Ask Realty Times - January 14, 2005
by Peter G. Miller
Question: I have five homes including my residence. I rent four and break even. Recently I have seen a huge gain in what they are worth on the market. I did an accurate net worth and realize I have over $1.6 million in net equity spread among the five. Should I start cashing out and how do I do this without seeing a huge capital gains hit? I really am stunned at what they are worth. I am now confused. Never in my wildest dream did I figure on this. Answer: First, congratulations -- you've done well. If you sell the properties you will be subject to a capital gains tax -- thus your equity will be reduced. For details, see a tax professional. The good news is that there are some practical alternatives. First, if you're just breaking even in terms of cashflow can your properties support more debt? Can you raise the rents -- this seems justified given the increased value of the property. With more rent, ownership will be more attractive and, if you want, you'll be able to refinance the properties to buy additional units. Speak with lenders to see what financing might be available. Second, consider exchanging the investment properties for other, more attractive units. Real estate brokers specializing in property exchanges can provide advice. Question: If one purchases a property under 100 percent financing, is it still a good idea to cover such property under a will? Would one be able to at least specify who should take over the payments, or at least be consulted to do so? Answer: A will, and a living will, should be required for every property owner. That you have bought with no money down means only that you have no equity in the property at the moment -- but you may in the future. As to what you can stipulate in a will, you can assign your assets as you elect. However, if there is no will the state government will divide your assets as it elects, an event which is unlikely to conform with your wishes. For specifics, speak with a probate attorney in your community. Question: We are considering changing from an electric heat pump system to a propane furnace and electric A/C. How will this affect the price of our home? Answer: Before converting you first need to see if you will have utility bill reductions as a result. To compare costs contact the local utility company. Note that part of the answer depends on your location, general energy needs in your community and the price fluctuations of electricity and gas. If the utility savings are marginal then the improvement may not add much to the home's re-sale value. If you're thinking of selling in the short-term an alternative approach might be to offer the home for sale with a credit to the purchasers at closing equal to the cost of a new heating and air conditioning system. Of course, if you have a hot market you may not need to offer anything. Local real estate brokers can provide specific marketing advice. Question: I recently passed the Federal and State Realtor licensing exam and am trying to decide what broker to work for. How can I evaluate a real estate broker and where can I find information on them? Answer: You did not become a Realtor by virtue of passing a state licensure exam -- you can only become a Realtor by joining the National Association of Realtors. No federal license is required to become a real estate salesperson or a NAR member. You are best served by looking for a broker with an extensive training or mentoring program, or both. And you may want to consider first working as an assistant to gain more experience. Question: I'm interested in buying a property in the downtown core in a major metro area. What are some of the questions to ask? Answer: Are the units rented? Are the rents being paid in a full and timely manner? Has the property been maintained or has maintenance been deferred? Does the property meet all building code requirements? Do the units have separate utility meters? Have lead paint notices been provided? Is the property subject to rent control? Etc. Question: We would like to buy a New York City apartment -- two bedrooms -- on the Upper West Side, but know the market is overvalued. Should we continue to rent and wait for prices to drop, or should we buy now in anticipation of the NYC market never going down? Answer: The question of value comes up constantly. How can anyone know that a market is overvalued? If properties sell and prices rise, then maybe apartments are just selling for their perceived worth. Whether that worth will rise or fall in the future is both unknown and unknowable. Real estate is a commodity. Prices can rise, fall or stagnate and there can be no assurance as to how the market will move next year or at anytime. Question: My question in short, is relative to interest-only financing and principal reduction. I read something that led me to believe that at some point in the life of an interest-only loan, the principal begins to be paid. Is that true or is the loan essentially "renting from the bank" forever? Answer: Many interest-only loans are set up so that the mortgage is interest-only during the first 10 years and then self-amortizing for the balance of the loan term. There are two concerns here: First, if you have a loan which is interest-only for 10 years and sell the home after eight years, the loan balance has not been reduced and must be repaid from the sale proceeds of the property -- this assumes that the value of the property has risen by enough to pay the loan plus selling expenses. The second issue is that there can be a substantial difference between the initial payments when the loan is interest-only and the monthly payments when the loan begins to amortize. For an example, see "The Beauty Of Interest-Only Loans -- And The Beast."
This column is designed to provide accurate and authoritative information in regard to the subject matter covered. It is made available with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services. If legal services or other expert assistance is required, the services of a competent professional person should be sought. | 
