E2 vacation continued from E1


times she’s on the phone so much that her children get annoyed, but she has to tell them to be qui- et because she can’t afford to hang up and lose potential rent- ers. “It’s a business we work hard at that provides very little — if any — pleasure at this time,” Lambert said.


If you were hoping to pay off your mortgage with rental in- come, don’t bank on it. To be sure, monthly rents have held relatively stable in many areas while the purchase price of vaca- tion real estate has dropped. And mortgage rates are at record lows. So recent buyers may find that rental income covers a larg- er proportion of the ongoing costs than if they had bought the same property at 2005 or 2006 prices. Marie Cahill, sales manager at Connor Jacobsen Realty in Beth- any Beach, said that the average sales price for a single-family home in her area was $707,525, compared with $1.4 million at the market peak in 2006. Yet the average rental income for a sin- gle-family home has remained at $22,000 to $25,000 per year. Rental income typically “would pay more of your costs now than it did five years ago, be- cause prices have come down,” Cahill said. “But it’s such a gam- ble. And it’s different every year.” She said that cash the owners paid upfront for a home affects the monthly carrying costs. If they made a large down pay- ment, the monthly mortgage would be lower, and rents would cover a larger portion of it. Even so, rental income typical- ly pulls in only a fraction of the costs of a vacation home, real es- tate agents and lenders say. And lenders are taking a hard line on using rental income to help a buyer qualify for a mortgage.


“If you’re buying, you have to be prepared to qualify without counting on rent,” said Jamie L. Wetzelberger, branch manager at SunTrust Mortgage in Ocean City. “That’s the responsible thing to do, period.” Brett Wolf, president of Profes- sional Mortgage Services, which provides home loans in Ocean City and Berlin, Md., said he hasn’t financed a single invest-


KLMNO


M1 M2 M3 M4 V1 V2 V3 V4


SATURDAY, AUGUST 28, 2010 In down economy, a vacation home can mean more work


ment property this year that counted weekly rent to help the borrower qualify. “I haven’t seen anyone come to buy property planning to pay it off with rental income,” said Sherry Bezold, an agent with Century 21 New Horizon in Ocean City. She said that what a homeowner would make in a sea- son would be enough only to cov- er things such as taxes, condo


fees and expenses. “They wouldn’t be able to use the in- come to cover their mortgages.” The amount of rent a home- owner can charge depends, of course, on the property and loca- tion. “Traditionally, oceanfront has


the biggest demand, but in the crazy times we’ve had, you just never know what to expect,” said Lisa Cafferty, a broker at Cold-


well Banker Seaside Realty in North Carolina’s Outer Banks. Eric Schwartz bought a house


at Rehoboth Beach in August 2008 and planned to rent it out for more than 10 years. Rental in- come covers a little less than two- thirds of the mortgage. But that defrays some expenses — and is in line with his expectations. “That’s the price for a home,” said Schwartz, who lives in Bucks


Rules of thumb to assess investment home’s potential by Tom Kelly


Let’s assume home values are down in the area where you like to vacation. Truth be told, you wouldn’t mind retiring there one day.


If you bought an investment home now and rented it out, is there any way of knowing if it will appreciate? And is there a break- even formula to use when consid- ering annual cash flow? One of the better second-home rental formulas now used was de- veloped by Christine Karpinski, author of “How to Rent Vacation Properties by Owner.” Karpinski’s definition of the break-even point is when all of the income (rent) from your vacation rental proper- ty is enough to pay all of the bills associated with ownership of the property. In other words, your va- cation home should not cost you another dime after your down payment.


According to Karpinski, if your monthly mortgage payment is equal to — or less than — one peak-season week rental rate, and if you rent for 17 weeks, then you should be able to achieve pos- itive cash flow.


Consider a property that rents “by owner” (without a real estate


management company) for $2,000 a week during the peak season with a monthly mortgage payment of $2,000. There are 12 peak weeks, most or all of which are usually occupied. So 12 weeks rented equal one year’s mortgage payments. In addition, you’ll need to rent


it for five other weeks to pay for incidentals such as power, phone, association dues, minor mainte- nance, etc. If you handle the rent- al yourself and have 17 weeks booked (33 percent occupancy), you will have a break-even cash flow. Rent more, and you have positive cash flow, according to Karpinski, who serves as the di- rector of the owner community at HomeAway.com.


When analysts look at stocks,


they often focus on the price- earnings ratio as a measure of whether the stock is overvalued or undervalued. The higher the number (especially relative to the market as a whole or to historical averages), the more likely the stock is to decline in price over time. Professor Edward Leamer at


the University of California at Los Angeles proposed that real estate be considered in a similar light. In this case, though, the ratio is the price of the investment prop-


erty to the annual rent it will earn. This calculation will give you a standard by which you can judge the relative potential for appreciation of different proper- ties in different neighborhoods and even in different cities. In other words, it helps you make sound investment decisions by giving you a tool to measure al- ternative investments against each other. Here’s how it works. Suppose you’re looking at a $255,000 property that will rent for $1,500 a month, or $18,000 a year. (We can assume there will be no vacancy, but you can figure in whatever you deem to be rea- sonable.) You are also looking at a $120,000 property that will rent for $850 a month, or $10,200 an- nually. The price-earning ratio for the


first property is approximately 14 (255 divided by 18), and the sec- ond is approximately 12 (120 di- vided by 10.2). The second prop- erty appears to be a better candi- date for appreciation because it has the lower price-earnings ra- tio.


For a truly effective compari- son of the two properties, you need to make a second calcula- tion. You need to look at the price-earning ratio average for


both properties relative to those properties in the same neighbor- hood.


If the ratio for the neighbor- hood of the first house is 20 while the ratio for the second house is 10, then the first property might be the better buy. It is under- priced relative to its surround- ings, and the second property is overpriced.


Although all of this might ap- pear complex, it’s quite simple. After all, you already know the prices being asked for the proper- ties you are evaluating, and you should know what rent you can charge once you own them. All that’s needed is to find out


the averages for prices and rents in the immediate neighborhood, and you’re done. Check county records, or ask a local real estate agent or property manager to help you with these two numbers. This is a helpful re- search process that could propel you to financial success. realestate@washpost.com


Tom Kelly’s book, “Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border,” was written with Mitch Creekmore, senior vice president of Stewart International. Kelly can be reached at tomkelly.com.


County, Pa.


Because Schwartz has three children in his family, he wanted to make the place inviting to renters with families. So he put a foosball table in the dining room and equipped the house with four TVs. The development also has family-friendly features such as pools and a tennis court. Soon af- ter buying the place, Schwartz made a Web site that includes pictures as a way to get an edge over the competition on Craigs- list.


Schwartz said he has rented out the house for every prime- season week that he made it available, this year and last. Most people who buy vacation homes just want to use them for fun. A survey of vacation-home buyers by the National Associa- tion of Realtors released in March shows that only about 25 percent of those who bought vacation homes last year planned to rent them out. When the survey was first done in 2002, only about 16 percent had plans to rent. “Vacation-home buyers are looking for ways to generate a lit- tle income” in the tough econo- my, said Paul Bishop, vice presi- dent of research at NAR. “The second aspect is that there are more ways that vacation-home owners can market their proper- ties.”


According to the survey,


26 percent of vacation-home buyers planned to make the place their primary residence someday. Buyers’ median age was 46, with a family income of $87,200. Thirty-four percent bought a


vacation home within 100 miles of their residence; 40 percent bought vacation homes more than 500 miles from home. rysts@washpost.com


If an association’s board is unresponsive, throw the bums out kass continued from E1


as well as alleged bylaw vio- lations. Unless your petition spe- cifically listed questions for the board to answer, I am concerned that your petition is too vague, and even when the special meet-


ing is called, you may not be giv- en responsive answers. Review your petition. If it is


too general, I suggest that you submit a revised petition (again signed by the requisite number of unit owners), and present a num- ber of specific questions for the


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board to answer. The petition should list three or four dates when the meeting can be held. While the board does not have to honor those dates, it does have the obligation to call a special meeting. Give them one month in which to call the meet- ing. If it is not called, then de- pending on where you live, you may have the following remedies. In Virginia, you can contact the Common Interest Communi- ty Ombudsman at www.dpor. virginia. gov/dporweb/cic_ombuds.cfm, although I am not sure how many teeth that agency really has. In Montgomery County, you can contact the Commission on Com- mon Ownership Communities at www.montgomerycountymd. gov.


In the District, or in other


Maryland counties, you will have to file a lawsuit in the appropri- ate court. But even if the board is respon- sive and calls for that special meeting, will that satisfy you and your other owners? If not, here’s another suggestion: Throw the rascals out. Every community association has a provision in its legal docu- ments allowing for the recall of elected board members. Keep in mind that while a board elects its officers — and has the right to re- move those officers — usually only the membership can remove a board member. You have to carefully review the procedure — and the requisite number of votes needed for the recall — which is spelled out in your association le- gal documents. Mount a good old-fashioned political campaign, much like politicians do when they run for office. Get team (or floor) cap- tains to gather petitions signed by as many owners as possible. If there are absentee owners, de-


mand that the board send your materials to all such owners. The board should not release the members’ names and addresses to you, but it should be required to send the material if you pro- vide the necessary postage and pay administrative costs to the board. The recall vote can be held at a special meeting, and again you will have to file that formal peti- tion with the board. Alternative- ly, if your annual meeting is com- ing up shortly, use that as the ve- hicle to get your questions answered. But, once again, you must comply with the legal re- quirements in your bylaws, in- cluding requesting the removal and election of board members. You should have a slate of po- tential board candidates includ- ed in your petition, so that own- ers who will not attend the meet- ing can vote by proxy. I recommend that your group


retain an independent attorney to guide you through the process. The association’s lawyer will challenge any deviations from


the requirements, so you want to make sure that you follow the rules. It is unfortunate that many boards do not understand that they were elected to serve the best interests of the association. Most board members are hard- working, but some are on an ego trip. This is the first time they can be called “Madam (or Mister) President.”


Board members have a fiducia-


ry duty to diligently represent the owners who elected them. If they are not doing their job, it is up to the association members to hold them to this duty or remove them from office.


blkass@kmklawyers.com


Benny L. Kass is a Washington lawyer. This column is not legal advice and should not be acted upon without obtaining your own legal counsel. For a free copy of the booklet “A Guide to Settlement on Your New Home,” send a self-addressed stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036.


NF407 3x1.5


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