DEAR BOB: My husband and I want to build our own home. He is a mason, and we have many plumber and electrician friends who will help us build in return for masonry work, so our labor costs will be almost nil. We are looking for land now. The total cost of land and materials will be about $60,000. We have saved up $8,000 and are anxious to get started. We are new at this, so how do we start to finance this project? -- Mrs. L. N.
DEAR MRS. L. N.: Mortgage money is very expensive and tight now for resale homes and for new homes built by experienced builders. Do-it-yourself contractors have difficulty financing homes when money is loose, and it's even more difficult now.
Lenders shy away from homes not built by professional contactors because one costly mistake can put the project into trouble. But if you insist on proceeding, talk to banks, S&Ls and mortgage brokers in your town to get suggestions on how to finance your new home in today's tight mortgage market.
DEAR BOB: You often tell people to buy a home only if the seller will help finance the purchase. As a seller, whose house has been on the market for more than four months, I think you're wrong. It seems to me that If I finance the sale, I'm selling my home at a discount, since the buyer will pay me in inflated dollars worth less than today. Do you agree? -- Len H.
DEAR LEN: Yes. We're in a home buyer's market (meaning there are fewer buyers than sellers). It's a great time to buy, but not such a good time to sell.
Buyers who get their seller to finance the purchase, usually with a second mortgage, land contract, contract for deed, lease-option or other finance device, are really buying at a discount. As you correctly emphasize, such financing will be paid off in cheaper, inflated dollars worth less than today.
As a seller how can you protect yourself? Simple. Provice for periodic interest rate adjustments in the financing you carry for your buyer, just as banks and S&Ls now are doing with their flexible-rate mortgages. Use some fair standard, such as the Federal Home Loan Bank Board's average interest rate on new loans.
DEAR BOB: I just paid more than $12,000 to Uncle Sam on my 1980 income taxes, and 1981 promises to be worse, since I just got a pay raise. I've heard that real estate can "shelter" my income from taxes. Please explain how this could help me. Also, please explain negative cash flow. Susan Ann A.
DEAR SUSAN ANN: When you invest in good depreciable income property, such as apartments, offices, warehouses or commercial stores, that property ususally goes up in market value while sheltering some of your income from taxes.
For example, suppose you buy a $100,000 income property for $10,000 cash and the seller finances the $90,000 balance at 12 percent interest only. Suppose further that the building has $10,000 annual gross rents with $4,000 operating expenses. The mortgage interest will be $10,800, thus producing a $4,800 negative cash flow that you would have to pay out of your pocket.
But the building's depreciation deduction (a noncash bookkeeping estimate for wear, tear and obsolescence) -- plus the property's market value appreciation -- should more than make up for this deficit. Suppose $80,000 is the building's value, and you elect to depreciate it over 20 years at $4,000 per year. Your total tax loss on paper is $4,000 plus the $4,800 negative cash flow, a total of $8,400.
The result is that you won't pay tax on $8,400 of your salary. Assuming you are in a 30 percent income tax bracket, you'll save about $2,520 in income tax. If the building goes up in market value 10 percent per year, your annual return is $2,520 plus $10,000, a $12,520 annual yield on your $10,000 investment. If you own enough properties like this, you won't pay any 1981 income taxes, and you'll profit from the appreciation in market value too. Ask your tax adviser for more details.