Question: I am considering buying a new condo as an investment property in a brand new development in Northern California. The sales person told me that at least one of the people on title for the condo has to be living in it and buyers will be asked to sign an affidavit saying so. Can a developer dictate to me whether I have to live in a property I buy, and how can they enforce this? These units are in high demand (I'm on a preferred buyer list, and they only sell on pre-scheduled sales event days), and so it sounds like they want to discourage people from buying them as rentals. Is this legal?

Answer: They most certainly can. The builder can restrict who can move in by virtue of ownership/renter status, because their financing may be attached to the fact that the development is an owner-occupied community. There are various mortgage programs that allow only owner-occupancy financing. The builder may even be using a government-backed program that has federal regulatory issues connected with the ownership consideration. The builder obviously wants to maintain the ownership integrity of the community so that at least the initial condo owners can enjoy the benefit of owning in a development full of residents who want to maintain the quality of the property because they own there.

It's an unwritten rule of thumb: Owners maintain property better than renters.

I've seen some condo developments lose valuable financing options because the renter-to-owner ratio increased beyond the limits. In one situation, a lender was willing to offer FHA financing, for instance, only after 51 percent of each building became owner occupied. As each unit sold, the new owners would have to wait until enough units sold to owner-buyers to surpass the 51 percent mark before they could go to settlement. Some of the settlements were delayed for up to six months while they waited.

Can they enforce these rules? Yes -- if they are willing to go to court to have the sale ruled null and void. You are signing legally binding contracts when you purchase real estate and by saying, in writing, that you are the owner occupier when indeed you aren't -- and you move in renters -- then you may be committing fraud and could be prosecuted to the fullest extend of the law.

Question: I realize with a rental property you obviously want to rent it for more than your mortgage payment. How do you determine the profit margin? For example, if our current mortgage payment is roughly $1,500 a month and we know we can rent it for $1,700, is that enough of a margin? What other things should we consider in figuring out if this is a good risk or not?

Answer: Your $200 margin at least gets you past the positive cash flow threshold as long as the house is in good shape. At the end of the year your gross profit is $2,400 -- plus the renter has paid all the taxes and insurance per month. But is that enough? If your furnace breaks down, how much of your profit will you have to eat up to replace it?

I would highly suggest purchasing a home warranty to help protect you from unforeseen breakdowns in the rental. The warranty will cost several hundred dollars per year and they usually include a deductible for each occurrence.

Other items you'll have to be ready to pay for through the year include:

• Vacancies (the mortgage payment for each month it's vacant)
• Insurance
• Marketing expenses between tenants
• Fix up costs between rentals (painting, repairs, etc.)
• Homeowners association fee (unless this is included in your rent payment)
• Miscellaneous repairs -- and there are always miscellaneous repairs (think about your own home)

Published: December 5, 2003

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Mr. Carr is an award-winning real estate broker in Northern Virginia and authored "Real Estate Investing Made Simple: a commonsense approach to building wealth." He also contributed to Donald Trump’s book, "The Best Real Estate Advice I Ever Received," and is an active trainer and coach of top producers in the Washington DC market. As a sought-after expert on real estate, Mr. Carr has been featured on CNN, various broadcast outlets and was the former real estate editor for The Washington Times. He accepts questions at his blog www.RealEstateOlogy.org.