Investing Your IRA

To the advisers, brokers and financial institutions pushing workers to save more for their futures and consider the 401(k) sacred, this debit card is not just objectionable, it’s blasphemous.

“We absolutely hate it,” says Jean Setzfand, director of financial security at AARP, the organization for people 50 and older. “A 401(k) loan is a last resort.”

“A horrible idea,” adds Linda Lubitz Boone, president of investment advisory firm Lubitz Financial Group in Miami. “It’s hard enough to save to begin with.”

“Terrible,” fumes Robert Wuelfing, president of the Spark Institute, a trade group for the retirement-services industry. “If you’re taking out a 401(k) loan, it should be a thoughtful process, not to buy a big screen TV.”

Even official watchdogs are on alert. The Financial Industry Regulatory Authority, or FINRA, recently issued a stern warning about 401(k) debit cards, calling them “a tempting convenience that can have significant repercussions” on your retirement security.

The cards also have become Public Enemy No. 1 for some Washington lawmakers; Sens. Charles Schumer, D-N.Y., and Herb Kohl, D-Wis., blasted them last week as an apparent abuse of 401(k) plans and proposed legislation to outlaw them.

Debit details

The rub is that employees evidently like the ability to borrow; studies show it actually makes them more likely to contribute to a retirement plan. Most 401(k) participants have access to loans and about 20% have gone through hoops and hassles to get one.
Yet employers seem to be drawing the line with the debit card. Though the product has been around for several years, few companies offer it — and probably won’t. They’re focused more on automatically enrolling U.S. workers in plans, not handing out quick and easy loans.

Reserve Solutions, a unit of New York-based money manager The Reserve, claims on its Web site that its ReservePlus debit card “encourages ’smart borrowing’ practices.” Bruce Bent, The Reserve’s chairman, says the 401(k) industry and lawmakers have a “gross misunderstanding” of the product and that access to retirement funds can spur employees — especially lower-income and younger workers — to save for retirement.

“We have to do a better job on education so people can appreciate what [the card] does, instead of having this visceral reaction that it’s bad,” Bent says.

The heightened controversy about 401(k) debit cards comes with the times. There’s a growing concern that with things so tough, people living paycheck to paycheck will increasingly turn to retirement savings as a source of cash. Mortgaging your future — unless it’s for an emergency or to enhance your education or career — is almost always a poor decision. You’ll have less money to support yourself after you retire or you’ll have to work more years before calling it quits.

Pros and cons

The debit card aggravates that problem, but it has advantages and disadvantages versus standard 401(k) loans.

For starters, the ReservePlus card is flexible; it can be used multiple times, for any purpose. As with a traditional loan, employers set a borrowing limit based on how much you’ve saved for retirement. By law, the upper limit is generally $50,000 or 50% of your account balance, whichever is less. The approved amount is set aside in a money-market fund and earns tax-deferred interest until you use the card.

With every transaction, you have five years to pay back the money, and the interest rate — now about 8% — may be better than you can get elsewhere, especially if you have sketchy credit. Also, you’re paying yourself instead of a credit-card company, and on more favorable terms.

One major advantage of a debit card is that if you’re laid off or leave the company, there may be no pressure to reconcile the debt immediately. With a traditional 401(k) loan, the outstanding amount must be repaid in full, usually within 90 days. Otherwise the loan amount is considered a taxable distribution.

That means you’ll pay income tax and — with few exceptions — a 10% early withdrawal penalty if you’re younger than 59 1/2. With a debit card, your plan may allow you to write a check to cover each monthly statement until the loan is settled.

Be careful; sometimes the easiest money to get is the hardest to pay back. Fail to make timely payments for three consecutive months or default and you’ll be hit with those same distribution taxes and penalties.

And since the 401(k) reimbursement isn’t coming out of your regular paycheck, as it would with a traditional loan, it’s just like any other bill, so you’ll need to be diligent and organized.

Moreover, the debit card can be expensive. In addition to the finance charges, expect set-up, maintenance and cash-advance fees. Repayments are made with after-tax dollars that will be taxed again when you start drawing on your account, and the interest isn’t tax-deductible.

Look closely at that interest rate too. It’s based on the prime rate of 5% — money that returns to your 401(k) account when you repay it. But the other 3% or so goes directly to Reserve Solutions.

The following article is by Barbara Nichols who is a real estate broker and general contractor in Los Angeles. She has consulted as an expert witness in hundreds of real estate lawsuits.  She has recently written “The No Lawsuit Guide to Real Estate Transactions” published by McGraw Hill.  

Rental property tenants are unpredictable.  I have had to deal with everything from the desperate tenant whose business was failing and decided to grow marijuana as an alternative business to the tenant who tries to make repairs and makes the problem considerably worse. 

We can’t prevent what is unexpected and sometimes can’t prevent the expected, but we can do a great deal to assure that when it happens we will be in a better legal position to deal with it.

The Importance of the Rental Property Agreement

A comprehensive rental agreement is extremely important.  It should include at the minimum:

• The start and end dates of the term of the lease
• The means of lease extension and lease termination
• The circumstances under which the property owner may enter the property
• Responsibility for repairs and maintenance
• Penalties for non-payment of rent
• Renovations or alterations to the property allowed or not allowed to be made by the tenant
• Ownership and removal of renovations at the end of the lease or if the tenant must be evicted
• Notice for termination or eviction of the tenant
• Numbers and names of persons, or companies on the lease
• What business is to be conducted at the property, excluding all others
• Deposits and their application or circumstances for refunding
• Insurance coverage and requirements
• The stated condition of all contents at the time of the lease and their required condition at termination.
• Lease amount, payment terms, conditions for modification of rent

Forms and Documentation are Key

The lease form should be properly composed by an attorney or modified from a standard form provided from a reputable source, such as an Association of Realtors®, or Commercial rental organization.  Separate forms might deal with property condition, insurance requirements, building rules and regulations, parking issues, and neighborhood issues (such as noise late at night).  Commercial properties in or near residential neighborhoods must take neighbors into consideration or face problems the property owner will have to deal with for many years.  Neighbors have a long memory.

Any problem that does arise should be documented with the date it occurred, what happened to cause the problem and who was called about the problem or sent a letter.  Also note what happened to resolve the complaint, if it could be resolved.  Do not let a problem linger or ignore it as it has a tendency to grow.  A tenant may later claim the owner did not seem to have a concern with the issue over some period of time and only now is complaining about it.  Contact an attorney for advice early on for any serious issue.  Following appropriate legal procedure can shorten the time to resolve the matter. 

Some Hot Tips for Contracts

• Never permit the tenant to modify, remodel, repair, redecorate or change anything without the owner’s express written consent, and print this statement in boldface type in the contract.

• Make sure that there is a clause in the contract to allow the owner or the owner’s representative to enter the property at least once a month even if it is to check the smoke detectors.  if I had done this I would have seen those marijuana plants!

• Be wary of the tenant who pays in cash.  In the contract insist on a check drawn from the tenant’s bank.  This will facilitate collecting on a court order to recover funds, since you will know the bank and the account number of the tenant.

• Be sure the owner’s insurance policy on the property is properly written to cover the property with the tenant and the tenant’s business.  Also, require the tenant to obtain, and maintain adequate contents insurance on their property.  Both the owner and tenant should have adequate liability coverage in case someone is injured or assaulted at the property.

If You Have to Go to Court

On several occasions I have found myself in court trying to collect on back rent or property damage.  Because I was prepared with a solid contract and documentation I am glad to report I was able to collect every time, with the exception of the marijuana grower who skipped town.  I saved myself considerable legal expense and money, if not aggravation.  Tenant evictions can be lengthy in California.  Even with proper procedures owners should plan on

possibly a six month ordeal.  In one case regarding a client’s property, I showed up with the sheriff who had to usher the tenant off the property.  He was in the act of moving and loading the moving van.  I felt compelled to warn the moving company to collect via cash or a cashier’s check to avoid getting a bum check from this deadbeat.

Zoning, trip-and-Falls, Security Issues

In one case a commercial tenant failed to check zoning before signing the lease and discovered the space they rented would not allow a fitness center.  Tenants or their guests have suffered injuries or assaults called “acts of third parties” and sued the owner.  In one case, the employee of the tenant parked in a handicapped space during a rain storm.  He stepped out of the car on crutches only to fall and suffer further injury.  The downspout from the roof gutter drained directly into the parking space!  Owners and their property managers must be vigilant to eliminate hazardous conditions and provide well lighted and secure premises.

Agent Representation

If a real estate agent or property management company is acting on behalf of the property owner, a detailed written agreement should be used covering the agent’s responsibilities.  The property management company might also request to be named as an additional insured under the property owner’s liability insurance.

“Experience is the worst teacher; it gives the test before presenting the lesson.”

                                                            --Vernon Law

The ideal scenario is when applicants are simply between homeownership due to employment relocation or because of a temporary move to a city. But in the case of foreclosure being listed on an application, a red flag certainly flashes before us. The best case for this category of renters occurs when other credit has been responsibly handled. Even in this situation, in a strong market it may be ill-advised to take the risk.

Your written screening criteria should indicate whether or not other good credit histories are enough to overcome the risk resulting from a foreclosure; but again, the condition of the rental market in your area should factor into whether or not your criteria needs to be adjusted to take this into account.

It makes sense during these record-high rates of foreclosure that some consideration is given to this group of people so long as their other credit has been responsibly handled and your rental market is not extremely strong.

It may be necessary to reduce the negative impact of foreclosure in your screening criteria for these people to make the grade. Also give serious consideration to requiring an additional deposit for people in this situation. If you have to alter your screening criteria, be sure and document it along with the effective date of the change.

This is where a 1031exchange becomes an appealing option. This unique transaction is based on Section 1031 of the Internal Revenue Code, which states “no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for an investment.” In a 1031 Exchange, the seller does not receive the proceeds on the sale of an investment property; instead they are held by a third party qualified intermediary who then facilitates the transfer of the proceeds to another investment property as required by 1031. “The 1031 Exchange is a wonderful way that the IRS allows real estate investors to defer payment of capital gains tax on their investments,” said Jon Ryan, Senior V.P. of Western Region Sales for 1031 Exchange Advantage, Inc. “More than in many other markets, a high ratio of residential housing in Southern California is in fact investment property. This type of transaction has numerous benefits, and right now is proving to be a great time for it.” 1031 Exchange Advantage, Inc., a wholly-owned subsidiary of Vineyard National Bancorp, a 2.5 billion dollar institution listed on NASDAQ, is a nationwide provider of 1031 Exchange services and partners with Prudential California Realty to educate their real estate agents on the ins and outs of 1031 Exchanges, so clients and investors can exchange with confidence.

One of the biggest benefits of the 1031 Exchange is that by deferring the payment of capital gains tax on the sale of an investment property, the investor has much more cash to put toward the next property. 1031 Exchanges are not limited to residential properties; in fact they can be utilized in Multi-family developments; Home Office; Tenancy In Common; Triple Net Leases; Condo-Hotels; Oil and Gas property; Raw Land and Foreclosures. Prudential California Realty, one of the top five brokerages in the nation and a member of HomeServices of America Inc., a Berkshire Hathaway affiliate, attributes approximately 10% of their real estate transactions to 1031 Exchanges. “We are big proponents of the 1031 Exchange; so much so that we train our agents on it monthly,” said Steve Rodgers, President and CEO of Prudential California Realty. “The benefits are so important that we want all of our agents and clients to be fully versed in the concept.”

There are several variations of the 1031 Exchange that can accommodate investors in different situations. A Reverse 1031 Exchange is an arrangement where a new entity is introduced, known as an Exchange Accommodation Titleholder, or EAT. The EAT is a single-member LLC established by the Qualified Intermediary that takes title to a property for the investor until the relinquished property is sold. The investor must take title to the “parked” property from the EAT within 180 days in order for the transaction to qualify for 1031 Exchange tax benefits. This is known as the “Safe Harbor” offered by the IRS for real estate investors in this situation. Reverse Exchanges are specifically beneficial to investors who may find a property they would like to acquire before they have sold the current investment property. The Reverse 1031 Exchange allows these investors to potentially save thousands of dollars in capital gains tax.

The laws concerning 1031 Exchanges have been amended several times since the practice became commonplace. Most recently in 2005, investors gained new benefits through the introduction of Revenue Ruling 2005-14, which coupled section 1031 benefits with those of Section 121. This allows investors to exclude up to $250,000 (500,000 for joint returns) of the gain from the exchange of a property that qualified as their principal residence for at least two years and also acted as an investment property for at least the year prior to close of escrow.

Investors can exchangea former residence, and utilize both tax breaks, allowing them to pocket up to $250,000 ($500,000 for joint returns) through the section 121 tax exclusion and defer any remaining gain over the $250,000 limit ($500,000 for joint returns). It also allows investors to move into their exchange property after a period of time, then sell it as their residence if they owned it for at least five years.

“The IRS is providing these opportunities to investors, but not all are aware of the money they could be saving,” continued Ryan. “It’s not often that the IRS actually gives the chance to save thousands of dollars, and the process is very straightforward when you are working with a professional.”

1031 Exchanges also provide another unique benefit to investors through the Tenancy In Common (TIC) concept. This arrangement allows unrelated co-owners to each own an individual fee interest in a property. Tenancy In Common properties differ from the typical 1031 scenario because the properties are generally multi-family developments, retail centers, office buildings, shopping malls and other large commercial buildings with quality tenants already placed.

This scenario is a great option for exchangers who are looking to reduce involvement in the management of their properties, or who desire a larger building as an investment but are without the resources to do so as an individual.

No matter which variation of the 1031 Exchange is employed, partnering with an expert is a vital step that will save the investor the frustrations and headaches of going it alone. 103 1Exchanges are detailed and complex procedures with strict deadlines and tight time windows, and a professional can understand where you want to go and help you create that reality. Whether it is through your professional Realtor or a qualified intermediary, getting started on 1031 Exchanges is easier than you think, and the huge benefits in tax savings are waiting.

Rob Massey is the founder of RentalHouses.com and vice president of industry development for Rentals.com. In this article he outlines the most important things to do to a property to attract the best tenants.

A common mistake made by novice landlords is a lack of preparation or work on the home before putting it on the rental market. The reality is, however, that the most discerning prospective residents, who normally are your ideal renters, demand attention to detail.

Here are a few vital tips:

Painting-The rule is simple. The house needs to look as though it was just completely painted. The reality is that it’s not always necessary to have just completely painted the entire house, but it needs to look as though it has been. This is easily achieved by starting with the same neutral color throughout the whole house.

Housecleaning-There are different definitions of clean, but most knowledgeable property managers insist that there needs to be a clean smell throughout the house, perfectly clean kitchen appliances, and bathrooms that invite use without the need for prior cleaning.

Carpet cleaning-Not only will your carpet look and smell better, but it will actually help extend its life. A thorough cleaning of the carpet between vacancies should never be skipped.

Outside condition of the property-This is the part that will formulate a “first impression.” Make sure the shrubs and trees are properly trimmed; the grass is cut and tidy; the walks and driveway are edged and groomed. The exterior paint condition is critical as well. Peeling or dirty exterior paint is a sign of an untidy house and not what you want to convey in your first impression.

Attracting desirable residents starts with the proper preparation of the condition of your rental house. Don’t fall short in this most important step in this process.

Eric Bramlett is the Broker and co-owner of One Source Realty in Austin Texas.  Here is his short course on becoming a landlord. 

When you decide to buy a piece of real estate in order to pursue a business as a landlord, you are making an exciting and potentially financially-freeing decision. After all, simply owning real estate is an excellent investment. In addition, taking this real estate and turning it into an apartment or other form of rental property can provide for a steady flow of income. Nonetheless, there are several things you should know before you buy that first piece of real estate and enter into the world of renting.

Consider the Maintenance

One of the first considerations you need to make when you buy real estate and decide to become a landlord is the cost of maintenance and upkeep. Remember, you still own the real estate and--as the landlord--you are responsible for maintaining the property. If you are not a handy person or if you simply do not have the time it takes to complete repairs and perform maintenance on the real estate you buy, you will need to hire someone to do this for you. This might mean hiring a property manager, which will cost you about 5% of the gross income you earn from your rentals.

Learn the Law

The laws affecting real estate and rentals will vary from state to state. Therefore, you need to make sure you are aware of the laws affecting you in your state. Although there are some variances in these laws, the basics are essentially the same; your tenant has all of the same rights of ownership except for the right to sell the real estate. In addition, as long as the tenant pays rent, he or she has the right to live on the property. At the same time, they do not have the right to damage the property in any way.

The law requires that you keep the real estate in a "habitable condition." Although there is a bit of gray where this is concerned, the law is understood to mean that the real estate must have working locks on its doors and windows, the heat must work, and the roof cannot leak.

Know How to Find Tenants

Before you sink your money into a piece of real estate that you plan to rent out, make sure you have a good idea as to how you will get tenants. In addition, be sure you are clear on the laws when it comes to interviewing and screening tenants. There are several discrimination laws in place that limit the types of questions you can ask a potential renter.

Before you purchase that real estate, set your standards so you know what you will and will not accept from a tenant and make sure your standards are all legal. Some areas to consider include:

• The price of rent
• Whether or not you will accept pets
• The number of allowable occupants
• The amount of your security deposit
• Whether or not utilities are included in the rent
• Any minimum income requirements you expect from your tenants
• Whether or not you will accept HUD Section 9 participants

Make sure your standards are clear to all potential tenants before you even begin the interview process.

“The housing market is undergoing a significant correction and that is affecting all segments of the industry, both multifamily and single family, for rent and for sale,” said NAHB Chief Economist David Seiders. “The excess inventory has to be absorbed in order to restore balance to the housing markets.”

The MRMI is derived from a quarterly survey of multifamily builders and developers, in which their responses are rated on a scale of zero to 100, with a rating of 50 generally indicating that the number of positive responses is about the same as the number of negative responses. For the fourth quarter of 2007, the measures that track builder confidence in the current supply and demand conditions for all classes of multifamily housing–except the most affordable apartments–fell to or below 50.

Multifamily builders apparently are trying to rein in new supply as much as possible. The components of the index that track current supply conditions for market-rate and lower rent apartments stood at 40.0 and 45.3, respectively, in the fourth quarter of 2007, down from 59.8 and 48.7 the same time a year ago. Asked about their expectations for the next six months, builder confidence remained weak, with the component of the index for market rate apartments standing at 50.0, and for lower-rent apartments at 48.9 in the fourth quarter of last year, down from 69.5 and 59.5 at the same time the year before.

The component of the index that gauge demand were lower for both Class A and Class B market-rate apartments in the fourth quarter and essentially flat for the Class C (affordable) apartments. The component of the index tracking demand for Class A fell 15.8 points, from 59.2 in the fourth quarter of 2006 to 43.4 in the fourth quarter of 2007. The index for Class B slipped 6.4 points, from 55.1 to 48.7 during the same time period. The component tracking demand for affordable Class C apartments stood at 58.3 for the fourth quarter of 2007, compared with 58.6 at the same time a year ago.

As the number of calls from prospective renters slowed, incentives and concessions were being used to shore up demand, according to survey respondents. As a result, the component of the index that tracks net rents dropped sharply, down from 61.3 in the fourth quarter of 2006 to 47.5 for the fourth quarter of 2007.

Although not as optimistic as last year at this time, builders do expect conditions in the apartment market to improve. For the fourth quarter of 2007, the components of the index gauging expectations for demand over the next six months stayed at 50 or above: Class A stood at 50.0; Class B at 53.9; and Class C at 61.1.

You've heard of social networking sites like MySpace and FaceBook...but have you heard of social lending sites?

Over the past few years, several websites have sprung up that combine features of the omnipresent social networking sites, and commerce sites like eBay. These sites allow individuals to become either a borrower from or a lender to the online community. The website collects basic financial information from would be borrowers, as well as the intended purpose for the money. The site then posts a short profile of the borrower, so that other members of the community can choose to lend money to them or not.

The very first created was www.Prosper.com, which allows individuals to borrow and lend small amounts of money, for any variety of purposes. Recent posts include families wanting to start a small business and a father seeking to pay off his son's medical bills...you can see their pictures and read their stories. The maximum loan amount is $25,000 - and lenders can borrow as little as $50 towards someone's total desired loan amount, and determine what rate they are willing to lend at based on the individuals credit standing and risk profile. Prosper encourages lenders to fund small amounts towards many individuals loans, to help minimize risk of default. Why consider it? Although risk of default is certainly a potential - because these are generally individuals unable to borrow via more traditional methods - it is quite a learning experience, and the rate of return will be higher than via a traditional savings account.

Another similar site is www.Zopa.com - also a social lending site, but with a few key differences. If a borrower request is approved, Zopa funds it directly, raising funds by offering Certificates of Deposit (CD) to be purchased with attractive rates of return. If you purchase a CD, you are required to choose at least one borrower request to sponsor. By sponsoring a borrower you marginally reduce the interest rate earned on your CD, which in turn is used to reduce the rate that the borrower is paying. Best of all, your money and your rate of return is guaranteed and insured.

Perhaps the most intriguing of the social lending sites, www.Kiva.org is a blend of charitable giving and online lending. This site specializes in very small loans made to individuals in third world countries. The loans requests and photos are fascinating...who knew that a cow could be purchased for only $500, or that you could literally purchase tons of coffee and cocoa for $1000? The downside to Kiva is that the loan is not repaid with interest, and because it is a loan and not a charitable contribution, it is not tax deductible. But the upside - helping those in developing countries create and expand their businesses, provide for their families and improve their countries economy as a whole - well, this offers a substantial rate of return, just of a different type.

And consider getting your kids involved. Parents can use sites like these to help instill a sense of giving back, as well as a broader view of the economic world. Start with a small amount of money, and let them decide who to lend it to and why. When the loan is repaid, turn around and lend it again. It's never too early to get kids involved in the process of understanding money, lending, and the world around them as a whole.