Government launches plan to help 'underwater' borrowers

Tues. Sept. 7th 2010
AP Staff

WASHINGTON -- The Obama administration is trying to jump-start its sputtering attempts to tackle the foreclosure crisis with an effort to assist homeowners who owe more on their properties than their homes are worth.

Starting Tuesday, the Federal Housing Administration will permit lenders to give these borrowers refinanced loans backed by the government. The lenders will be required to forgive at least 10 percent of the original mortgage amount. Investors who have control over the mortgages as part of their large portfolios will select which borrowers are invited to participate.

The plan was first announced in March. Its rollout represents the latest of numerous efforts by the administration to address the housing bust. So far, the government has only nibbled around the edges of the crisis, as its programs have run into numerous problems.

The lending industry was ill-prepared for a crush of distressed homeowners, the economy worsened and millions of homeowners had taken on so much debt that their financial woes have been nearly impossible to resolve.

Nearly half of the 1.3 million homeowners who have enrolled in the Obama administration's main mortgage-relief program -- overseen by the Treasury Department -- have already fallen out over the past year.

Many borrowers say the government program is a bureaucratic nightmare, with banks often losing their documents and then claiming borrowers did not send back the necessary paperwork. Banks say borrowers often didn't return the required documents.

The new refinancing program takes a different approach. It allows investors in mortgage-backed securities to evaluate their holdings and select borrowers that will be offered refinanced mortgages guaranteed by the FHA.

The theory is that there are some loans that investors simply want to unload because they have a high risk of default.

However, when faced with the choice between slashing the amount borrowers owe on their home loans and foreclosing, lenders have generally chosen to foreclose on borrowers. Many experts doubt the new program will persuade investors to change their minds.

Government officials acknowledge that getting the plan going will be complicated. FHA Commissioner David Stevens said in a statement that it "requires significant coordination and operational execution by several parties to be successful."

The government estimates that between 500,000 and 1.5 million homeowners could be helped. But Stevens said the number of borrowers who actually benefit will likely be toward the low end of that range.

Even so, Keefe, Bruyette & Woods Inc. analyst Bose George called the government's estimates "extremely optimistic." George said investors are likely to only offer refinances to borrowers who have seen their home values plunge to the point where they owe 40 percent more than their home's current value. Those homeowners, he said, are in danger of walking away from their mortgages.

"We're assuming that the impact is minimal," he said.

To qualify, borrowers must be up-to-date on their mortgages, though many people who have already received loan modifications through other programs are still eligible. The plan is limited to loans in which homeowners owe at least 15 percent more than their home's current value.

Analysts at Barclays Capital estimated last month that the refinancing program would only aid between 200,000 and 300,000 homeowners. If it reaches that many, it would be a small share of the number of Americans with so-called underwater mortgages.

As of the end of June, about 11 million U.S. homes, or 23 percent of those with a mortgage, were in this position, according to real estate data provider CoreLogic.

No Money Down Programs Creep Back Into the Marketplace

NY Times, 9/4/10

When the housing bubble burst, one of the culprits, economists agreed, was exotic mortgages, including those that required little or no money down.

But on a recent evening, Matthew and Hannah Middlebrooke stood in their new $115,000 three-bedroom ranch house here, which Mr. Middlebrooke bought in June with just $1,000 down.

Because he also received a grant to cover closing costs and insurance, the check he wrote at the closing was for 67 cents.

“I thought I’d be stuck renting for years,” said Mr. Middlebrooke, 26, who earns $32,000 a year as a producer for a Christian television ministry.

Although home foreclosures are again expected to top two million this year, Fannie Mae, the lending giant that required a government takeover, is creeping back into the market for mortgages with no down payment.

Mr. Middlebrooke’s mortgage came from a new program called Affordable Advantage, available to first-time home buyers in four states and created in conjunction with the states’ housing finance agencies. The program is expected to stay small, said Janis Smith, a spokeswoman for Fannie Mae.

Some experts are concerned about the revival of such mortgages.

“Loans that have zero down payment perform worse than loans with down payments,” said Mathew Scire, a director of the Government Accountability Office’s financial markets and community investment team. “And loans with down payment assistance” — like Mr. Middlebrooke’s — “perform worse than those that do not.”

But the surprise is the support these loans have received, even from critics of exotic mortgages, who say low down payments themselves were not the problem, except when combined with other risk factors like adjustable rates or lax underwriting.

Moreover, they say, the housing market needs such nontraditional lending, as long as it is done prudently.

“This is subprime lending done right,” said John Taylor, president of the National Community Reinvestment Coalition, an umbrella group for 600 community organizations, and a staunch critic of the lending industry. “If they had done subprime this way in the first place, we wouldn’t have these problems.”

At Harvard’s Joint Center for Housing Studies, Eric Belsky, the director, said the loans might be the type of step necessary to restart the housing market, because down payment requirements are keeping first-time home buyers out.

“If you look at where the market may get strength from, it may very well be from first-time buyers,” he said. “And a very significant constraint to first-time buyers is the wealth constraint.”

The loans are the idea of state housing finance agencies, or H.F.A.’s, quasi-government entities created to help moderate-income people buy their first homes.

Throughout the foreclosure crisis, the state agencies continued to make loans with low down payments, often to borrowers with tarnished credit, with much lower default rates than comparable mortgages from commercial lenders or the Federal Housing Administration. The reason: the agencies did not offer adjustable rates, and they continued to document buyers’ income and assets, which many commercial lenders did not do. In 2009, the agencies’ sources of revenue dried up, and they had to curtail most lending.

Then they created Affordable Advantage. The loans are 30-year fixed mortgages, with mandatory homeownership counseling, available to people with credit scores of 680 and above (720 in Massachusetts). The buyers have to put in $1,000 and must live in the homes.

All of these requirements ease the risk, said William Fitzpatrick, vice president and senior credit officer of Moody’s Investors Service. “These aren’t the loans that led us into the mortgage crisis,” he said.

So far Idaho, Massachusetts, Minnesota and Wisconsin are offering the loans. The Wisconsin Housing and Economic Development Authority has issued 500 loans since March, making it the first state to act. After six months, there are no delinquencies so far, said Kate Venne, a spokeswoman for the agency.

The agencies buy the loans from lenders, then sell them as securities to Fannie Mae. Because the government now owns 80 percent of Fannie Mae, taxpayers are on the hook if the loans go bad.

The state agencies oversee the servicing of the loans and work with buyers if they fall behind — a mitigating factor, said Mr. Fitzpatrick of Moody’s.

“They have a mission to put people in homes and keep them in homes,” not to foreclose unless other options are exhausted, he said. The loans have interest rates about one-half of a percentage point above comparable loans that require down payments.

Ms. Smith, the spokeswoman for Fannie Mae, distinguished the program from loans of the boom years that “layered risk on top of risk.”

With the new loans, she said, “income is fully documented, monthly payments are fixed, credit score requirements are generally higher, and borrowers must be thoroughly counseled on the home-buying process and managing their mortgage debt.”

For Porfiria Gonzalez and her son, Eric, the loan allowed them to move out of a rental house in a neighborhood with a high crime rate to a quiet street where her neighbors are retirees and police officers.

Ms. Gonzalez, 30, processes claims in the foreclosure unit at Wells Fargo Home Mortgage; she has seen the many ways a mortgage holder can fail.

On a recent afternoon in her three-bedroom ranch house here, Ms. Gonzalez said she did not see herself as repeating the risks of the homeowners whose claims she processed.

“I learned to stay away from ARM loans,” or adjustable rate mortgages, she said. “That’s the No. 1 thing. And always have some emergency money.”

When she first started shopping, she looked at houses priced around $140,000. But the homeownership counselor said she should keep the purchase price closer to $100,000.

“They explained to me that I don’t need a $1,200-a-month payment,” she said.

The counselor worked with her real estate agent and attended her closing. On May 28, Ms. Gonzalez bought her home for $90,500, with monthly payments of $834. After moving expenses, she has kept her savings close to $5,000 to shield her from emergencies.

“If I had to make a down payment, it would have wiped out my savings,” she said. “I would have started with nothing.”

Now, she said, she is in a home she can afford in a neighborhood where her son can play in the yard. A neighbor brought her a metal pink flamingo with a welcome sign to place by her side door.

“My favorite part is the big backyard,” said Eric, 10. “And that’s pretty much it.”

“You don’t like it that it’s a quiet, safe neighborhood?” his mother asked.

“Yeah, I do.”

“He didn’t go out much with kids in the old neighborhood,” she said.

“Because they were bad kids,” he said.

Ms. Gonzalez said that owning a house was much more work than renting, and that when the basement flooded during a heavy rain, her heart sank.

“But I look at it as an investment,” she said, adding that a similar house in the neighborhood was on the market for $120,000.

Prentiss Cox, a professor at the University of Minnesota Law School who has been deeply critical of the mortgage industry, said the program met an important need and highlighted the track record of state housing agencies, which never engaged in exotic loans.

“It’s not a story people want to hear, because it won’t bring back the big profits,” Mr. Cox said. “The H.F.A.’s have shown how the problems of the last 10 years were about having sound and prudent regulation of lending, not just whether the loans were prime or subprime.”

He added, “One of the great and unsung tragedies of the whole crisis was the end of the subprime market.”

How to Navigate Short Sales

How can you get in on a good short-sale deal? It takes a certain amount of fortitude and patience, plus a lot of luck.

What's a short sale?

Selling a home for less than the amount the current owner owes the mortgage company is called a short sale.

Buying a home that is a short sale is different from buying a property that is actually owned by the bank, known as an REO, or real-estate owned property, or a property that is in foreclosure.

All of this sounds arcane, but it's lingo that anyone shopping for a home needs to understand to navigate today's marketplace.

A short sale can be a good deal for a buyer, and it can help the seller avoid having a full foreclosure on his or her credit record. Although a short sale and a foreclosure negatively affect the seller's credit score, in a short sale the damage can be minimized if the homeowner can persuade the lender to report the debt to credit bureaus as "paid in full."

In a short sale, the proceeds from the transaction are less than the amount the seller needs to pay the mortgage debt and the costs of selling. For this deal to close, everyone who is owed money must agree to take less -- or possibly no money at all. That makes short sales complex transactions that move slowly and often fall through.

An extension of the government's housing rescue plan could make it easier to buy short-sale properties. The new version of the Making Home Affordable plan will pay lenders up to $1,000 if they allow a short sale of a property when the owners don't qualify for loan modification because they owe too much money on the home. The program will spell out a short-sale process and provide standard documents, the U.S. Treasury says.

The government's plan probably still won't help if there are multiple liens on the property, but it should encourage lenders holding the first mortgage to move the process along.

Keep your eyes wide open

If you're house hunting and spot what seems like a great deal, chances are good that you are considering a short-sale property.

Most of the time, the seller has already fallen behind on the mortgage, but occasionally the seller is current but unable to continue to pay because of ill health or job change. This is particularly true in parts of the country where home prices have fallen significantly.

Before you rush in, consider the issues. The advice below comes from Scott Thompson, senior vice president of Mortgage Resolution Services, a distressed sales consulting company, and Vicki Vidal, associate vice president of government affairs for the Mortgage Bankers Association.

Know what you are getting into. Under the best circumstances, short sales take a long time to close and may require extra effort on the part of the buyer. Walking blindly into a short sale can be a losing and distressing proposition, so push for disclosure before you get involved, Thompson says.

This is not a do-it-yourself project. Find a real estate professional who understands the territory. Having a real estate agent on your side who knows how short sales work and who has negotiated others will increase the chances of closing the deal.

"I would ask the agent to provide references, specifically on an REO or a property that was in short sale," Thompson says. "You certainly don't want someone who is a shrinking violet."

Thompson and Vidal advise staying away from "short-sale counselors," those who say they can jump in and expedite the deal. Their game often involves negotiating a low price with the lender, charging the buyer more money -- often significantly more money -- and pocketing the difference. This "counselor" probably won't make the deal go any more smoothly for you and certainly won't do you any favors pricewise.

Be wary of the condition of the property. If the seller is in financial distress, chances are the home may not be well-preserved. The seller also may be reluctant to reveal serious maintenance issues. Proceed cautiously and get the property inspected by a knowledgeable person before you commit.

Make sure the deal has a prayer of closing

If you've decided to go for it, the first step is to have your real estate agent talk to the real estate agent representing the seller and determine the status of the short sale. Below are items that most lenders require from a short seller. If the seller is unable or unwilling to provide this information, the short sale won't close and any buyer is wasting his or her time. Your real estate agent should push for candor from the seller's agent.

A hardship letter. The seller must explain why he or she cannot continue making payments. The sadder the story, the better. A seller who is simply tired of struggling probably won't be approved, but a seller with cancer, no job and an empty bank account may.

Proof of income and assets. If the seller has money in the bank, including retirement funds, it is unlikely that the lender will let the debt slide. This package of information must include income tax and bank statements, going back at least two years. Sometimes sellers are unwilling to produce these documents because they conflict with information on the original loan application, which may have been fudged. If that's the case, this deal is unlikely to close.

Comparative market analysis. This document shows that the price of the property has declined and that the property won't sell anytime soon for the amount owed. This packet of information should include a list of comparable properties on the market and a list of properties that have sold in the past six months or have been on the market in that time frame and are about to close. This packet of information is similar to what's known as a Broker Price Opinion, which is less formal but often more informative than a property appraisal. The prices should support the seller's contention that the property is worth no more than the short-sale price.

A list of liens. There may be more than one, so determine how many liens are on the property. The good news is that since late 2008, the IRS has been willing to release a federal tax lien. The IRS is not forgiving the back taxes that homeowners owe; it is just no longer requiring that the lien be paid off before the property can be sold. And a single mortgage lien is an easy problem to solve.

If there are first and second mortgage liens, the question becomes: What's the plan to satisfy these lien holders? The seller and the real estate agent should have a plan that is more sophisticated than crossing their fingers, Thompson says. In the best of all possible worlds, the seller will be willing to contribute to paying off the second lien, so the first lien holder gets the full amount from the sale.

If there is a third mortgage lien, reaching any deal is very iffy. Deal killers include child support liens, state tax liens and homeowners association liens. If they exist and there are no obvious solutions, walk away, Thompson says.

Here's one more deal killer, something that can be difficult to sleuth out, says Thompson. Because a short sale generally doesn't cover the whole amount owed or other liens, it can trigger mortgage insurance. If the property is covered by a mortgage insurance policy that doesn't have to pay off until the home has been in foreclosure for 150 days or some similar length of time, chances are the insurer will hold up the sale because it won't want to pay any earlier than necessary and hopes the foreclosure will just disappear. Often the mortgage insurer will simply go silent. Thompson says: No response, no approval.

Be realistic

The bottom line: Don't choose a short sale if you're in a hurry.

"It's a waiting game," says Vidal.

Part of what slows down short sales is buyers' insistence on making really lowball offers, she says. "You get really crazy, ridiculously low offers -- and they are rejected."

Another factor is the increasing number of government programs aimed at keeping people in their homes -- about 50 percent of defaults never go as far as foreclosure, according to the Mortgage Bankers Association. So lenders see short sales as potentially the least attractive option and aren't willing to expedite them.

How can a potential short-sale buyer be protected from getting involved in an extended negotiation that doesn't go anywhere in the end? Thompson says you should negotiate an agreement with the seller and the seller's real estate agent that your offer will be the only one presented to the lender. If the lender isn't flooded with offers, it will be more motivated to move forward. If the lender turns down the offer without countering, then the restriction disappears.

Once you've crafted a deal, you better know where the money is coming from to close. If you're getting a loan, you need bank approval in advance.

As is true with any of these deals -- REOs, short sales, foreclosure auctions -- make sure you have money lined up. Cash is the best financing alternative in these cases.

Mortgage Rates Hit Low of 4.36 Percent

Thursday, August 26, 2010

Associated Press business staff

NEW YORK -- Mortgage rates fell to the lowest level in decades for the ninth time in 10 weeks as concerns grow that the economy is weakening.

Mortgage buyer Freddie Mac said Thursday that the average rate for a 30-year fixed loan was 4.36 percent this week, down from 4.42 percent last week. That's the lowest since Freddie Mac began tracking rates in 1971.

The average rate on 15-year fixed loan dropped to 3.86 percent from 3.90 percent the previous week. That's the lowest on records starting in 1991.

Rates have fallen since spring as investors shifted money into the safety of Treasury bonds, lowering their yield. Mortgage rates tend to track those yields.

The low rates have fueled borrowers to refinance their home loans. Refinancing is at its highest level since May 2009 and made up 82.4 percent of all new loan activity.

However, low rates haven't budged home sales, Those have been stymied by high unemployment, slow job growth and strict credit standards, and have dropped sharply since the expiration of home-buying tax credits in April.

To calculate the national average, Freddie Mac collects mortgage rates on Monday through Wednesday of each week from lenders around the country. Rates often fluctuate significantly, even within a given day.

Average rates on five-year adjustable-rate mortgages were unchanged at 3.56 percent. Rates on one-year adjustable-rate mortgages fell to an average rate of 3.52 from 3.53percent.

The rates do not include add-on fees known as points. One point is equal to 1 percent of the total loan amount. The nationwide fee for loans in Freddie Mac's survey averaged 0.7 a point for 30-year and 1-year mortgages. They averaged 0.6 of a point for 15-year and 5-year mortgages.

Tremont Valley Turnaround: New Townhomes Aim to Bridge the Gap Between Trendy Tremont and its Wilder Side

On a sunny June morning, the clatter of construction rings out across a once-forgotten Tremont hillside as crews finish up four new townhomes in time for the summer home-buying season.

This part of Tremont used to be famous for much less desirable activities. Up until a few years ago, car thieves dumped stolen vehicles here and set them on fire. The street was home to one of the largest illegal cockfighting rings in Ohio until the city came in and tore the coops down in 2006, when a raid rescued more than 400 chickens.

David Sharkey, a former resident of West 12th Street and one of the developers of the Tremont Valley Townhomes, remembers when West 11th was something of a walk on the wild side.

“I used to walk across the pedestrian bridge over the highway to get to Lincoln Park,” says Sharkey. “Heading back home, I never knew what I’d find when I got to the other side.”

Even then, it was obvious to Sharkey that the location had tremendous potential, if the land could be assembled into a contiguous site. This part of West 11th Street is close to the heart of Tremont and offers unobstructed views of the Cuyahoga Valley and Tremont Field.

Today, West 11th is the site of the new Tremont Valley development, which broke ground earlier this year. The project aims to bring affordable townhouse living to Tremont’s south side. So far, the developers have built one four-unit building, and one townhouse is sold.

“Tremont is a very popular place to live, and it’s well known for the Tremont Art Walk and as the home of Michael Symon’s Lolita,” says Sharkey. “We have an opportunity to create a substantial new community of homeowners on West 11th, and to connect this area with central Tremont.”

“With the creation of the dog park at Tremont Field, improvements to the park itself, and the promise that the Towpath Trail will eventually run right in front of the townhomes, we knew it was time,” he adds.

The Tremont Valley Townhomes are being developed by David Sharkey and Keith Brown, the principals of Progressive Urban Real Estate, a real estate brokerage with offices in Ohio City and Cleveland Heights, as well as David Fragapane of Civic Builders LLC in Tremont.

The project, which fits in with the community redevelopment plan for the Tremont neighborhood, has received support from the local block club, Tremont West Development Corporation and Ward 3 Councilman Joe Cimperman.

“The area in and around Clark Field is the next big thing in Tremont,” says Chris Garland, Director of Tremont West Development Corporation. “The Tremont Valley Townhomes are a key part of the redevelopment that’s taking place there.”

Village Capital Corporation (VCC), a nonprofit lender whose mission is to help revitalize the neighborhoods of Cleveland by lending to catalytic projects, provided the construction financing. Cleveland Action to Support Housing (CASH), a nonprofit organization, partnered with VCC to lower the interest rate on the construction loan. This subsidized rate increased the lender’s confidence in the project and helped make it possible for the developers to break ground. The total cost of the first four-unit phase is approximately $650,000.

“We’re confident that we’ll sell more units over time, but due to the low interest rate, we can afford to float the debt for now,” says Sharkey. “This is only possible because of the involvement of CASH. It’s tough right now, but we know we’ll be successful over time.”

The townhomes are priced from $180,000 and offer one- and two-car garage units. The project is set against a steep hillside, a natural feature that presented a design challenge and required additional retaining walls. Building the units against this backdrop, however, also offered an opportunity, opening up space for small yards. The rear patios are nestled into the blooming hillside. The fronts of the units have broad second-story decks with quintessentially Tremont views of trees, parkland and steel mills.

The townhomes’ narrow footprint, Sharkey says, is no deal killer – the units offer a surprising amount of space. The first floor has an open floor plan, with a handsome kitchen that opens up to a great room. The second floor has two bedrooms, including a large master with a spacious closet. The two car garage units have two full baths on the bedroom level, while the one car units have a single bath with shower and bathtub.

All of the units offer 15 year 100% tax abatement on the improved value of the property, and include a one year builders’ warranty.

Sharkey is a realist about the market, but he claims the project will succeed because of location, design, and price point. “There isn’t much new construction available in Tremont at this price,” he says. “These townhomes offer a lot of value for the money.”

Interested in Purchasing Investment Property? Tips to Get You Started

How to find good investment property

If you're cut out for it, life as a landlord can be quite profitable. But success isn't assured. Here's what you need to know before diving in.

By Liz Pulliam Weston

The idea of owning rental real estate seems to be gaining popularity as investors tire of the swoops and swoons of the stock market. As I pointed out in a separate column, not everyone has what it takes to be a landlord. But those who do may find rentals to be a good way to build wealth.

Once you've made the decision to buy rental property, your real work begins. Finding a profitable rental property usually takes time, connections and plenty of research.

Here's what you need to know to get started:

Know your time horizon

As with any other investment, you should have a good idea how long you plan to own a rental property before you buy it, says Robert Cain, publisher of the Rental Property Reporter newsletter.

The longer you plan to own the property, the more you'll probably need to invest in maintenance, repairs and improvements, Cain said.

"If you're keeping it for 20 years, at some point you're going to be putting a new roof on that property. You're going to be putting in new appliances and doing some major repairs," Cain said. If you're only planning to own a property for five years, by contrast, you'll probably want to avoid making any major improvements unless you're sure you can recoup the cost with a higher sale price.

You also may face more investment risk with a shorter time horizon. Although your rental will almost certainly appreciate over 20 years, it could easily lose value in the next five, particularly if you're buying in an overheated market. You'll need a bigger potential annual return to make up for that risk.

For many small investors, long-term ownership makes the most sense, said Pat Callahan, an attorney, landlord and founder of the American Association of Small Property Owners. You'll have plenty of time to ride out any swings in the market, and rental income can make a nice supplement to your day job. Find enough rental properties, and being a landlord may become your day job.

Develop a network

Experienced landlords find their properties in a variety of ways. Some hunt for foreclosures, making friends with city hall clerks or bank employees who know which properties are about to be sold. Some run ads in local newspapers. Others work with real estate agents who keep their eyes peeled for possible buys.

Several landlords recommended joining a local landlord or property owner's association to make contacts. Callahan's Web site offers links to local groups, as does the National Real Estate Investors Association.

"When you begin to own rentals, all the other investors start coming out of the woodwork," said Sean Hoppe, a landlord in Pottsville, Pa., who owns 11 properties. "Through investor meetings, networking, etc., I can find out what is for sale."

You also can try approaching landlords directly to see if they're willing to sell, by calling the numbers listed on rental ads in the classifieds, by cruising neighborhoods looking for "for rent" signs or by talking to any landlords you know personally.

That's how Bob, who asked that his last name not be used, bought his rental property near Albany, N.Y. The landlord of the three-unit building where Bob had rented for 15years was tired of the hassles and ready to sell.

"We love (the area) and jumped at the chance to buy it," Bob said.

So far, Bob and his wife have been pleased with their purchase. They raised rents and required security deposits, which caused the property's less desirable tenants to leave. He also has a backup plan for the building in case he starts to feel like the prior owner.

"If being a landlord got to be too big a hassle," Bob said, "we would just get rid of the tenants and make it our own place."

Get your finances in shape

The better your credit, and the less credit card and other consumer debt you have, the better your prospects for getting a decent loan, Callahan said. Lenders usually require bigger down payments, higher interest rates and generally stronger finances when you're buying rental property. That's because they know people are more likely to default on investment property than they are on their own homes.

Landlords say it also pays to have a substantial cash reserve left over after buying a property.

This can help pay for unexpected repairs and vacancies. Although there are few rules of thumb, setting aside at least one month's rent for each unit is a good start. CPA Paul Berning suggests having a line of credit, secured either by the property or your own home, to cover larger costs.

You also should make sure you can save enough for retirement and other goals before investing in rental real estate. While rental income can supplement your retirement kitty, most people shouldn't count on it to replace other investments or allow themselves to be entirely exposed to the whims of the local real estate market. Rents and property values can fall as well as rise, and those who are adequately diversified with investments in stocks, bonds and cash will be better able to endure the bad times as well as the good.

Avoid overpaying

As one experienced landlord put it: "You make your profit when you buy a property, not when you sell it." Pay too much, and you'll never recoup as much as you could have had you driven a better bargain.

The rental real estate market is generally tougher on investors who overpay than on homeowners who do the same thing, several landlords said. While a home is often an emotional purchase, which can lead to "I must have it!" offers and bidding wars, most landlords look strictly at the numbers to see if their investments will pay off. If you pay too much for a rental, you can't count on a "greater fool" coming along later to bail you out.

Not overpaying can be tough in a hot market, however. Apartments in New York, for example, currently sell at a 60% premium over their "inherent" value. In other words, they're selling for much more than the income streams the apartments generate, according to Reis, a national real estate research firm. In San Francisco and Los Angeles, the premium is 10%.

Some landlords use formulas, such as not paying more than six to eight times the rents they expect to make the first year. Others try to estimate what the property could be worth after needed repairs and upgrades are made, and they don't pay more than 70% of that price, less the cost of those repairs, CPA Berning said.

Every real estate market is different, however, and these formulas may not work in your area.

What's key is to make sure your rental income will cover your out-of-pocket costs, Berning said. That includes the mortgage payment on the property, as well as taxes, insurance, maintenance, repairs and a vacancy rate of around 5%. (If you have five units, for example, you should expect at least one unit to be empty three months each year. Here's the math: 5 units times 12 months equals 60; 60 times .05 is 3.)

If you can at least break even, you'll be able to profit from any price appreciation as well as from tax breaks available to rental property. Cain's Web site sells software to help you make these calculations.

When crunching the numbers, you should know that there's a big difference in how repairs and improvements are treated for tax purposes. You can typically deduct the cost of a repair, such as patching a roof or fixing a leaking pipe, on your tax return for the year in which the repair is made, Berning said.

Replace that roof or those pipes, however, and it's typically considered an improvement, which means the cost can't be deducted. Instead, it's added to the amount you paid for the property to determine your tax basis when you sell. The higher the basis, the lower your taxable profit. But if you have to wait 20 years after making a major improvement to recoup any of the cost for tax purposes, you may think twice about buying a property that needs a lot of upfront work, Berning said.

Longtime landlords say all this work pays off in profitable properties that build their net worth while providing a steady income stream. Callahan, whose family started investing in rental real estate in the 1940s, says it's a way of life she recommends.

"It doesn't matter if you're a professional or a laborer," Callahan said. "It's the equal-opportunity wealth builder."

Go Green: Reduce Air Pollution - and Save Money - While Mowing Your Lawn

Mowing the lawn is a weekly chore for many this time of year. What you probably don’t realize is that your gas-powered mower is also contributing to bad air quality, right there in your own backyard. Until recently, gas-powered lawn mowers were not required to regulate emissions. The good news is that new regulations and a selection of greener alternatives can help you do your part to reduce air pollution so close to home.

Gas powered lawn equipment produces roughly 5% of the air pollution generated in America—that’s quite a lot for such a little engine. The exhaust sends tiny particles into the air creating conditions that are especially unhealthy for young children or anyone with a respiratory illness or disease. Fumes from the engine also contribute to the formation of ground level ozone and smog, another hazardous air pollutant. A study conducted at the University of Florida in 2005 found that gas-powered mowers cause as much as 1,500 times more carbon monoxide, 31 times more nitrogen oxides and nearly 20 times more carbon dioxide than mowers powered by electricity. New regulations will go into effect in the next two years that will reduce emissions from newly-built models, but gas powered mowers aren’t your only option.

Electric mowers also generate pollution but at drastically lower levels and not in your backyard. Electric mowers are more expensive than their gas-powered cousins, but they are a lot less expensive to operate and maintain. An electric mower will cost you about $5 a year to operate, which is the cost of electricity to power or charge the mower. If you opt for the more convenient cordless electric mower, you should know that the rechargeable battery contains lead and should never end up in a landfill. Fortunately, there are many resources available for recycling rechargeable batteries of all shapes and sizes.

For ease of operation, electric wins hands down. It starts with the push of a button and you never need to fill up the gas tank or replace the oil. Most come with a mulching feature and some models have the ability to add on accessories for trimming or edging. The electric mower is lighter than its gas-powered alternative and it’s much quieter too. But the biggest benefit is that you’ll be inhaling the sweet smell of freshly-cut grass instead of pollution-causing gas fumes.

Of course, a human-powered reel mower is the greenest option of all and is a practical solution if you have a small area to mow. Today there are many styles to choose from; some even include an attachment to catch grass clippings.

When it’s time to choose your next mower, do your part and select a model that won’t add to the air pollution problem near your home, your neighborhood or around the planet.

2010, The Charlotte Observer (Charlotte, N.C.).