for those without the time, background, or desire to handle the selection and sign-up process.

Stage 3: During the Lease

If you have gone with a property management company, sit back and watch the professionals work. However, if you’ve decided to go it alone, there are some things you should know and consider. First, your tenant has legally enforceable property rights, including the right of quiet use and enjoyment of the premises. Translation: do not pop over unannounced for Sunday brunch, even if you bring the mimosas. Second, the government has enforceable rights against your property if your tenant is performing illegal acts on the premises. This can include seizure of the rental for sale at auction. Translation: check up every so often on the property, provided that you’ve given proper notice. Third, if the place needs repairs, arrange for them to be made in a timely manner by an experienced and insured independent contractor. Translation: it may be cheap in the short-term to have your cousin do electrical work, but the legal bills will stack up if something goes wrong.

Stage 4: Life After the Lease

So you have come to the point where your tenant’s lease is up and that security deposit is looking awfully attractive – don’t touch it just yet! Make sure that any charges you make against the deposit are proper, that those deductions are itemized and provided to your tenant, and that you cut your tenant a remainder check within the legally required timeline. If your tenant is refusing to leave, or is behind in rent, make sure to strictly follow all unlawful detainer procedures (definitely a time to consult your legal counsel or rely on the expertise of your property manager). Be aware that special laws apply if your tenant has filed bankruptcy – an unfortunate scenario that more and more Landlords may face while the economy still struggles.

Stage 5: Bonus Round

For those of you looking for some more in-depth advice on more complicated issues, your best bet is to consult an attorney, CPA, or both. They will be able to guide you through the mine field. For now consider these bonus points: (1) If you are not actively involved in the management of the property, special “passive activity” tax rules may apply, which affect your ability to write off losses on your rental, (2) If you are mildly concerned with asset protection, or you intend to acquire multiple rentals, you may want to consider creating a “blind trust” for purchasing your properties that provides privacy and some creditor protection. (3) If you are very concerned with strong asset protection, consider a limited liability company (LLC) that will minimize your personal liability in the event of a judgment against you and can play into your estate planning goals.

Conclusion: The issues discussed in this article may sound daunting, but they are all manageable provided you stay involved, informed, and vigilant. However, if any questions or uncertainties arise, you can rarely go wrong with consulting a professional.

Reviewing Your Estate Plan

By Thomas D. Reid, JD, The Burton Law Firm

While many individuals have created an estate plan to protect their family and assets, it is advisable to review an estate plan periodically to ensure one’s needs and wishes will be met upon one’s passing.

Although an estate plan is designed to take care of one’s wishes, certain provisions of the plan may need updating or review to ensure the plan’s effectiveness. Whether one’s appointed representatives have passed away, a change in family relationship, such as a divorce, has occurred, or the birth of a child or grandchild takes place, it is crucial that these provisions are reviewed periodically to ensure the updates in a person’s life are reflected in their estate plan.

There is no set time during which an estate plan review should be conducted. However, it is advisable to review one’s plan when a major change occurs in one’s life, or alternatively, every three years. Failure to review an estate plan regularly can result in, among other things, an agent serving the estate that has fallen out of favor with the Settlor, distributions of the estate against the Settlor’s intent and wishes, contingent guardianship of a newborn not being established, or assets left outside of the trust requiring the courts to probate the estate to change title to the assets.

Our firm is dedicated to ensuring that our clients’ estate planning needs and wishes are met at all times. As such, we ask that if you or anyone you know would like to review your estate plan, give us a call to set up an appointment to meet with our attorneys to ensure you and your family are protected.

For a more in-depth review of this subject, please see: www.lawburton.com news/resources.

The Burton Law Firm
555 University Avenue, Suite #275
Sacramento, CA 95825
Phone: (916) 570-2740 Fax: (916) 570-2744
www.lawburton.com
info@lawburton.com

Tax Planning for the Investor: Like-Kind Exchanges

Most investors do a great job researching and analyzing several properties to ensure they get the property that suits their investment strategy for the best price. Sadly, too many of those same investors allow too much of their hard earned dollars to end up in the hands of the IRS simply because they don’t involve their tax expert before they make investment decisions.

Properties are sold by investors for several reasons. Some want to continue in real estate investment, but want to upgrade their properties, or find the current neighborhood deteriorating. Others want to reduce their investment holdings. For these transactions, there are three ways to significantly avoid paying unnecessary taxes: like-kind exchanges, installment sales, and turning the rental property into your personal residence. This article focuses on like-kind exchanges. Future articles will address installment sales and conversions to personal residences.

When investors decide to upgrade their properties, or sell in an area where the value has peaked and buy where the value is starting to increase, the best way to avoid paying taxes is to do a like-kind exchange. The investor normally has to pay a capital gains tax of up to 24.55% (15% federal and 9.55% state) on the profits from the sale of the property. (And taxes are only going to get higher in the near future.) If your intent is to reinvest in another property, you can defer those taxes by doing a like-kind exchange.

By going through a qualified accommodator, who holds the money from the sale of the investor’s property, no taxes are owed, as long as no money or other value is received by the seller. This allows you to use all of your investment for the new property rather than having to settle for less due to paying taxes.

The timing has to be done to IRS specifications. Make sure your real estate agent has done several exchanges and that the accommodator has a good reputation and is financially solid. Some accommodators have recently fallen on difficult times, causing a freeze on investor money which has resulted in failed exchanges and taxes owed!

Richard Lagomarsino, EA is the president of FTMS Inc, and is an enrolled agent who is able to represent and help solve clients’ problems before the IRS. If you wish to avoid or prevent paying unnecessary taxes, call 916-773-1200 or visit www.ftms.net.

Tenancies in Common for Today’s Real Estate Investor

By The Burton Law Firm

This article is for informational purposes only. Nothing in this article should be understood as legal advice, and no attorney-client relationship is created by it or the information it contains. Consult with a licensed attorney if you require assistance in a legal matter. This article is protected by United States copyright law and may not be reproduced, distributed, transmitted, displayed, published or broadcast without the prior written permission of The Burton Law Firm. You may not alter or remove any trademark, copyright or other notice from copies of the content.

The tenancy in common (TIC) can be a very useful form of co-ownership. Tenancies in common are the “default” form of joint property ownership in California, so if the title documents do not specify a different form of joint ownership, it is generally presumed that a tenancy in common exists. However, a person who owns land outright may create a TIC in order to pass the property to another person for estate planning purposes.

Features of Tenancies in Common

A tenancy in common is one way of taking title to real property. In a TIC, multiple owners each hold title to an undivided interest in the whole property. Each owner has a right to use and enjoy the entire property. So if one owner holds 1% of the entire title, that owner may utilize the entire property for his business. However, that owner may not destroy or ruin the value of the land or its utility for other co-owners. If he or she does so, that owner may be liable to the other co-owners. Tenants in common do not have a right of survivorship with one another. Thus, if one co-tenant dies, the deceased co-tenant’s interest passes by testamentary instrument or operation of law to the co-tenant’s beneficiaries or heirs. The other co-tenants do not automatically acquire the interest, as would occur in a joint tenancy with right of survivorship.

TICs in Estate Planning

TICs can be used as an estate planning device. In this context, TICs let a donor transfer a low-value interest in high-value property to another person during the donor’s lifetime. With careful planning, this can reduce the donor’s taxable estate at death while minimizing gift tax consequences during life.

The TIC works in the following manner. The donor already owns a piece of property and wants to pass it on, usually to a family member. The donor would give a tenancy in common interest to a new owner (the donee). A tenancy in common interest is not as valuable as a fee simple interest in the entire property due to the reduced marketability of the interest, the limited freedom of use of the property, and potential limitations on transferring the interest to a third party. By creating a tenancy in common interest valued under the annual gift tax exclusion amount, the donor may transfer the TIC interest without incurring gift taxes. And since the value of the gift is lower than the value of the piece of property actually transferred, the donor is removing a large portion. Therefore, the donor transfers a low-value interest in a high-value property.

For a rough example, assume that D wants to transfer a TIC interest in real property to D’s grandchildren. The property is worth $250,000. D creates ten TIC interests, one for each grandchild, and ensures that each interest has a discounted value equal to the annual gift tax exclusion amount ($12,000 in 2007). D gives all ten interests to the grandchildren, which totals $120,000 in gifts. But due to the devaluation of TIC interests, the ten TIC interests actually dispose of a much higher value of property, perhaps around $180,000. Therefore, D has reduced his taxable estate by $180,000 while only making $120,000 in gifts and not incurring any gift tax. Using the TIC has allowed the donor to pass on property which has been assigned a greatly discounted value.

There are some disadvantages to using a TIC, however. First, the donor gives up control over the portion of the property transferred as a TIC interest. If the donor desires the interest back, he or she must purchase it from the donee. Second, once the donee receives his or her interest, the donee is free to treat the property as the donee sees fit. The donee could use the property for a purpose not intended or even contemplated by the donor. Third, the donee is free to transfer the TIC interest to a third party. This could prove a rude surprise for the donor, who no longer is dealing with a trusted donee, and instead must now deal with a complete stranger. Fourth, the donee could sue for partition of the property and a court could order that the property be either physically separated, with each co-tenant receiving his or her share and dissolving the tenancy, or that the property be sold and the proceeds divided according to the respective interests of the co-tenants. Finally, the donor may recognize taxable gain on the value of the property transferred to the donee, and thus gift taxes may be owed. However, by utilizing the annual gift tax exclusion amount, this need not be of great concern to the donor.

Conclusion

You should speak with an attorney before creating a tenancy in common to serve your tax or estate planning legal needs. Although a TIC might be right for your situation, other legal options will often provide greater flexibility for you and your family while still meeting your planning objectives.


For a more in depth review of this subject, please see: www.lawburton.com, news/resources.

The Burton Law Firm
555 University Avenue, Suite #275
Sacramento, CA 95825
Phone: (916) 570-2740 Fax: (916) 570-2744
www.lawburton.com
info@lawburton.com

Disability Guidelines - Part 2 (Who must comply and who does and does not qualify as disabled)

In our last article we began discussion of the May 17, 2007 Department of Justice disability guidelines. The new guidelines state that “Any person or entity engaging in prohibited conduct – i.e., refusing to make reasonable accommodations in rules, policies, practices, or services, when such accommodations may be necessary to afford a person with a disability an equal opportunity to use and enjoy a dwelling – may be held liable unless they fall within an exception to the Act’s coverage. Courts have applied the Act to individuals, corporations, associations and others involved in the provision of housing and residential lending, including property owners, housing managers, homeowners and condominium associations and others involved in the provision of housing and residential lending, including property owners, housing managers, homeowners and condominium associations, lenders, real estate agents, and brokerage services. Courts have also applied the Act to state and local governments.
Under specific exceptions to the Fair Housing Act, the reasonable accommodation requirements of the Act do not apply to a private individual owner who sells his own home so long as he (1) does not own more than three single-family homes; (2) does not use a real estate agent and does not employ any discriminatory advertising or notices; (3) has not engaged in a similar sale of a home within a 24-month period; and (4) is not in the business of selling or renting dwellings. The reasonable accommodation requirements of the Fair Housing Act also do not apply to owner-occupied buildings that have four or fewer dwelling units.”

Who qualifies as a “person with disability”

In the new guidelines it states that “The Act defines a person with a disability to include (1) individuals with a physical or mental impairment that substantially limits one or more major life activities; (2) individuals who are regarded as having such an impairment; and (3) individuals with a record of such an impairment.
The term ‘physical impairment’ includes, but is not limited to, such diseases and conditions as orthopedic, visual, speech and hearing impairments, cerebral palsy, autism, epilepsy, muscular dystrophy, multiple sclerosis, cancer, heart disease, diabetes, Human Immunodeficiency Virus infection, mental retardation, emotional illness, drug addiction (other than addiction caused by current, illegal use of a controlled substance) and alcoholism.
The term ‘substantially limits’ suggests that the limitation is ‘significant’ or ‘to large decree.’
The term ‘major life activity’ means those activities that are of central importance to daily life, such as seeing, hearing, walking, breathing, performing manual tasks, caring for one’s self, learning and speaking. This list of major life activities is not exhaustive.”

Who does not qualify

The Act states that “juvenile offenders, sex offenders, by virtue of their status, are not persons with disabilities protected by the Act. Similarly, while the Act does protect persons who are recovering from substance abuse, it does not protect persons who are currently engaging in the current illegal use of controlled substances. Additionally, the Act does not protect an individual with a disability whose tenancy would constitute a ‘direct threat’ to the health or safety of other individuals or result in substantial physical damage to the property of others unless the threat can be eliminated or significantly reduced by reasonable accommodation.
The Act does not allow for exclusion of individuals based upon fear, speculation, or stereotype about a particular disability or persons with disabilities in general. A determination that an individual poses a direct threat must rely on an individualized assessment that is based on reliable objective evidence (e.g. current conduct, or a recent history of overt acts). The assessment must consider (1) the nature, duration, and severity of the risk of injury; (2) the probability that injury will actually occur; and (3) whether there are any reasonable accommodations that will eliminate the direct threat. Consequently, in evaluating a recent history of overt acts, a provider must take into account whether the individual has received intervening treatment of medication that has eliminated the direct threat (i.e. significant risk of substantial harm). In such a situation, the provider may request that the individual document how the circumstances have changed so that he no longer poses a direct threat. A provider may also obtain satisfactory assurances that the individual will not pose a direct threat during the tenancy. The housing provider must have reliable, objective evidence that a person with a disability poses a direct threat before excluding him from housing on that basis.”

Gary Link, Attorney, is President of the Law Office of Gary L. Link, Inc. Since 1979, Mr. Link has represented landlords in over 35,000 eviction cases and litigated over 10,000 eviction trials. He is a member of the California Apartment Association, the Rental Housing Association, as well as a member of the local, state, and national bar associations.

For questions relating to this article, call the law office at 916-447-8101. The information in this article is applicable as of 2007.

Diamonds in the Rough

Conditions favorable for income property purchase

Current conditions in the real estate market are resulting in favorable circumstances for those looking to buy income property. As more subprime loans reset in 2008, anticipate another wave of short sales and foreclosures to appear, and with the Feds announcing that their priority is the economy, expect interest rates to stay relatively low.

Low interest rates and almost bottom-out prices are creating new investment opportunities and a healthy correction for the real estate industry. Investors have no trouble finding bread and butter properties that create cash-flow with a down payment of 20% or less. The only problem is that the best of these properties under $250k go pending very quickly, and investors are competing with multiple offers that are often above asking price and sometimes involve all cash.

As homeowners lose their homes, how is the rental market affected? We all require the basic necessities of life, and one of them is shelter. With the rise of foreclosures, the transition from homeowner to renter has become more common, and it’s been difficult not only on FICO scores, but on many egos. Most homeowners refuse to move out of their 2500 sq ft home into an apartment or condo, preferring to rent a house, and even then, most will not even consider anything under 1300 sq ft. These new renters are willing to pay a premium for a house that is clean and shows well. 

FICO: More than a number

Screening Tenants 

There may be some concern, as a landlord, that if potential renters defaulted on their mortgage, they will default on their rent. The truth of the situation is, the majority of transitioning homeowners were doing just fine paying their mortgage until their loan reset.  Their new monthly payments almost doubled, while their income remained unchanged; one can easily see how their new mortgage payments became an issue for them.

So how do you screen these tenants? Rather than focusing on the FICO score, look at their other trade lines, such as car loans, credit cards, etc. If the majority of their trades are in good standing with zero to very few 30, 60 and 90 day late payments, and/or they have only a foreclosure, you may be screening a sound prospective tenant who has a history of paying on time. On the other hand, unfortunately those who have tried to survive through a foreclosure nightmare by sacrificing their trades in good standing have made it almost impossible to qualify for a rental. So, if you decide to consider an applicant who has foreclosed, don’t neglect to verify your other objective rental standards. Although many have made a huge financial mistake that has cost them homeownership, we have found that many ex-homeowners still take pride in their homes.

Optimistic Outlook

With a struggling economy and record-setting foreclosures, many paint a picture of bleak times. For those with a more optimistic viewpoint, looking to purchase a new income property or fill a vacant one, there are many “diamonds” waiting to be found. The current real estate market, as with the rest of the economy, will undergo changes, but for those with an optimistic view, the current inflation can be looked upon as an opportunity that can include good prospects in buying rental property at favorable interest rates, along with an increase in rents.

By Robert A. Ortiz, President/CEO
For more information regarding
RNB Property Management, Inc. please call 916-435-2424 or visit us online at
www.RNB2day.com