DEAR BOB: The only real estate my wife and I own is our home. We bought it about six years ago and it has proven to be an excellent investment, since it has appreciated handsomely in market value. But we are kicking ourselves because we sold a nearby house my wife inherited about three years ago. That house also has appreciated nicely, but we don't own it.
We have been looking around for good real estate investments to buy, but we can't find any that make financial sense. Rental houses don't produce enough income and we hear apartment buildings can be a management headache. Any suggestions? -- Brian C.
DEAR BRIAN: I agree it is very difficult to buy real estate investment property that makes financial sense. What a shame you sold that house. But we can learn from our mistakes. Just as your home and that inherited house appreciated in value, chances are that will happen again in the future. However, rather than wait for inflation to force real estate values up, why not do something to push up the value of property you acquire.
I think fixer-upper houses offer the best profit potential today, if you can buy them far enough below market value. My goal is $2 of increased market value for each $1 spent on improving fix-up property. Although I don't always reach that goal, I come close enough.
My suggestion is to buy run-down houses in good areas of your town. Look for distress properties, such as foreclosures, probate properties, IRS tax seizure sales and sheriff's sales. Then fix them up for either immediate resale or long-term investment.
DEAR BOB: We own a 24-acre parcel that we need to sell to raise cash. It has been listed more than six months with a local real estate agent, but she admits there are no prospects because we need a cash sale and won't finance the sale.
Is there any way to arrange a loan of about $200,000, so we won't have to sell? -- Nicholas S.
DEAR NICHOLAS: Obtaining land financing has always been difficult, but today it is virtually impossible except at prohibitively high interest rates.
The reasons are many. One is the high risk of foreclosure unless the borrower can afford monthly interest payments from other income sources. Another is that even if the lender forecloses, chances of profitable resale are slim and the risk of loss is high. Another problem is that lenders today want only prime loans and that means single-family houses.
At the best, you might be able to borrow 50 percent of the land value, presuming you have excellent credit and income. Consult a local mortgage broker to see if a land loan can be obtained in your area.
DEAR BOB: Last year I bought my home from my cousin. He had purchased the house about six months earlier from a co-worker. The co-worker has since left town. It now appears the man who sold the house to my cousin forged his ex-wife's signature on the deed. When I bought the house I stupidly paid cash. Last month an attorney who represents the ex-wife contacted me. He says the ex-wife's signature was forged. She doesn't really want the house, but demands $25,000 to "go away." What should I do? -- David N.
DEAR DAVID: Since you didn't mention title insurance, I presume you failed to obtain a policy at the time you bought the house. Title insurance should always be obtained, but especially when buying real estate from friends and relatives.
Your first step should be to retain a real estate attorney who will contact the other attorney to verify that the deed was forged. If it was, and you are unable to reach a settlement with the ex-wife, she could sue you. Should she win, you could lose the house because the forged signature was void, thus making your deed worthless.
DEAR BOB: For the past 11 years I have been a loan agent with a major S&L. I am constantly amazed at how little home buyers understand about mortgages. Like you, I encourage borrowers to take the biggest mortgage they can qualify to obtain.
People often come back to thank me. As a result of satisfied customers and real estate agents, about 75 percent of my business is referrals. But you would be doing home buyers a big service if you explain the true cost of a home mortgage, after income tax savings.
For example, suppose a borrower gets a 10 percent interest rate mortgage. Many people think that is high, but I point out after their income tax interest deduction, if they are in a 28 percent tax bracket, they really only pay about 7.2 percent interest. They agree that is a bargain. Why don't you ever point out the true cost of a home mortgage? -- Ben R.
DEAR BEN: I've been using similar examples for the 15 years I have been writing this column. But I appreciate your emphasizing the importance of the income tax savings for home loan borrowers. Often they look just at the interest rate they are paying, rather than their net after-tax interest rate.
DEAR BOB: We have almost $100,000 equity in our home, which is worth about $160,000. Several weeks ago you suggested to another reader that to avoid paying tax on a home sale, the owners can move out, rent the house to tenants and then trade the house for an apartment building. That's what I would like to do, but without the intermediate step of moving out and renting the house to tenants. I fear that might make the house difficult to sell.
Can I avoid tax by trading my house for an apartment building where I would live in a deluxe owner's apartment worth at least as much as the sales price of my house? -- Muriel P.
DEAR MURIEL: Yes. You will be using the "rollover residence replacement rule" of Internal Revenue Code 1034. It says to defer tax on the sale of your principal residence you must buy and occupy a replacement principal residence of equal or greater cost 24 months before or after the sale.
In your situation, if $160,000 is your home's net (adjusted) sales price after paying selling costs, such as the Realtor's sales commission, to defer the tax on your profit you can buy an apartment building with an owner's apartment worth at least $160,000 that you occupy within 24 months before or after the sale. For details, consult your tax adviser.
DEAR BOB: After 26 years of marriage my husband and I are getting a divorce. I always suspected he was fooling around with his secretary, but after our youngest child got married recently he admitted it. Our biggest asset is our home in which we have about $200,000 profit.
However, the problem is my husband is 58 and I am 54. If we are to shelter our entire profit, we need to wait another year and I can't stand to be married to this adulterer any longer. Right now we can use that $125,000 "over 55 rule" exemption, but I am wondering if there is any way to get all our $200,000 profit tax-free? -- Ethel H.
DEAR ETHEL: Yes. Wait to sell the house until both of you are 55 or older. Then you can each claim up to $125,000 of home sale as tax-free profits. You could lease-option the house to buyers now, but with the option to be exercised after you become 55.
I am presuming both of you meet the "over 55 rule" requirements of being 55 or older on the day of the home sale, owning and living in the home at least three of the five years before the sale and never having used this tax break before. Consult your tax adviser for details.
DEAR BOB: At a cocktail party I was talking with a woman who invests in real estate. She owns several rental houses and was telling me she recently "mortgaged out" on all of them. What does that mean? -- Fred R.
DEAR FRED: Mortgaging out means the property owner has refinanced with a new mortgage for more than she originally paid. For example, suppose your friend bought a house for $100,000 with $20,000 cash and an $80,000 mortgage. After a few years, due to improvements and market value appreciation, suppose the house is worth $120,000 and the owner refinances for $100,000. She has mortgaged out.
DEAR BOB: For as long as I can remember, my father has said he wanted to build a home on land he inherited out in the country. It is about 20 miles from the nearest town and is not especially attractive. There is electricity and telephone, but not much else. My father, 78, is not well-to-do and building a house will take most of his cash reserves. He realizes he won't be able to get a mortgage because of the rural location and his limited retirement income. I am concerned about the unexpected construction problems that might arise, as well as my father living alone at his age in a rural area. What can I do to stop him? -- Betty Ann P.
DEAR BETTY ANN: I agree it is foolish for your father to build that home at his age. Not only is he tying up cash that might be needed for an emergency or a better investment, but he is taking unnecessary risks.
Building a home is always dangerous because of the uncertainties, both physical and financial, but your father's age adds to the risks. However, presuming your father is of sound mind, there isn't much you can do to stop him.
But I wouldn't give up and in a friendly way try to go over all the pros and cons to convince him not to build.
Readers with questions should write Bruss directly at P.O. Box 6710, San Francisco, Calif., 94101.