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How to Be a Real Estate Mogul With Less Risk

The Motley Fool — 2012-12-03T18:00:00 00:00

By Michele Lerner

Want to be a real estate mogul but without the hassle of directly owning property?

Real Estate Investment Trusts, or REITs, offer a simpler -- and safer -- way to reap the benefits of a diversified real estate portfolio through owning shares of a portfolio of property.

REITs, which are publicly traded on stock exchanges, are trusts that own properties like apartments, office buildings, hotels, warehouses, shopping centers and health care facilities (such as hospitals and nursing homes). Most, but not all, operate these properties, too. About 10 percent of REITs are mortgage REITs that invest in mortgages rather than real property.

REITs were created by Congress in 1960 so that average investors could invest in large-scale, income-producing real estate. Instead of joining a real estate partnership, investors can buy REIT shares without any minimum investment requirements.

REIT Rules

As of Jan. 1, 2012, there were 166 REITs registered with the SEC, the majority of which trade on the New York Stock Exchange. There are also REITs that are not publicly traded, which is why, according to the IRS, there are about 1,100 REITs in the U.S. that have filed tax returns.

In order to qualify as a REIT, companies must meet IRS provisions and have the majority of their assets and income tied to real estate investment. REITs must distribute 90 percent of their taxable income to shareholders every year. REITs can deduct dividends paid to shareholders from their corporate taxable income, so most REITs avoid paying corporate tax by simply sending all of their taxable income to shareholders.

If you own REIT shares, you pay federal and state taxes on the dividends you receive, and any capital gains distributions that the REIT makes if it sells property. REITs are usually eligible to be held in tax-deferred retirement accounts such as an IRA, a 401(k) or a pension plan.

Read the rest of this story on Daily Finance.

See more on Daily Finance:
Why the Ralley in Mortgage REITs Isn't Just a Fluke
A Surprising Factor in Your Kids' Success: Whether You Own or Rent
Paper Route Helped This Couple Save Home From Foreclosure

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Fighting Off Foreclosure: One Woman's 3-Year Ordeal

The Motley Fool — 2012-10-19T12:00:00 00:00

Filed under: News,Foreclosures

By Michele Lerner

When even a single home goes into foreclosure, the effects can be far reaching. In the case of Dee, when she faced foreclosure on her home in Prince George's County, Md., the potential hardship extended well beyond her immediate family.

Dee's home not only shelters some of her six children and occasionally her four grandchildren, but is also a place of refuge for neighbors, friends, and sometimes complete strangers who need a roof over their heads.

"I'm on the front lines of what's happening in our economy in terms of unemployment and people losing their homes," says Dee (who asked that we not use her last name). "I've been the neighborhood mom and have fed or given shelter to many people since I bought this house in 1999."

Recently, Dee provided a safe place to stay for a single mother and her four kids.

"She had lost her job and her apartment and was going to sleep in her car," Dee says. Dee and her adult children (ages 19 to 29) helped the woman get back on her feet. The woman found three jobs, started college classes, and gets her kids to school daily. Now the family is thriving in a safe environment.

Things could have turned out very differently for the woman, her kids, Dee and her family -- and the entire community. And they almost did when Dee nearly lost her home.

The First Blow

Dee says her home wasn't "comfortably affordable" right from the start, but she felt it was smarter to own a home than rent because she was a single parent with six children. She was fearful that rising rents would push her out of an apartment, so locking into a mortgage seemed to make more sense even though it was a stretch for her budget.

Dee worked for an international law firm and, thanks to her base salary and overtime pay, she was able to cover her mortgage. "I was diligent about paying my mortgage, and I didn't refinance when my home's value increased," she says.

That changed in 2008 when her company eliminated all overtime. "My income dropped. Although I tried to continue making payments, my mortgage eventually became delinquent," she says.

She sought a loan modification to make her mortgage payments more affordable. "But the bank returned my loan payment and began the foreclosure process."

Then on Sept. 11, 2009, Dee and 43 other employees of her law firm were laid off.

Read the rest of this story at Daily Finance.

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Nightmare Stories of Renting Out Your Home

The Motley Fool — 2012-10-09T14:30:00 00:00

By Catherine Baab-Muguira

During the heady days of the housing bubble, many Americans bought second homes and investment properties, believing that the value of these properties would increase. Then came the bust, and some owners turned to renting out those recently acquired homes, condos and apartments. Zillow.com has referred to these folks as "accidental landlords."

If you're finding yourself in an accidental-landlord situation, take it from those who have tried it: While renting out properties can help to cover mortgage payments, provide a stream of income, and sometimes even a tax shelter (when properties generate taxable losses or decrease in value), the landlord business also has a pricey dark side.

'What a Huge Mistake!'

Tara Kennedy-Kline, an entrepreneur in Shoemakersville, Pa., says that she and her husband once saw renting property as a way to invest in their sons' futures. But the dream quickly turned sour.

"What a huge mistake! Our first tenants left as a result of an eviction notice after four months of not paying rent, and they trashed the place," says Kennedy-Kline. The next renter they found didn't turn out any better than the first. "The second tenants stopped paying rent in May and we couldn't get them out until November and that was by forced eviction by a constable."

Steven Glassberg is an attorney with offices in New York City and Port Washington, N.Y., whose practice includes all aspects of real estate. He says that being a landlord is harder than most people think it will be.

Kennedy-Kline took both tenants to court and won. But winning in court isn't the same as getting paid. Now Kennedy-Kline and her husband are into the collections process for more than $5,000. "Even the sheriff can't get our money," she says.

Non-payment isn't the only issue people face with their investment properties, Glassberg says. "Add in maintenance, insurance, carrying costs, and it is not a business for most people."

See other tails from the frontline of landlording at Daily Finance.

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Want to Rent to College Students? 5 Cities Where You'll Get the Most Bang for Your Buck
New Renters in Modesto Reportedly Find Body of Fellow Tenant, Jorge Amador-Molina

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Facebook CEO Mark Zuckerberg Refinances Mortgage Loan Down to 1%

The Motley Fool — 2012-07-16T15:15:00 00:00

Filed under: Celebrity Homes,Financing,Credit

Mortgage rates have fallen to record lows. But if you're in the market for a home loan, you're going to have a tough time matching the deal that Facebook founder and CEO Mark Zuckerberg got on his mortgage.

Like millions of Americans have done in recent years, Zuckerberg decided to refinance his mortgage. But according to Bloomberg, the rate he got was amazing low: just 1.05 percent.

How did he do it? And can non-moguls get a similar deal?

Taking a Monthly Gamble

The key to understanding why Zuckerberg got such a great deal on his mortgage is that he didn't get a conventional fixed mortgage. Rather, he decided to refinance his $5.95 million loan on his Palo Alto, Calif., home with an adjustable-rate mortgage.

Adjustable-rate mortgages, or ARMs, got a lot of notoriety during the housing boom. With lower interest rates, ARMs helped many homebuyers afford high-priced homes, because they often offered low teaser rates for an initial period of time. But after that teaser rate went away, borrowers were stuck making higher monthly payments, which many blame for what eventually cracked the housing bubble.

Even so, the average ARM, which locks in rates for one year at a time, carries a rate of 2.7 percent. What helped Zuckerberg get an even lower rate was his willingness to accept monthly resets of his interest rate. That means his monthly payments could rise as soon as August.

Despite that theoretical risk, few people expect interest rates to rise anytime soon. The Federal Reserve has said that it plans to keep rates low at least for the next couple of years, and many analysts expect an even longer period of low rates.

That said, there's not much downside to the Facebook founder even if the Fed raises rates. That's because Zuckerberg has a huge reserve of wealth behind his loan. Unlike most homeowners, he can simply sell assets and pay off his mortgage loan if the interest rate on his loan suddenly skyrockets.

How the Rest of Us Should Play the ARMs Race

The trend that most homeowners have followed recently is to get rid of adjustable-rate mortgages in favor of fixed loans. With average rates on 15-year mortgages at 2.86 percent and 30-year mortgages fetching 3.56 percent, ordinary homeowners don't get much benefit from taking on the risk of an adjustable-rate mortgage.

Despite Zuckerberg's cheap rate, trying to follow in his footsteps isn't a smart idea for most homeowners. Refinancing to a fixed-rate mortgage will help you lock in affordable, predictable payments no matter what happens to interest rates in the future.

You can follow Motley Fool contributor Dan Caplinger on Twitter here. The Motley Fool owns shares of Facebook.

See also:
Anderson Cooper's Manhattan Pad Sells for $3.8 Million
Listing Fails: The Best of the Worst in Real Estate This Week
Countrywide 'VIP Loans': Few Pols Resisted Mortgage 'Gifts'

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Living on a Prayer: Church Foreclosures Skyrocket

The Motley Fool — 2012-03-13T12:40:00 00:00

Filed under: News,Foreclosures

By Rich Smith

The Bible tells us that "it is easier for a camel to go through the eye of a needle, than for a rich man to enter the kingdom of God." Foreclosing on his pastor probably doesn't make the trick any easier.

There's a new development in the housing crisis: Foreclosures are hitting houses of worship.

According to a report from Reuters, 2011 was a record year for foreclosures on church buildings. Prior to the Great Recession, bank seizures of houses of worship were rarer than atheists in foxholes, with only a handful of foreclosures occurring in the decade prior to 2008.

That all changed when the mortgage crisis hit.

Just as homeowners in the 1990s and early 2000s rushed to take advantage of rising house values and fatter wallets to spend lavishly on real estate, the real estate bubble encouraged irrational exuberance in the pews. Congregations took out loans to refurbish and enlarge their church buildings. Unfortunately, these loans were not the 30-year fixed mortgages that most of us are familiar with. Instead, churches took out commercial loans -- five-year loans with balloon payments at the end.

The usual procedure was to refinance loans when their balloon payments came due. Problem is, loans predicated on the inflated real estate assessments that prevailed before 2007, once reassessed for possible refis in 2010 and 2011, were found to lack sufficient principal. Banks began turning down refinancing applications, and churches were told to either pay off their loans (i.e., make the balloon payment) or go into foreclosure.

Result: From 2010 to present, bank foreclosures on church buildings have skyrocketed -- 270 foreclosures since 2010; a record 138 foreclosure sales in 2011 alone.

Forgive Them, Father

Loan officers asked about this trend are, not surprisingly, chagrined. As one banker named in the Reuters piece complained: "It is not the practice of the Bank to [use] foreclosure in the absence of good cause. We trust the community will not rush to judgment without full knowledge of all the facts."

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Better pray for a miracle, then. It might make all the economic sense in the world to foreclose on a debtor that's unable to pay its bills. If a debtor can't pay, the logical thing to do is foreclose, resell the property, and try to get back at least part of the money lent. But when a bank does this to a church, it's playing with fire (and brimstone).

Whatever fate may await foreclosing bankers in the afterlife, the perils in the here and now are clear. Foreclose on a family home, and you've made a handful of people angry. Foreclose on a church, though, and you've taken your PR nightmare wholesale. In one step, you've won your bank the ill will of hundreds of congregants -- or more. People who will, in all likelihood, spend the rest of their mortal lives regaling friends, neighbors, and other potential banking clients with the story of how they "will never bank with XYZ bank again -- those guys foreclosed on my church!"

And it gets worse. Say a bank feels it has no choice but to foreclose on a church. What's it supposed to do with the property? Houses are no picnic to sell these days: Who's going to buy a house of worship out of foreclosure?

A Silver Lining

Depending on square footage and nearby foot-traffic patterns, a slightly used church might make an appealing location for, say, a new Starbucks. McMansion shoppers might be another target demographic for the used church market, if the churches aren't too small.

But as it turns out, Reuters reports that there is one bit of good news for the banks. Financial institutions foreclosing on delinquent church buildings have so far been able to resell most of their inventory to other congregations.

Just as in the housing market, where foreclosures and falling prices created opportunities for new buyers to purchase starter homes, congregations that used to squeeze into a rented school gymnasiums or other temporary quarters are finding opportunities to buy starter churches on the cheap.

As William Cowper once observed: "God moves in a mysterious way, his wonders to perform."

Motley Fool contributor Rich Smith does not own shares of any companies named above. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of and writing covered calls on Starbucks.

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See also:
Strategic Default: Would Half of Homeowners Walk Away?
Short Sales: The Long and Short of Them

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