Stories of Interest for April 2012

I post a lot of interesting articles to Twitter, but a few articles that have stood out for me this month are:

From April 12th:
 

Capital Growth AND Capital Gains!

Real Estate in Cambodia.

We focus on real estate in Australia, because that is were we are based.  I thought for a change it would be interesting to choose a country that not too many people are familiar with, and look at their investment and real estate market.

What do you know about Cambodia? Unfortunately most people are only aware of what happened in the 1970's  when millions of people were living in poverty, starvation was rampant, and hideous crimes were committed against it's citizens. These were very dark days.

Does A Holiday Rental Make Sense?

Having a rental property that you rent out full time makes sense, but what about a holiday home? A place where there will be a good percentage of the year where it's vacant?  Should you consider it an investment or is it more of a luxury?

It is commonly believed that it isn't a smart investment, but if you love the place and you will use it most of all, then maybe you are on the right track.  Lets look at some ways make the most out of the investment/luxury.

• Buy what you can afford. Makes sense for all investments really. But don't count on the income from the property to help pay for it. 

Don't Own It, Rent It!

So when you read the title, did you think?: 'No you're wrong! You're throwing money away when you rent!' Or  were you thinking: 'Yes! Renting gives me more flexibility!'

On Linked In there was a great discussion on this very issue, which made me think about the real benefits of renting your primary residence. I won't talk about investment properties, because, well, the point of buying a rental property, is so that someone will rent it off you!

So what are the benefits of renting your home, rather than owning it?

What to Look for When Renting a House.

When you are looking for a new house to rent, it's a wise idea to have a checklist handy so you don't have to remember everything.  Renting an apartment can be stressful, especially if time and money are limited. It's not uncommon for people to leap before they look just to relieve the pressure of apartment hunting. Selecting a place to live is important. If you're unhappy with your home, it can have a significant negative impact on your life. 

So, once you've determined the place is in your price range, take a pad and pen to make notes as you consider the following:

Australian Property Values for the Next 8 Years.

Residex has calculated what is likely to happen to property values over the next 8 years. Some areas are looking at a 6% increase, where other areas will grow under .5%. So what are the coveted areas?

Your Investment Property wrote an article March 20th discussing the findings. Here it is:

Which of Australia’s property markets have been predicted to achieve average annual growth of 6%-plus over the next eight years? And which ones are expected to achieve a paltry 0.41% per year on average? Read on for the latest predictions from Residex.

Rent-to-Own

Rent-to-Own is a real estate agreement that combines a rental lease and a purchase agreement in one. The agreement states that the tenant of the property has the option to purchase it at a specified price and date in the future. This arrangement is also known as a lease-to-purchase option, lease-option, owner-financing or lease-to-own. This type of financing is not new, it has been used for a long time in Australia, but its popularity goes through cycles. When there is a downturn in the market and it's harder for home buyers and investors to get loans then this type of financing become very popular. It is a great way onto the property ladder if you need a longer period of time to save for a deposit, your credit is bad or you have other circumstances such being a new immigrant.

How does it work?
It's very important to use a lawyer to create a legal contract as they can become quite sticky if you don't understand all the details. A rent-to-own contract usually focuses heavily on the option-to-purchase section and is only fairly vague about the lease portion of the contract. This why you will need to pair it with a separate rental agreement to work out the finer details of the lease, or develop a comprehensive contract that you understand. The lease-to-own agreement is a good deal for the buyer, but you have to pay for the privilege to stay in a place and reserve the option to buy it at a fixed price. The buyer pays extra rent (rent premium) and also pays a lump sum fee (option fee) for the option to purchase the property.

So before any fees are paid, the buyer and seller have to agree on the selling price of the property. This agreed price is fixed, regardless of what the property market is doing at the time the option to buy is exercised. i.e. When it is time for the buyer/renter to either purchase the property or not. This period is usually between 1-3 years, which will also be the duration of the rental lease.

For example: Let’s say the buyer/renter and seller we have agreed to a sale price of $500,000 and an option period of 2 years. That means that buyer/renter will first rent the house for 2 years and once the 2 years is up, he or she will have the right to buy the house for $500,000 (regardless of whether housing prices have risen or fallen during that 2 years). But there is a catch. The buyer/renter must pay a fee to secure this price and contract.  This fee is often called an 'option fee', but it can be called other things, so make sure you understand this in the contract. It is usually 1-5% of the property's sale price. It is a non-refundable fee! If the buyer/renter chooses to go ahead and buy the property, that fee will become part of the down payment and the buyer/renter will need to find the remaining portion of property. If the buyer/renter decides to NOT go ahead with the sale, the seller will keep the non-refundable fee.

The rent premium portion of the agreement is that the buyer/renter pays higher-than- market rate -rent and the difference will go towards the purchase price of the house if the buyer/renter goes ahead and buys the property. So if you are interested in a $100,000 property and it normally rents for $1,000 a month, you could agree to a rent premium of $200 and lease period of 2 years.  This means the buyer will be paying $1,200 each month for 2 years. If at the end of the period the house is bought then the rent premium ($2,400) will go towards the total selling price so the buyer now owes the seller $97,600. But if the property sales does not go ahead you usually do not get this back, unless you have negotiated with the seller in the original contract.

It's important to note that at the time of the final purchase of the property and securing a mortgage with a bank or a mortgage company, that the finance company will have it's own guidelines of what can be applied to the down payment or the purchase. Typically banks only allow an amount that is above and beyond market rent to be considered for a down payment. In that case, the lease-option works as an automatic savings plan for the tenant.

Now on to the advantages and disadvantages.

The Ups

• Renters are able to put money towards the equity of their home.
• Renters are able to overcome situations that have prevented them from getting a traditional mortgage.
• Can help landlords find tenants in a down market and secure a good return on their investment.
• Renters are able to use this as a trial run as they learn what the responsibilities are when owning a home. (Could be seen as a negative to the buyer and a positive to the seller.)

The Downs

• From a renter/buyer perspective being responsible for all the maintenance of the property while renting could be seen as a negative.
• As a buyer, if you choose not to buy the home you could lose the option fee.
• As a seller, the buyer could back out of the transaction and not buy the home.
• As a buyer, a rent increment might be put on top of the typical lease payment to cover the portion going towards the down payment.
• Still no guarantee that when the purchase goes ahead that you will secure an on-going mortgage with a finance company.

Cautionary Tale 

 It may seem like a great option to buy a home, but in the US, there have been some scams.  Tenants sign a rent-to-own agreement, move in, and fix up the home. After six months or so, the landlord finds a reason to evict the tenants and keeps all of their money and their improvements. Then the landlord gets someone new to sign a rent to own agreement. In Florida in 2005 hundreds of deals were made like this, but very few people became home owners. So be aware of what you are signing.

Also remember that your contract will probably cover the following:

• In order to get a rent credit, you have to pay your rent on or before the due date of your lease (usually the 1st of the month). Any payment made after the due date will give you 0% rent credit toward your home purchase for that month, a late fee may apply, and you will not be building any equity in the house. That means none of your rent money will go towards buying the house.
• Maintenance of the home is your responsibility as the tenant-buyer. This includes things like broken windows from stones or baseballs, clogged drains, peeling paint, broken appliances, burnt out bulbs, lawn work etc. Any major repair that the house needs to be in livable condition is the owner’s responsibility. Many landlords will try to force you to pay for these major repairs as well.
• As already mentioned above the Option Fee is non-refundable of which 100% is supposed to be put toward the sale price of the house. It is not a security deposit. If you do not buy the home at the end of the lease term, or if you are evicted before you can buy the home, you will lose all of the money that you paid for the option.

Rent to own is a great option for some home buyers, but make sure you have a lawyer go through the contract very closely, and make sure the people you are dealing with are upstanding. Have you bought a rent-to-own property? How did it go, did I miss something?

What is a Positively Geared Property?

We looked at negatively geared properties last time and now lets look at positively geared properties. I found this article and thought it covered all the key points, I edited it only to minimise repeated information and advertising. But this article is definitely pro-positive gearing. As I said in my last post I'm not advocating one system over the other as it comes down to your investor profile and your goals.

Have you found many positively geared properties, or are they hard to find?

This article first appeared at cashflowinvestor.com.au April 2011 

What is a Negatively Geared Property?

When you bought your first rental property was it a negatively geared investment or positively geared? What about subsequent properties? 

There is a lot of information out there that will help you understand the difference between positive and negative gearing a property. This post is about negative gearing, next time I will share a great article about  positive gearing.

I am not advocating one system over the other, it comes down to your investor profile and your risk assessment. What works for one person, will not work for another.

What's Normal Wear and Tear?

Is this 'normal wear and tear'?

One of the most frustrating aspects of landlord/ tenant relationship is upon moving out. It comes down to a little phrase that says the tenant should leave the property as it was found, except for 'normal wear and tear'. But what does that mean? From a tenants perspective, landlords charge for every scrape and ding, and from a landlord's perspective it feels that the tenants weren't careful enough and need to pay for damage. So who's right, what's considered normal and what's too much?

The problem is there is no clear definition of 'normal wear and tear'. Therefore, it comes down to personal interpretation -  to one landlord that would mean one thing and to another something else. So what do you do? The easiest way is to hire a Property Manager who has experience with all aspects of working with tenants, and they will be able to give you clear guidelines on what to expect. But if you do not have a property manager, there are some things you can do to protect yourself as a landlord and these also protects tenants.

Lay out Expectations.
The most straightforward way to avoid issues is to write it down. In the rental agreement include what is considered normal. For example, worn carpets, paint chips and nail holes from hanging pictures are considered normal. But provide some examples of what you would expect tenants to pay for, such as; stains on the carpets, gouges out of the wall (where hanging pictures went wrong), chunks out of the wooden floors, broken windows - or broken anything. If you have a range of options then the tenants can see what is expected of them. If there will be pets, make sure there is clarification on what is expected upon move out. Are scratches on the floor or walls acceptable?

Visual Record
When new tenants are moving into the property take lots of photos or video of the property to minimise any disputes on moving out. Walk through the property together and point out any areas that you are aware of. Encourage the tenant to find anything that they are not comfortable with. As a tenant, if the landlord does not want to take photos, take them yourself, and send them a copy.

Call In Repairs
Remember as a tenant you need to call in anything that needs to be repaired. The little things can snowball if they are not taken care of quickly could mean that you need to pay for it when you move out. If your landlord is not responsive, make sure you keep track of when and how you tried to contact them. By doing this, if there are issues when you move out, you will have a record. Some landlords put clauses in their rental agreements that outline that that any repairs be called in in a timely manner.

Are you liable?
It's expected that landlords will repaint every couple of years, but if tenants have repainted without asking, or damaged the paint within the first few months, it's probably best for the tenant to either repaint (to a high level of quality), or accept the deduction from the bond.

Something that most landlords don't take into consideration when writing their agreements, is who will be living in the property. This can drastically affect what condition the property will be in when they move out. What is 'normal wear and tear' for a single professional will be radically different to what is 'normal wear and tear' for a family of 5 with a cat and a dog. Of course you would not expect the property to have had the walls decorated by little hands, but you will get a few more dings on the wall and probably a stain or two on the carpet. It is worth the extra effort to write an agreement that covers different situations.

Normal wear and tear.
So in the end, normal wear and tear it comes down to someone's word against another. Repainting, cleaning the carpet and a few nail holes and scuffs are normal, but if it's more than that, it could be a problem. So take precautions, write it clearly in the contract, or ask for it to be written out, take photos, even ask questions about what is expected, and write it down and sign it.
 

What's your definition of normal wear and tear?