Q: I constantly hear that investing in real estate is the best hedge against inflation. That sounds like a generalization that may not always be true. For example, suppose I buy an apartment building where there's no rent control. Then rent control goes on. In all probability, the apartment building will suffer a loss in value in an infaltionary economy, won't is? Where's my hedge against inflation?
A: In that situation, your apartment building will, almost certainly, suffer a loss in value. The cost of maintaining and operating it will increase faster then rent control will allow you to increase rents. The return on your investment will decrease. When the return on your investment decreases, value will decrease. So, the generalization should be changed to prudent investment in real estate is the best hedge against inflation. In other words, invest carefully and wisely in real estate, and you've still got the best hedge against inflation. This may require guidance of a knowledgeable and experienced real estate professional.
Q: My wife and I are 30 and have no children. Our combined income is $40,000 a year and we have $16,000 in savings. Our mortgage payment is $562 per month on a house which we purchased four years ago for $58,500 and is currently worth more than $80,000. Despite the deductions for our house, we are near the 40 percent tax bracket and are interested in a tax-sheltered investment.Would you suggest the purchase of a condominium or a town house for rental purposes? Would a condominium near the city be a better investment than a town house of equal value farther from the city?
A: In one location, a condominium investment might be better than a town house investment. In another location, the contrary may be true. You need to give specific facts so concrete answers that are accurate and reasonable can be given you. In general, don't make a real estate investment for tax shelter reasons alone. A prudent real estate investment should be made for sound economic reasons. The tax shelter should be a plus, albeit part of the sound reasons.
I suggest you may want to consult an investment or real estate professional for specific answers to your specific problems.
Q: I'm a real estate broker who does some appraising of single-family residences. Recently I heard that an appraiser who erred in computing the number of square feet in a house he was appraising for the seller was held liable and required to pay damages to the buyer on account of the error. I can't understand this. The appraiser was employed and paid by the seller. Why should he have to pay damages to the buyer for his error?
A: The situation isn't quite as bad for the appraiser as you've heard. The appellate court in New Mexico (where this occurred) held that the law is that an appraiser may be liable for his negligence to a buyer even though he was employed and paid by the seller if (1) the buyer has a right to rely on the appraisal or (2) the buyer is a beneficiary or a member of a class of beneficiaries intended to be benefitted by the appraisal agreement between the seller and the appraiser. These are factual issues that must be proven by a preponderance of the evidence to the satisfaction of the judge or jury. To the best of my knowledge, these factual issues haven't been determined in this particular case. In a given situation, their resolution may vary with the purpose of the appraisal, and will be determined by the facts. If you find yourself being sued because of alleged negligence in making an appraisal, seek legal counsel without delay.