Dealing With Deadbeat Agents

DEAR BOB: What are your views on investing in commercial real estate, compared with residential properties? I read about the ease of renting commercial properties where the leases last for many years, instead of a year for apartments and rental houses. Would commercial properties be too complicated for a new investor? -- Karen C.

DEAR KAREN: I recommend rental houses because they are so easy to buy, finance, manage and profitably resell. Having owned commercial and apartment properties, I find single-family rental-house investing to be easier and more profitable.

However, a contrary view is contained in the superb new book "Confessions of a Real Estate Entrepreneur" by James A. Randel (McGraw-Hill, 2006).

DEAR BOB: I own rental properties in Las Vegas and have been calculating my depreciation tax expense by using the property tax assessor's tax ratio between land and building value. My problem is that the depreciable building value is low at only 36 percent to 50 percent. I think I should be taking a bigger depreciation write-off. I've heard of investors using an 80-to-20-percent ratio of building to land. What should I use? -- Julie T.

DEAR JULIE: The exact answer depends on the type of property. For example, if you own a rental condominium, your building-to-land ratio will probably be about 98 percent to 2 percent.

The local property tax assessor's ratio of building to land means nothing. He still gets the same market value and property tax no matter what the ratio. All that matters to him is the total property value for tax assessment purposes. When the IRS audited me on this issue several years ago, I showed the IRS agent my property insurance agent's replacement cost estimate for the structures. The IRS readily accepted the insured replacement cost for allocating depreciation, with the remainder of my property purchase cost going to the nondepreciable land value.

Since then, I have talked with tax advisers and other investors who use the same method of taking the insurance replacement cost to justifiably arrive at the depreciable value of the structure.

DEAR BOB: I am a real estate agent about to make a purchase offer on a property with a contingency. Can you outline how to make this appealing to the property seller? -- Dede C.

DEAR DEDE: You ask a difficult question. In the current buyer's market for homes in most cities, most sellers are glad to receive any purchase offer. If the seller doesn't accept your buyer's offer, be sure the seller counteroffers to keep negotiations moving. Don't leave until you have a written counteroffer.

Make the contingency clause reasonable, such as a contingency for the buyer's approval of a professional inspector's report within five business days. Provide a similar reasonable time for a mortgage appraisal within a short time. In most cities, inspectors and appraisals aren't too busy to meet short deadlines.

However, if the contingency clause involves the sale of the buyer's current home, show the seller the home is listed for sale with a reputable local realty agent. Include a 48-hour release clause in the purchase offer in case the seller receives a better no-contingency purchase offer from another buyer.

DEAR BOB: I own a rental condo in Florida that is rented on a one-year lease and I live out of state. What is the best way to protect myself from liability in the event of an accident on the property? I have considered transferring title to a limited liability company. I am concerned that will require special insurance and additional transfer costs. Would buying additional liability insurance be better? -- Jeff M.