QUESTION: We want to buy a small apartment building, perhaps four to six units, where we can live in one apartment and rent the others. Last week we almost purchased a very attractive building, but we suspected that the expenses shown on the broker's statement were too low, so we asked the seller for the utility bills.
It turns out the agent left off the garbage, water, sewer and electric utilities. After we recalculated the seller's figures, it looks like the building loses about $225 per month. What is the best way to determine the true income of an apartment building?
ANSWER: Congratulations on verifying the utility bills. Another good way to determine the true net income of income property is to make your purchase offer contingent upon inspecting and approving the seller's Schedule E of the federal income tax return. Investment property owners never overstate their income or understate their expenses on their income tax returns.
Best Day of Month to Buy Income Property
Q: I went to one of those "90-minute free real estate seminars" where the pitchman told just enough information to get the audience interested in attending the weekend realty seminar for $595. I decided not to enroll because the pitchman was too slick and I didn't have the money. However, he said there is one day of the month which is the best time to buy income property. What day is that?
A: The best day to buy income property is the day after rents are collected, usually the second day of the month. The reason is the seller then must credit the buyer with the full month's rent, minus one day, and the buyer's first mortgage payment usually is not due until the following month. After considering the security deposits, which must be transferred to the buyer, if the timing is right the buyer can often minimize the down payment when the sale is closed on the right day of the month.
Make Tax-Deferred Trade for Apartments
Q: If we sell our large old home our profit will be about $150,000. We would like to use our profit to buy an apartment building where we could live in the manager's apartment and run the building. Is there any way we can avoid paying tax on our home sale profit?
A: Yes. Move out of your home and rent it to tenants, thereby converting it to investment or business property. Then it is eligible for an Internal Revenue Code 1031 tax-deferred exchange of business or investment property such as apartments. Personal residences do not qualify for this preferred tax treatment. Please consult your tax adviser for further details.
When a Real Estate Contract Is Assignable
Q: I contracted to buy a small apartment building. As far as the seller is concerned, she is to receive all cash. However, I encountered difficulty obtaining a mortgage. A friend volunteered to take over the contract because he has better financial connections than I do. But the seller refuses to sell to my friend. She says the contract is with me and she doesn't have to sell to my friend to whom I have assigned the contract. I think she realizes I made a very good buy. Can I force her to sell to my friend?
A: The general rule is a contract is assignable unless prohibited by its terms or there is a personal service element.
Presuming the contract does not prohibit assignment and your friend's cash is as green as your cash, I see no reason why the contract cannot be assigned. However, a court might rule differently. But it is up to your friend to decide if he wants the property bad enough to get involved in a specific performance lawsuit. Ask a real estate attorney to explain further.