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Make the most of your home investment

Benjamin Moore
Ask Our Broker Secrets to
Successful
Residential
Leasing
‘Hard’ prepayment penalty.
Pondering the purchase
‘Soft’ prepayment penalty. of a rental property?
What’s the difference? Here’s what to consider
Q: What’s the difference between a BY CHARLES SCUTT
“hard” prepayment penalty and a “soft” CTW Features
one?
THINK YOU’VE GOT WHAT IT
takes to be a successful land-
A: According to Carolyn Warren in the lord? This role requires more
book “Mortgage Rip-Offs and Money Savers than simply knocking on doors
(Wiley, 2004), a “hard” prepayment penalty every first of the month to col-
will be charged if you sell or refinance the property within lect the rent. If you’re consider-
a given period.A “soft” prepayment penalty will apply only ing the purchase of an apart-
if you refinance. In other words, you can sell without a ment building or other residen-
tial property you’re looking to
penalty at any time. For specifics, ask your loan officer and lease out, it’s important to
check your Truth in Lending statement. know what’s required.
The first thing to consider is
Q: Can you comment on quickie pay-down sys- your personality and tolerance
tems for home mortgages. Would you recommend for risk, says Tonja Demoff,
them? founder of Tonja Demoff
Companies, a real estate invest-
ment-strategy provider in Las
A: I would not recommend Vegas.
any “program” involving
third-party payments.
Why use the “Do you have the personali-
ty it takes to be a landlord? I
It often pays to accelerate
loan payoffs to reduce over-
money for a would consider this to be the
most important determining
factor when making the deci-
all interest costs. For program instead sion to purchase any rental
instance, a $150,000 fixed- property,” she says.“Although as
rate mortgage over 30 years of on your loan? an owner you can hire a prop-
at 6.25 percent will have a erty manager, you will always
total potential interest cost need to be involved in your
of $182,487. Pay off the same loan in 15 years and the properties in order to have a
Blue green: Painting with low-VOC paint gives any room – of any color – a sense of green. profitable investment.”
interest bill falls to $81,504 – a savings of more than Demoff says the right candi-
$100,000. (In practice, savings would be larger because a date is an entrepreneurial-mind-
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.
Green Machine Gaining Steam ed person with disposable
income, a good chunk of cash
reserves, and someone who
Prepaying a mortgage raises several questions that bor- Bring your home up to speed in the age of eco-friendly can handle and will not overre-
act to wear and tear on the
rowers should carefully review: property.
• Can you prepay your loan in whole or in part without BY BARBARA BALLINGER environmentally smart is healthi- While it’s tough to guarantee “This candidate would also
penalty? If yes, you can just increase your monthly payment CTW Features er for you, your family and pets a specific payback and time be required to have a high
and cut years off the mortgage term and, thus, big money because green items have few or frame to recoup dollars, green degree of energy and strength,

B
off the interest bill. eing good to the planet has
• Does it make sense to prepay a mortgage? Are there become a much more pop-
ular, mainstream trend, in
places where you can put your money and earn more part because there are so many
interest with as little risk? Of course, you also can divide easy ways to go green.You can
your surplus dollars, pay down your mortgage and invest in recycle and make minimal
stocks, bonds or whatever. changes in what you do every day:
• If you’re considering a mortgage-cost reduction pro- use less water when you shower,
gram, will you have to pay a fee to someone else? If the for instance, or buy green building
materials, furnishings and prod-
answer is yes, then the money you spend for such a “serv- ucts that consume fewer natural
ice” is money that is not being used to reduce your loan resources, are produced closer to
balance. home and are made in ways that
are environmentally friendly.
See ASK OUR BROKER, Page 2 But another prime reason sus-
tainability is surging is that being
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 Web-
based clearinghouse for all
things green.
Yet, concerns remain that tak-
ing this course initially will be
more expensive, not offer a suffi-
cient payback in the future and
will be time-consuming to pur-
sue.
Wrong on all accounts.
advocates say doing so will
prove financially worthwhile.
Moreover, some choices are no
more expensive than their non-
green 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 certi-
fied by the green council
Leadership in Energy &
Environmental Design, which is
dubbed EcoManor.
See GREEN MACHINE Page 2
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 leas-
ing apartments to servicing the
renters, handling funds and
tracking rent payment and
payables to taking care of
immediate and preventive
See LEASING Page 2

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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 retain-
ing gray water in a cistern for
washing clothes and watering.
I’m also saving money because of
tax abatements since I’m generat-
ing 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 incen-
tives 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 elec-
tricity you use, says Seydel.
LEASING
The road to landlord
CONTINUED FROM PAGE 1
maintenance needs – requires a
wealth of experience and knowl-
edge,” says Dennis Lee, principal
of The Apogee Companies, a real
estate management provider, in
Boynton Beach, Fla.This job
“requires a strong personal con-
stitution to assure the ability to
survive the varying difficult chal-
lenges that may be encountered.”
Equally important as your per-
sonal 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 mortgage-
loan principal and interest, real
estate taxes, insurance, mainte-
nance and miscellaneous expens-
es?
“If the purchase is purely for
income purposes, the numbers
are very important,” Daniels says.
“If it’s partly for long-term invest-
ment, a positive cash flow may
not be as important to the pur-
chaser 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 pack-
aging 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 pack-
aging, 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 every-
thing from organic sheets that
contain no chemicals to shower
aerators that conserve water, tan-
kless water heaters that heat
water on demand and low- or no-
VOC paints that have few or no
toxic chemicals, which can cause
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, where-
as a purchaser who only invests 5
percent of the purchase price
will have a much larger cash flow
burden.”
Next, what you need to deter-
mine is what type of property
you want to own, says Daniels.
“Will it be a low- to middle-
income or a middle- to high-
income 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 practi-
cality 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 dili-
gence be prepared to incur a vari-
ety of expenses – including the
respiratory, skin and eye irrita-
tion, 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 spe-
cific 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 prac-
tice 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 pro-
gram 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
hiring of a property-inspection
service and professional apprais-
er (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 establish-
ing a network of maintenance
people or retain a property man-
ager 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 strict-
ly 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 neigh-
borhood may generate more net
income than a more attractive
property in a more upscale neigh-
borhood.”
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
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green-building standard that
reflects the architecture, geogra-
phy 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 commit-
ment than today.“Don’t drink
from plastic cups; sleep on natu-
ral 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.
© CTW Features
purchased by investors intending
to either ‘flip’ the units or other-
wise 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 invest-
ment, and get an attorney to
review all contracts and agree-
ments. 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 proper-
ty. 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 extreme-
ly difficult to recoup the money
you could have saved if you
pushed for a better bargain.
© CTW Features
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 middle-
men 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 some-
one give a second look to a home that has a tainted loca-
tion 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 bro-
kers. 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 nonthreat-
ened 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 peter@ctwfeatures.com