This is a guest post by the Calgary mortgage specialists at the Purcell Mortgage Team.  For mortgage related tips and tricks, check out their weekly-updated mortgage blog.

The real estate market has had its ups and downs, with the end result being plummeting rents and massive foreclosure rates.  For the savvy investor, this also means sweet deals on respectable properties.  This, of course, leads us to the question of the hour: should you pay off the mortgage(s) on your rental properties, or do you leverage the equity you’ve built in them to purchase new ones?

Understandably, it’s a tough call.

Paying Off Your Mortgage – Pros

It doesn’t take an accountant to figure out that a property without a mortgage is inherently more profitable.  More of the money that your

tenants pay you go into your pocket, making a mortgage-free property an ideal situation for many.  Not only that, but paying off your mortgage is also much easier to do when the property is rented out- if the tenant is paying the mortgage, you really have nothing to lose aside from a little sweat equity every now and again.

This may all seem quite basic to anyone with a bit of financial know-how, but have you really considered all of the finer details?

• Little/no mortgage payments - Using the income derived from your tenants to pay down the principle owing will lower mortgage payments.

• Lower overall overhead -  Reducing mortgage payments and/or interest payments reduces your financial overhead, making it easier for you to obtain profitability.

• More equity available if necessary - Obtaining loans at an excellent interest rate on the value of a paid-off property is surprisingly easy (it’s amazing the value that financial institutions put into debt-free assets).

Paying Off Your Mortgage – Cons

Many people reach this far and say “really, there are cons to paying off my mortgage?”  Well, in fact, there are.  Quite a few of of them actually.

If you’re the financially creative type, paying off your mortgage does indeed reduce your overhead.  It also increases your profitability for each property, and increases the amount of cash flow that you may wind up having to pay taxes on.  There are many tax loopholes that exist for properties that are still mortgaged, and those options start drying up once there is no lien against the property.

As well, using your working capital and income to pay down your mortgage on your rental properties also means that you have less liquid assets available to you for immediate financial purchase or investments.  For some, this will not be a big problem, but for others it can outright stall their investment plan.  Talking to a certified accountant that specializes in real estate accounting is always a good option in determining which road you should take.

Some advantages to keeping your properties mortgage are:

• Constant new cash flow - In rare instances where the market plummets this can be a problem (owning a home worth less than the mortgage is never a good thing), but for the most part a sound property investment will grow in value.  Leveraging the equity in your rental properties via HELOC’s or traditional mortgages can provide a steady, relatively low-risk influx of cash.  Someone else’s cash, as well.

• Tax breaks and profit reduction - For most people it doesn’t make sense to reduce profit, but for those seeking low-risk tax shelters, an investment property is a great way to tie up cash in an appreciating asset.  Homes that are mortgage offer more in the way of tax credits as well, so talk to your account to see what applies to you.

If you are willing to accept some risk in your investment strategy, leveraging the equity of your current rental properties to purchase some new ones can be a great way to increase your investment portfolio.  There are many landlords who have dozens of rental properties, each remortgaged when their mortgage comes up for renewal.  As always, ensure that you think your financial strategy through before making any decisions.

Good luck out there.

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Pay Off the Mortgage or Leverage Your Equity? It’s a Tough Decision.

So, recently I had the realization that the late fees I charge tenants are obviously not high enough. I have a few tenants who consistently, every single month, are late on their rent.

Of course, the reasons range from car trouble to an occasional dead grandmother but that’s irrelevant. The point is that these people are obviously living month-to-month and do not keep any money in reserve for “emergencies.”

The standard terms in my leases are, “…rent is due on the 1st of the month and late on the 4th…” Additionally, “…late fees are $25 on the 4th and $5 per day after that.” So, basically, if a tenant is 1 week late with the rent, it will cost them $55 extra for the month. I guess $55 is not a lot of money these days and the tenants see this as “no big deal.”

My plan next lease renewal is to raise the fee on the 4th to $50 and $10 per day after that which will put them at $110 extra for being late one week. I mean, late fees are supposed to be an incentive to not pay the rent late and with rents so low, I risk losing the tenant if I raise the rent.

However, the next problem becomes that if you go to eviction court, the judges in their infinite foolishness wisdom, could very well pronounce the amount of late fees “unconscionable”  (the exact term in the Florida state statute) and negate the whole amount.

Well, I’m going to risk it and raise the late fees. These people need to be more responsible.

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New Late Fee Strategy

In the past, when a person stopped making payments on their home, it generally took 3 months before they were foreclosed upon by the bank and evicted from the property.

These days, as any real estate agent will tell you, it could take the better part of a year for the process to come to a close. In the past I have made posts detailing some of the completely unprofessional behavior exhibited by the banks during the “short sale” process.

For the uninitiated, a “short sale” is when the bank agrees to discount the loan amount due on a property usually due to some financial hardship on the part of the borrower. Whereas, a foreclosure is when the bank takes possession of a property and evicts the previous owner with the intention of selling it at market price to re-coup its losses.

I have also heard stories of people basically squatting in homes where they live there but are only paying utilities and not rent or a mortgage payment. In this case, if the property is actually foreclosed on, they will be given 30-days notice to vacate the property. Not a bad deal for a short time anyway.

Recently, I heard an interesting news report about why the banks are doing everything in their power to delay a short sale or foreclosure. Surprise! It’s for their own benefit, of course.

Basically, when a bank forecloses on a property, they typically take some kind of financial loss which affects the bank’s balance sheet. This is not usually a problem for the bank if it’s a few hundred properties.  However, when the number of foreclosures is in the millions (like is happening today) it causes a big problem for the banks in that those losses are large enough to affect the bank’s stock price which in turn affects their market capitalization.

Suddenly they’re not so rich and can’t operate like they used to. So, their answer is to delay, delay, delay so as to spread the losses over time which in turn reduces the hit to their stock price.

Take a look at this interesting interview of former bank regulator William Black, author of The Best Way to Rob a Bank Is to Own One.

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Why Banks Aren’t Foreclosing on Schedule

Recently I made a post directed at tenants about how NOT to inquire about a rental property. This post is sort of a follow-up to that one:

This SHOULD be a common-sense-type concept but from my recent experience fielding phone calls about one of our vacant rental houses, the point is obviously lost on many tenants seeking new accommodation.

People do not seem to understand that the rental application process starts at the first phone call. Along with looking good on paper (i.e. the actual rental application) you must be able to communicate effectively and somewhat professionally.

From a landlord’s perspective:

- If you cannot be reached by phone because you gave your friend’s number while inquiring about the property and your friend can’t be bothered to be courteous when I call…..you will not get approved.

- If you are demanding and inflexible when scheduling to view a rental property. For instance, you call and say that you absolutely must see it right now, within the hour and your tone-of-voice is threatening in any way…..you will not get approved.

- If you seem overly desperate to rent a place for whatever reason and you don’t seem like you have your life/money/mental “act together”….you will not get approved.

- If I return your phone call and you are half-asleep and have no idea who I am and why I’m calling …..you will not get approved.

- If you seem clueless for any reason, as in you may have a problem determining when you should turn off a water shut-off valve or a circuit breaker in the electrical panel….you will not get approved.

And finally, if you balk at the prospect of scraping together the money to cover first, last and security and I get a whiff of that….you will not get approved.

Also, for extra dis-credit, if your vocabulary is not wide enough to include the word “balk”….you will not get approved.

In other words, if you seem like you’re going to be a problem to deal with within the first few times we speak on the phone, why would I want to enter into a legally-binding year-long contract with you?

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Tenants: How To Get Your Application Approved

Currently have one detached single-family house on the market for rent. When the last tenants moved out we had to hire a landscaping crew to come in and perform a complete makeover on the yard.

The tenants had “maintained” the yard by cutting the lawn about once every 2-3 months which in Florida, in the summer, is a big no-no. For those readers not familiar with Florida lawn care, you have to cut the grass every week in the summer to prevent the grass from growing as tall as your waist.

The lawn crew we hired consisted of three men and this job took them 7 hours of work so you can get an idea of how overgrown the yard was.

Before the tenants moved out, they hired some local yahoo to cut the grass so they would not be charged for lawn care come move-out inspection day. He did not do a very good job. That is, he did not edge or weed-whack. He just cut the grass.

So, it’s now 3 weeks later and the local yahoo calls me up to “complain” that the yard is looking terrible and that maybe I should come down to the property to take a look. Also, if we didn’t want to be fined by the city, he could cut it for us.

I let him know that we had it covered and all was well. He again complained that the grass was getting too tall and I should reconsider who I got to cut the grass because “I need to come down there to check the work.” I finally had to hang-up on the guy because he wouldn’t take “No” for an answer.

Nice sales technique buddy!

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Fruit Cake Lawn Care

Recently, I discovered a new (to me) site that is not only visually appealing but provides some great information about the landlord business. The main feature of this site is that the information is imparted via video clips.

Host Justin Palma who seems like a really nice and laid-back kind of guy, presents a sometimes dry subject in a very  interesting way. He uses actual footage of contractors working to repair or rehab his rental units in his “In The Trenches” section and he uses his “In The Office” section to explain the business end of things. I particularly like his use of animated charts to make the office work visually interesting.

When you have a minute definitely check out Justin and  Landlording.tv. Here’s a sample:

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Interesting Site: Landlording.tv

I will just start this post off by saying, “DUH!!”

Now that I’ve gotten that out of my system…I recently received a call from a tenant who let me know that for three-weeks now, she had noticed that there was black mold growing on the walls of a hall closet in her rental unit.

She also mentioned that two of her kids have asthma and they could not stay in the house due to the mold causing decreased breathing capacity.  And she mentioned that she’s been trying to clean the mold with bleach but it keeps coming back.

I arrived at the property to find that the air conditioning drain-line was clogged and the unit was draining into itself and causing a pool of water to form underneath where air comes into the system. The closet with the mold is right next to another closet which houses the A/C unit.

I cleared the drain line and let the weekend elapse. Today, miraculously, the mold was gone and everything was dry.

DUH!!

I wonder what would happen if I attached an intelligence test attached to our rental application.

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Black Mold Growing Inside A Rental

So, this story is actually from a local real estate agent who is handling the job of finding a tenant for a client.

The agent received a request to show the rental property from a woman who seemed very eager to rent the property in question. The agent, being busy with other business, did not call the woman back for a couple of hours. In the meantime the woman who just could not wait, called the agent’s broker who showed the rental to her.

After seeing the property, the woman contacted the agent and started trying to negotiate the rental price. The agent let her know that if her credit was stellar and her application checked out, the owners would consider negotiating on the rent.

After reviewing the application, it turns out that the woman who was in her 40’s had no credit, due to being married.  Her employment history consisted of nothing except a potential waitress job which was lined-up for after a new local restaurant opening. So currently, no job.

Her prior residential history revealed that the woman had lived on the same street as mine about a year ago. After identifying the property on my street which the woman listed, the memories came flooding back…

The woman lived there with her husband (who is in the process of divorcing her) and two kids. The yard looked like a complete mess most times. The kids who were toddlers at the time, would roam the street in diapers seemingly unattended.

Every so often when I would drive down the street in front of her house, she would burst from the front door and run out into the street, arms flailing, yelling and screaming for me to slow down because her kids were in the street. All this while I was driving at or below the speed limit.

Whenever I would see her around town she would give me the “stink eye” and was generally a pill to deal with.

Of course, I relayed the stories to the agent who promptly denied her application as no one needs a complete virago like that living on their street or renting from them.

At this point the potential tenant turned into a complete stalker. She left notes taped to the agent’s office front door after hours, called the agent incessantly and demanded to speak directly with the owners of the property.

Finally, the agent had to inform her that this is why the owners had hired her to find a tenant for them. The agent also informed her that she had non-existent credit and a sketchy employment history. The owners would not be negotiating on the rental price.

It seems that some people insist on digging themselves into a hole and then they will wonder why the world is against them when really, they are their own worst enemy. N-E-X-T!!

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The Word For Today Is Virago

Recently the web site AngryRenters.com was brought to my attention. Upon viewing this “hot mess” of a site, I was taken aback by how certain politically motivated conservative groups would presume to hijack a certain socioeconomic demographic for their own purposes.

Here are some of the amusing reasons sites like this are completely irrelevant to all but those of feeble intellect:

• The site was created and run by an organization called Freedomworks which is decidedly representative of the extreme right-wing of the American Republican Party. Also see Dick Armey, Chairman.
• The site supposedly gives a voice to renters who are upset with a supposed government bailout of mortgage lenders. Except they’re not upset (see below.)
• On the site there is a “Sign the Petition to Congress” link which apparently has been taken over by people who see right through the nonsensical nature of this site. 70,000 “signatures” so far!
• Freedomworks is one of the organizations who promoted the “astroturfing” (as opposed to real grassroots) of  the town hall meetings congresspeople were holding on health insurance reform.
• Most of the tenants I deal with are just trying to keep up with their bills. They aren’t concerned about the government bailing-out mortgage lenders because they don’t have a mortgage and it doesn’t affect them.
• …and finally, yes. The picture above represents how renters feel about this topic. NOT!

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How Political Conservatives Exploit Renters

Recently I had the opportunity to review a piece of rental property management software called Landlord Enterprise 2009 offered by Provericon Software Development based in Calgary, Alberta, Canada.

This tightly integrated and intuitively designed software allows property managers or landlords, large and small, to perform critical tasks such as tenant management, property management, property maintenance scheduling, document management, lease management and some light accounting.

It’s a standalone program (as opposed to web-based) which can be run by a single user or on a network. Operating system requirements are Windows 98, 2000, XP, Vista and presumably Windows 7 when it’s released. The software can be used by large and small landlords and is also compatible with the American and Canadian rental markets.

Landlord Enterprise 2009 allows you to manage the complete landlord/tenant relationship. You can do everything from collect rent to view reports on tenant contact history which you can also print or export to Microsoft Excel which is a nice feature. You can also view rent roll, unit maintenance history, accounting and tax reports.

The property management functionality is very well thought out. The first step is to set up all your managed properties with details including location, building age, square-footage, etc. then you can add maintenance details like repairs and upgrades to the maintenance log. You can even add items to the log that need to be scheduled for the future, and then add that item to the integrated calendar as a task to be completed. One small item I would like to see added is the ability to have the system remind you about tasks to be completed via email or SMS possibly?

Integrated document management is another excellent feature. Landlord Enterprise 2009 allows you to create links to documents of any kind (Word, Excel, Adobe PDF, etc.) which can then be sorted by tenant name for quick access. The documents are opened in their associated Windows application when you click their link.

As for the accounting functions, income and expense reports are available but one useful feature is that you can set up budgetary amounts for various expense and income sources. You can then view them for the whole year to see the “big picture.”

All-in-all Landlord Enterprise 2009 is a very full-featured and easy to use piece of software. I highly recommend it as it can save time and keep all your ducks in a row especially if you filing system looks anything like the picture to the left.

Provericon Software Development is currently offering a 10% off discount when Landlord-Success.com readers purchase Landlord Enterprise 2009 by using the coupon code CEOLLEE2009 at checkout.

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Landlord Enterprise 2009 Software Review