Q. The stockbroker who has handled my brokerage account for the past five years recently advised me of a real estate limited partnership his firm is offering. According to him, the partnership has bought eight homes in four subdivisions currently being built by a local builder. The partnership has then leased the homes back to the local builder. These are the model homes for the subdivisions. According to the broker, my return will be ever 11 per cent a year, fully tax sheltered. The years when the subdivisions are completed.My wife thinks this sounds too good to be true. I'd appreciate your opinion of the 11 percent return and the amount of risk involved in such an investment.
A. This is a program builders (locally and in other parts of the United States) have been using for the past few years. It frees cash for them while furnishing them with model homes at a reasonable monthly cost.
The risk to the investor has not proven to be more than minimal in this area, so far. But neither has the return, unless the investor is in, roughly, a 50 per cent tax bracket.
There is, typically, little or no cash flow from the leased model homes. So the return normally lies in the depreciation and interest deductions, equity build-up, and hoped-for profit on sale of the model homes when the builder is finished with them.
Three important factors to help derive an attractive return: Don't pay any more for the model homes than the price at which the builder sells similar homes in the subdivision; negotiate absolutely net leases with the builder; require him to restore the model homes to their original condition (insofar as feasible) prior to turning them back to you at the end of the lease terms.
Earl A. Snyder, a realtor, appraiser and attorney, answers questions only in this column. His address: 14909 Kalmia Dr., Laurel, Md. 20810.