Q–I am moving away from the area for about a year on a training assignment in Europe. Since I want to return to my home, I plan to rent it while I’m gone. How can I determine the fair market rent? I’m willing to rent it to a responsible family at a below-market rent. Should I call a Realtor to rent it for me? How much will it cost?
A– Here’s a very rough guideline: A house should rent for 1 percent per month of its fair market value. That means, for example, if your house is worth $100,000, it should rent for $1,000 per month.
However, in most cities it is virtually impossible to get that much rent. But in a few communities, such as St. Louis, houses rent for more than 1 percent per month of market value.
To find out the fair market rent for your house, I recommend you consult several local Realtors who specialize in home rentals. After inspecting your home, they can easily recommend a reasonable rent.
By hiring a Realtor to rent your residence, you should expect top quality professional service. This will include showing your home to qualified prospects, receiving an application and credit report on the prospect, and obtaining the first and last month’s rent, plus a security deposit. For this service, expect to pay the rental agent a fee of approximately 5 percent of the annual rent. Of course, this fee is negotiable.
Q–Our home is worth about $220,000. The mortgage is paid down to around $87,000. We want to refinance to reduce our interest rate and get some cash so we can add a family room, but a friend told us we will owe tax on the money we receive. Is this true?
A–No. Your friend is mistaken. Mortgage refinance money is not taxable. There is a very good reason; You must pay it back. It would hardly be fair to tax you on money that must be repaid.
Q–I own a rental house in California on which I have been carrying earthquake insurance. Recently I received the renewal bill for this policy and it is outrageous. Also, it carries a 15 percent deductible. Should I carry earthquake insurance on California property?
A–I agree the premiums on California earthquake insurance policies have become outrageous. I dropped earthquake insurance on my properties because of the high premiums and the very high 15 percent deductible amount. If these properties are severely damaged by an earthquake, I figure the mortgage lender just bought the real estate.
Q–Recently you told a homeowner if she decides to rent her house to tenants, instead of selling it, she can take an income tax deduction for depreciation. I’ve never heard of that tax deduction. What is depreciation?
A–Depreciation is a non-cash bookkeeping tax deduction for estimated wear, tear and obsolescence on business and rental properties. Residential rental property must be depreciated over 27.5 years on a straight-line basis.
That means the property owner divides the adjusted cost basis of the building by 27.5, not including land value, which is not depreciable, and deducts that amount each year as if it were a cash expense.
Depreciation is the best income tax deduction there is, because it doesn’t require any cash payment, such as mortgage interest, fire insurance and property taxes.
Q–Lately you’ve run several letters from home loan borrowers who are frustrated trying to deal with their out-of-state “scum bag” loan servicers. The only solution is to get tough, as I did.
My mortgage servicing was sold, for the third or fourth time. The new loan servicer in Texas said I was short $540 in my escrow impound account for property taxes and fire insurance premiums, but according to my calculations, my escrow contained about the right amount. I phoned and was rudely treated by a young woman who barely knew what a mortgage was. When I asked to speak to her supervisor, she hung up. I then wrote a complaint letter to the loan servicer’s president, as you often suggest. A friend told me to ask for the loan servicer’s license number in my state. It turned out the loan servicer is not qualified to do business in my state! My loan servicing was quickly transferred to a nearby loan servicer who has not said a word about increasing my escrow deposit.
A– Congratulations on getting tough with your “scum bag” loan servicer. Recently I have received many letters complaining about loan servicers demanding unjustified increased payments into property tax and fire insurance escrow impound accounts.
For example, I have in front of me a letter from a California property owner whose Florida mortgage loan servicer is demanding an increase in the escrow account balance based on a new RESPA (Real Estate Settlement Procedures Act) law. When the borrower asked for a copy of the new law, she was told to pay $40 or “go to the library.”
Escrow impound accounts are “free money” for loan servicers. That’s why they’re so eager to extract as much as possible from borrowers. In most states, unless it is a VA, FHA or PMI (private mortgage insurance) home loan, borrowers aren’t even required to have escrow accounts and can cancel them at any time.
Your tactic of asking for the loan servicer’s license number in the state where the property is located is excellent. I did that a few years ago with Atlantic Mortgage and Investment Corp. in Jacksonville, Fla., which was not licensed to do business in California, where my property was located. As a result, the owner of my mortgage, Fannie Mae, transferred my loan servicing to an excellent in-state loan servicer.
Borrowers should get tough with their out-of-state loan servicers who are improperly demanding escrow increases. Phone or write them to ask: (1) Who owns my mortgage (such as Fannie Mae, Freddie Mac, Ginnie Mae, etc.); and (2) what is your license number in my state? However, banks can do loan servicing nationwide. Then follow up. As you learned, it pays to complain.
Q–For 18 years I’ve lived in a 48-unit condo, in which 31 units are now rented. The result is poor maintenance, excessive noise and failure to enforce the CC&Rs (conditions, covenants and restrictions). For example, a one-bedroom unit is rented to a father with five children, ages 3 to 14. One day he disappeared, leaving the 14-year old in charge of four small children. He was in jail for six weeks. We called the police, who had the county take the children. But now they’re back. The so-called professional management company is doing a terrible job. The board of directors won’t enforce the CC&Rs. What should I do?
A–Have a meeting of all the owner-occupants to take action. Attend the board of directors meetings. Speak up. Run for election to the board. Then enact and enforce reasonable rules for the benefit of everyone.
If that doesn’t work, sell your condo. Another alternative is to move out and rent your condo. When a “neighborhood” goes bad, as your condo complex obviously has, it’s time try to improve conditions or get out.
Q–I hope and pray you can help me with a problem. My adult daughter will not remove her name from my home, which I want to sell. As long as her name is on the deed, I can only rent it. My lawyer says there is no loophole. Although I am 74, I cannot obtain a reverse mortgage because my daughter is on the title. What can I do?
A–Your situation shows why parents should not add even their adult children’s names to their real estate title. Like good wine, kids can go bad!
One possibility is for you to sue your daughter in a partition lawsuit. The court can order the property sold with the sales proceeds distributed according to each owner’s share of the property. Perhaps you need to consult a another real estate attorney.
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PLEASE NOTE: Real estate laws vary from place to place. Be sure to check the laws of your state and municipality before making decisions on real estate matters.
Write to Robert Bruss at Tribune Media Services, 435 N. Michigan Ave., Chicago, Ill. 60611.
