DEAR BOB: I am thinking of renting my lake cabin on a year-round basis. How should I set the rent? Charles M., Fairfax.
DEAR CHARLES: Find out what comparable cabins in your area rent for. Local real estates agents and newspaper wand ads are good information sources. l
DEAR BOB: I think you're wrong when you tell people that their home is going up in value, on the average, about 14 percent per year. It's far higher than that when you consider that most people don't pay all cash for their homes. For example, suppose I buy a $50,000 for $10,000 cash down payment and that it increases in value by 14 percent to $57,000 after one year. The $7,000 profit on my $10,000 investment is really 70 per cent, not the mere 14 percent you're misleading people to believe. Don't you agree? Lydia R., Gaithersburg.
DEAR LYDIA: Yes. You're given an excellent explantation of why leverage maximizes real estate profits. Thanks to the magic of using borrowed money, homeowners and investors own the best inflation hedge going. Thanks for making the benefits of real estate leverage so clear.
DEAR BOB: Is it true that if we carry back the mortgage on the sale of our home to our daugther, we must charge her at least 6 percent interest? We hate to charge her so much. Marge M., Fairfax.
DEAR MARGE: If you don't charge at least 6 percent interest on a promisory note which is involved in an installment sale, the IRS can impute interest at 7 percent interest on all payments received. Ask your tax advisor.
DEAR BOB: Please clarify for me when loan fees paid to get a home mortgage are tax deductible. As a real estate agent, I'm often asked if loan fees are deductible. Also, what about FHA and VA home loan fees? Dan F., Washington.
DEAR DAN: Loan fees paid to get a home mortgage, except FHA and VA home loans, are tax deductible as itemized interest deductions. However, loan fees paid to get a mortgage on any property other than the buyer's principal residence must be amortized (deducted) over the life of the mortgage.
VA and FHA loan fees are different, however. Since the government sets the interest rate on VA and FHA home loans below conventional mortgage rates, lenders charge loan fees to raise their yield. Each one point loan fee raises the lender's yield about 1/8 percent. As of this writing, FHA and VA home loans are at 10 1/2 percent interest. So a two loan fee would raise the lender's yield by two-eighths, or 1/4 percent to 10 3/4 percent.
However, by law FHA and VA home buyers can only pay a one-point "loan processing fee." This means the home seller has the "privilege" of either paying the FHA or VA loan fee or not selling to that buyer. Your tax advisor can explain loan fee tax deductions further.