Wednesday, July 30, 2008


By Victor Hairapetian, Attorney

Question to Victor: A 60 day notice that I served ends on the 15th of the month, I know I am only suppose to receive 15 days, but the tenant paid the whole month, what should I do?
Victor’s Advice: This is an area that most landlords easily confuse. You may demand and accept rent that covers through the 15th, however you should not accept a check that includes any amount beyond that final day. This means that you should not accept a month’s check, and then offer a refund or credit since the acceptance of the payment alone can invalidate the notice. The simplest and clearest solution is to compute what is due, and return the original check to the tenant and ask that they replace it with the amount you computed.

Question to Victor: Am I responsible if my tenant’s dog bites someone or another tenant at the property.
Victor’s Advice: The answer to this question is too detailed for this article, and California premises liability law is still evolving, however keep in mind that the primary consideration that will be taken into account is your knowledge or reasonable opportunity to know of the likelihood that the animal is a danger to others. Certainly, the type of dog and its prior history in the property will be relevant to such considerations.

Question to Victor: Can I serve a tenant with a 3 day notice for a property in REAP.
Victor’s Advice: Yes, you may serve the tenant the amount that REAP has set, but be sure to check with REAP to see whether the tenant has paid REAP directly. For those readers who are unfamiliar with REAP, it constitutes the “Rent Escrow Account Program” in Los Angeles that regulates rents for units deemed to be in substandard conditions.

Question to Victor: Is there any way I can stop a tenant from just getting up and leaving a unit in the middle of their lease.
Victor’s Advice: No. A tenant may vacate your unit at any time, however you still have rights to sue for the breach of a lease including all of the future rent you will be losing until a replacement is found.

Question to Victor: My landlord hired a lawyer who keeps sending several threatening letters to me alleging things that are not true and scaring me that he intends to evict me, what can I do.
Victor’s Advice: You should immediately respond with advising the landlord and his
attorney that you dispute all of the allegations and to instruct them to
cease the harassment. As a tenant you also have rights, and should
not be bullied just because the other person has a lawyer. You
should consult with a lawyer so a response can be prepared that
assertively addresses their threats and gets your message across.

Victor’s Advice: Someone told me that I have to pay the interest on the security deposit to the tenant even though the building is in rent control, is this right.
Question to Victor: Sounds like your tenant’s giving you advice, it does not sound right since you are not in rent control.
Question to Victor: What is the consequence of demanding rent above the MAR (maximum allowable rent) in a rent control jurisdiction.
Victor’s Advice: A landlord who demands rent in excess of the MAR may be held liable for the excess charged, interest, attorneys fees, costs, and even punitive or treble damages. Definitely not a good idea.

Question to Victor: A judge dismissed my eviction since I was late to court, can he do this.
Victor’s Advice: Yes. This can be easily corrected and your case will be reinstated if the reason was due to your inadvertence or excusable neglect. See a lawyer.

Quote of the Month: “..I am moving by the end of the month and do not want to cause
any problems..”

Victor Hairapetian is an attorney licensed to practice law, and has conducted thousands of evictions in California. Feel free to submit your questions to him, and have them answered in the Apartment Management Magazine, or otherwise feel free to contact his office for any questions at (818) 500-9881 or email him at

Friday, July 25, 2008

US foreclosure filings more than double in 2Q

Taken from Forbes

The number of households facing the foreclosure process more than doubled in the second quarter compared to a year ago, according to data released Friday.

Nationwide, 739,714 homes received at least one foreclosure-related notice during the quarter, or one in every 171 U.S. households, Irvine, Calif.-based RealtyTrac Inc. said. That's up 121 percent from the second quarter of 2007.

Soft housing sales, declining home values, tighter lending standards and a sluggish U.S. economy have left strapped homeowners with few options to avoid foreclosure. Many can't find buyers or owe more than their home is worth and can't refinance into an affordable loan.

Foreclosure filings increased year-over-year in all but two states, North Dakota and Alabama.

Nevada, California, Arizona, and Florida continued to clock in the highest foreclosure rates. One in every 43 Nevada households received a filing during the quarter.

Cities in California and Florida accounted for 16 of the worst 20 metro foreclosure rates. Stockton, Calif., had the worst rate, with one in every 25 homes in the town receiving a foreclosure filing. That's nearly seven times the national average.

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Thursday, July 24, 2008

The Latest on Vacation Homes and Section 1031

I have a vacation property at Lake Tahoe that I’ve owned for several years. My kids have grown and aren’t interested in going there for vacation. Also, I’ve been too busy with my business to get up there much over the past few years. So I think that it’s time to sell it, but I have not placed it on the market yet. I think it will sell for about $800,000. My tax basis is $100,000, so I’m looking at about $700,000 of gain, which means approximately $105,000 of federal taxes and another $65,000 of California state taxes. Can I exchange the home under Section 1031 to defer the $170,000 in taxes?

A property must be held “for investment or in a trade or business” to be eligible for gain deferral under Section 1031. “Investment” means primarily for appreciation and not for personal use. Therefore, the Lake Tahoe property will only qualify if you hold it primarily for appreciation.

You will want to know what “primarily” means, of course. The Tax Court addressed this issue in 2007 in the case of Moore vs. Commissioner. The Moores owned a vacation home in Georgia. The family used the property for recreational purposes two or three weekends per month from mid-April to Labor Day each year. They would also visit the property intermittently during the “off season” to perform maintenance and other caretaking duties. The Moores moved to a new primary residence farther away from the vacation home and weren’t able to visit it. They decided to exchange it for a closer vacation home. They claimed an exchange on their tax return, stating that the vacation homes were held for investment. The Tax Court disallowed the exchange because the Moores’ primary intent was personal enjoyment and not investment. The Moores never rented out either vacation home, or even attempted to rent them out.

I guess that I should compare myself to the Moores. I’ve used the Lake Tahoe property about 15 to 20 days per year over the past few years. I have not rented it out other than to friends and family members. I did not want renters that I did not know. I’ve heard horror stories about irresponsible renters who caused thousands of dollars of damage. The rentals to friends and family amounted to about 10 days per year. I’m not sure if the rent I charged was fair market. I never checked for comparable rentals, although I’m sure other properties in the area are rented.

So you have issues similar to the Moores. While they did not rent their properties out at all, your rentals are minimal. You need to be concerned that the IRS might assert that you held the property primarily for personal purposes. Let’s look at other factors that go to the issue of investment intent. How have you treated the property on your tax return? The Tax Court pointed out that the Moores did not have investment intent because they did not claim depreciation or investment expenses on their tax return, and they deducted the interest on the mortgage as home mortgage interest. If you have taken similar reporting positions, you would have difficulty in an audit. I would recommend that you wait to sell the property and try to come within the IRS safe harbor for vacation homes. You have a lot of tax dollars at stake.

That seems wise. I’m not in a hurry to sell and I want to defer the taxes. What is an IRS “Safe Harbor” and what are the requirements to meet it?

This IRS recently issued Revenue Procedure 2008-16, and if you meet the requirements of this revenue procedure, the IRS will not challenge whether your vacation home qualifies as property held “for productive use in a trade or business or for investment” under Section 1031. That’s why it is called a “safe harbor”. Under the safe harbor, your Lake Tahoe property will qualify as for an exchange if it is owned by you for at least 24 months immediately before the exchange. You’ve met that requirement. However, in each of the two 12-month periods immediately preceding the start of the exchange: (i) you must rent the property to another person at a fair rental for 14 days or more, and (ii) your personal use of the property cannot exceed the greater of 14 days or 10 percent of the number of days during the 12-month period that the property is rented at a fair rental.

No Problem! I’ll just rent it to my kids for 14 days in each of the next two years, and limit my use to 14 days total. That sounds too good to be true. Will that get me
in the safe harbor?

That is too good to be true. The IRS is not that kind and gentle. The 14 day rental must be to unrelated parties. You are deemed to have used the property for personal purposes if used by you or your family members. So rentals to your kids, even at fair market rent, count as personal use by you and not towards the minimum 14 day rental requirement. Family members include your children and grandchildren, your siblings, and your parents. You can however rent to friends, in-laws or extended family members. You also can’t “trade” rentals with someone under a reciprocal use arrangement, even if rent is charged. Likewise, if you were to co-own the property with another person, you can’t rent to each other. For example, if you and your friend each owned a 50% interest in the property, you can’t meet the 14 day rental test by renting to each other. In short, you must rent the property to non family members for fair market rent. Any rental at less than fair market rent is counted as personal use by you too.
If you have a buyer in mind for the property, you may rent it to the buyer for the next two years and give the buyer an option to purchase the property with a reasonable earnest money payment too.

I have some friends that I could rent it to for 14 days or so. How do I determine what constitutes “fair market rent”? This seems to be an important key in fitting into the safe harbor.

You are correct that it is important. According to the Revenue Procedure, “fair market rent” is determined based on all of the facts and circumstances that exist when the rental agreement is entered into, and all rights and obligations of the parties to the rental agreement are taken into account. You should obtain an appraisal or other evidence from local rental agencies as to the fair market rent, at the time of the rental. Don’t wait till you’ve been audited several years later! Remember that you have significant tax dollars on the line and you want to go into an audit armed with good evidence of fair market rentals.
Don’t forget the other requirement. You and your family members cannot use the property for more than 14 days per year, or 10% of the rental days, if greater. This includes rentals to friends at less than fair market rental. I should mention that you may rent the property to your child if he or she uses it as a principal residence (and not a vacation home) and pays fair market rent. You may also be allowed some usage for repairs and annual maintenance, but be prepared to prove that you were there principally for that purpose. Have receipts, pictures, or other evidence of the work done.

This is great! I can apply some of the $170,000 in tax that I’m deferring to the cost of vacations to new places over the next two years. I’ve always wanted to go on a
cruise in the Greek Islands.

Yes, but remember to carefully document the rental to unrelated parties as well as your personal use. If you meet these requirements, the IRS cannot question whether the Lake Tahoe property is held for investment. Also, be sure not to claim the home mortgage interest deduction because it will not qualify since you are not using it for more than 14 days. And deduct the expenses related to the property as investment expenses under Section 212 of the Internal Revenue Code.

What about the replacement property in the exchange? Suppose I find a vacation home that suits my current needs, or would make a good retirement home later? How does the safe harbor work with respect to the replacement property?

You can do the same thing with the replacement property for the two years after the exchange. It will qualify as replacement property if you own it for at least 24 months immediately after the exchange, and, in each of the two 12-month periods immediately after the exchange, you rent it out to unrelated parties for 14 days or more. Like the Lake Tahoe property, your personal use of the replacement property cannot exceed the greater of 14 days or 10 percent of the number of days during the 12-month period that the dwelling unit is rented at a fair rental. Generally, all the safe harbor requirements that we’ve discussed for the Lake Tahoe property will also apply to the replacement property.

Kevin A. Williams, President of North 1031 Exchange is currently the Managing Director of the North Wealth Management Company LLC. He has a Bachelor’s Degree in Economics and holds the following securities registrations: FINRA series 6, 7, 24, 63 & 65 and is licensed by the California Department of Insurance. He has allocated his talents to the institutional investment services arena for over 15 years. Kevin can be contacted at North 1031 Exchange, 4667 MacArthur Boulevard, Suite 220, Newport Beach, CA 92660. Toll Free: 866-700-1031 or 949-975-1031 or

Myths and Realities of Low Income Housing

by Bryan Wittenmyer

Before I explain what I believe are myths about lower-income housing let me first clarify a few important points. First, low-income landlording, or even regular middle-income landlording is not for everyone. I’m not one of these guys who says everyone should be a professional landlord. A good portion of the population just isn’t cut out to be anybody’s landlord, or even in business for that matter. Landlording of any stripe or flavor is not easy. It just isn’t.

In addition to that bit of negativity let me add this. Landlording, again any type, is not a rapid one or two year process that will liberate you from all of your money troubles or cares of this world. Professional landlording is very similar to being in business: It requires constant vigilance.

Now having taking the gloss off of income property and having lowered your expectation back to earth, let me very briefly and succinctly explain a few big benefits of income property before we get into my myths and realities segment. I’ll list just three benefits, although there are many, many more.

First, owning real estate assets just makes a whole lot more tax sense than buying and selling, although buying and selling has it’s place in the business world. You can grow large amount of capital faster, starting with virtually no cash, with income properties, than with other assets or businesses. And, ten years from now, you’ll be far better off for it.

Second, while developing a cash flow is no easy trick with income properties, it is like any other business or trade, a developable skill. And, this cash flow will come into your mailbox every month, whether or not you work. Furthermore, once properties have all or most of the debt service paid off, you have what I have coined, Perpetual Income. The income stream from a rental asset can literally be maintained for ten, twenty, even thirty years, without expending or depleting the corpus of the asset. At the end of your rental career, or if you just feel like it, you can sell this undepleted body of capital known as the building.

Third, while many consider landlording a lowly or pitiful career, I consider owing income property as one of the top careers, even glamorous. It has a mystique to it that people respect. I occasionally meet old school mates, and I often hear them ask in wonderment, “I hear you own rental properties.” They say it with amazement.

3 Myths

There are countless books on the market explaining rental properties and landlording. The interesting thing is precious few talk about low-income landlording. Almost like it doesn’t exist. The fact of the matter is, and this is big: Most landlords are engaged in at least some form of low-income housing. Doubt me? Ever hear of Section 8 housing? Hmmm. Seems to me that good ol’ Section 8 housing is low income housing by the governement’s own definition. Here’s another zinger: The vast majority of folks who are full-time housing entrepreneurs are involved in some form of lower-income housing.

The truth of the matter is a huge portion of the tenant populace is classed as lower-income, especially when you factor in their net worth. I hang around dozens of landlords, and at least in my little world, these guys have a lot of low-income rentals. It’s the yield.

So, myth number one: Very few investors are involved in low-income housing, except a hardened bunch of “slumlords”. The reality: a good portion of professional landlords are involved in at least some forms of lower-income housing.

Myth number two: Low-income housing is slum landlording; low-income property investors invest in deplorable and bombed out ghettos where few dare to trod. The reality: There are at least 3 levels of lower-income housing, only one of which is blighted, war-zone property (which by the way, I strongly urge you to avoid) . There is an upper level of lower-income areas which is marginally desirable. This is the area where folks will live and stay and pay their rents. So the point is, there are acceptable and relatively safe areas that technically are lower-income, but depending on interpretation could even be classed lower-middle income.

Myth number three: There are no good, low-income tenants; they all trash property, and don’t pay their rent. The reality: While yes, there are some bad tenants in the bunch, even a higher percentage than in middle-income housing, there is a solid core of folks in the lower-income areas who, when managed properly, will pay their rent and even remain in a house or apartment for several years. There is an art and craft to finding these folks, and occasionally you’ll make the wrong tenant selection, but you can find acceptable rental clientele in the right areas.

What Does All of This Mean?

There are housing needs in lower-income areas that can be serviced with minimal to moderate amounts of risk with a very high yield potential. That potential, is cash flow. Secondly, aggressive investors who aren’t afraid to get their hands dirty can at build a cash flow base from which to launch a more upscale rental portfolio. This again is not for everybody. You have to find a comfort level. If any mistake is made, folks buy in too tough of areas. There is a point of diminishing returns in tough areas. It’s all about yield. Don’t even think of messing with lower-income houses unless you absolutely buy at sub-wholesale levels. If the deal isn’t stunningly cheap in terms of price or financing, don’t buy it.

Wednesday, July 16, 2008

In Slowing Economy, Apartment Vacancy Rates Remain Stable

Taken from Multi-Family News
By Anuradha Kher, Online News Editor

New York--Amidst headlines of doom and gloom in the economy, the multifamily industry is holding relatively strong. “Vacancy rates in the apartment sector have been stable in the last three quarters and apartment rent growth in the second quarter of 2008 has seen the strongest gain as compared to all other types of commercial real estate,” Dr. Sam Chandan, chief economist and senior vice resident for research at Reis Inc. said today in a virtual conference hosted by Reis.

“Overwhelmingly and in all parts of the country, buyers are preferring to rent now as a result of which effective rent growth is expected to keep going up. The overall slowdown and situation in the slowing labor market will negatively affect apartments and in some markets, the condo shadow market will compete with the apartment sector with more units coming online,” he said. As a result, asset prices for apartment units have been falling from their peak period to the first quarter of 2008, by 13.3 percent.

Chandan also talked about the ongoing housing crisis, resulting financial troubles, low consumer confidence levels and slowing labor market and then went on to outline how this will affect commercial real estate. He said there will be greater regulatory oversight, more significant intervention in the housing market as is already happening and tighter credit conditions in the housing market.

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