Q–My wife and I want to buy a house, but we can’t find a single-family detached house on which we can afford the mortgage payments. However, we saw a nice two-family duplex where one unit has two bedrooms and the other, where we would live, has three bedrooms. The real estate agent worked out the income and mortgage payments for us so the rental income will help us make the monthly payments. But my father-in-law advises against buying a duplex, because then we’ll have to deal with tenants. What do you advise?
A–There are millions of duplexes where the owners live in one unit and rent the other unit to tenants. The first property I bought, 31 years ago, was a triplex where I lived in the house at the front and rented the two apartments at the rear.
Buying a small income property is a great way to get started in home ownership and real estate investing. There’s nothing wrong with buying a duplex. Although they often don’t appreciate in value as well as single-family houses, a duplex will enable you to own your own home. In addition, you’ll get the income property tax deductions for the rental unit.
But your father-in-law is correct that you’ll be living very close to your tenants. Be sure to check the soundproofing between units before you purchase. Once you train your tenants not to bother you, except to pay the rent each month, owning a duplex can be an excellent investment.
Q–Following your suggestion, we interviewed three local realty agents about listing our home for sale. Their estimates of its value were within $4,500 of each other, so the asking price is not the issue. They all seem equally competent and have good recommendations from their previous sellers. One agent wants a six-month listing, another wants a three-month listing, and the third agent wants a 30-day listing automatically renewable unless we cancel it. How long a listing should we sign?
A–The six-month listing is far too long. Realty agents love long listings because then they don’t have to work so hard to get the home sold quickly. The 30-day listing puts pressure on the agent to get your home sold fast, but the automatic renewal is a unique feature I have not encountered before. The 90-day listing is ideal for both you and the agent.
Q–I think you should change your thinking about advising home buyers to make the minimum cash down payment. My wife and I got our mortgage paid off when I retired at 65. That was almost 10 years ago. It’s wonderful not to have to make monthly mortgage payments.
A–We agree that having a free and clear home at retirement time can be wonderful. However, when buying a home, the biggest obstacle is the lack of a down payment. That’s why VA no-down-payment and the new 3-percent-down-payment Fannie Mae and Freddie Mac mortgages are so popular.
However, retirees should not rush to rapidly pay off their home loans. I don’t think it’s wise to have all your eggs in one basket, because a free-and-clear home ties up a huge amount of equity. That’s why many retirees are house rich and cash poor. Thankfully, they can now easily obtain reverse mortgages, which pay them monthly income.
Q–Next fall our daughter will be going to college. She has been accepted at two very expensive colleges, but hasn’t qualified for any financial aid because our income is too high (actually we are quite middle class). My wife thinks we should take out a $100,000 home equity loan and borrow $25,000 per year to pay her tuition. Is this a smart or dumb idea?
A–It’s a very smart idea, because the interest on your home equity mortgage up to $100,000 is tax deductible as itemized interest. Be sure to get the type of home equity loan where you can write checks as you need the funds. The other type, where you receive a lump sum, means you would pay interest on the entire $100,000 even though you only need $25,000 each year.
Q–After reading your articles about the new federal $250,000/$500,000 home sale tax break, my wife and I want to sell our home. But our tax advisor says our state tax law does not conform. We’ll owe state tax, though no federal tax, if we sell now. Is this correct?
A–Most states that have income taxes have not conformed their state tax law to new Internal Revenue Code 121, which contains the new $250,000/$500,000 home sale tax break. Several states are now considering conforming tax laws. But so far only California has conformed, as far as I am aware. Your tax advisor is your best information source on this topic.
Q–My husband got into a dispute with the IRS regarding business taxes. If he doesn’t pay the amount the IRS says he owes, they threaten to slap a lien on our house. Can they do this? If so, can they take away our house even though we have only a small equity of about $12,000? Can the IRS stop us from selling our home?
A–When the IRS records an income tax lien against your husband in the county where you own property, it becomes a general lien on all your realty there. If you don’t reach an agreement with the IRS, it could seize your home and sell it to collect the unpaid tax. However, unless you have a large home equity, it probably won’t do so. Instead, the “new and improved” IRS will wait patiently until you eventually sell or refinance. Then the tax lien must be paid to clear the title. Consult your tax advisor or attorney.
Q–As a professional property inspector, I agree with 99 percent of your advice. Recently you ran a letter from a woman who was upset when she found water in her basement following heavy rains. I have been a home inspector for about 12 years and have inspected thousands of homes for buyers and sellers.
The one point we disagree about is your characterization of the basement moisture condition as a defect. This is a recurring problem for home inspectors. Buyers have “selective memory.” Most inspectors encourage the clients to be present for the inspection (as you always recommend). But it is important to pay attention and to read our written report. Since the woman received an inspection report that indicated possible water seepage, she apparently didn’t understand it. Home buyers should ask questions during the inspection and read the report to avoid surprises.
A–Thank you for sharing your expert knowledge. As I recall, the woman said the inspection report (made during a dry spell) indicated possible basement water problems. Now, several years later, when water entered her basement due to heavy rains, she blames everyone but herself. Since she was warned of the potential problem, I don’t think she has any recourse against the seller. As I advised, a sump pump will probably solve the problem.
Q–Several years ago I inherited a share in a real estate limited partnership from my mother. After doing research, I learned what poor investments they are. I was surprised that my mother, who was usually very smart with her money, would invest in something so risky. I wrote to the general partners to find out the value of the property. It is now worth about 25 percent of the original purchase price. There is no plan to sell it. They told me there is no market for the shares. I would like to rid myself of this investment, even if I have to take a loss, since I could use the money elsewhere. How can I sell these shares in a small partnership?
A–I regretfully report there is virtually no resale market for shares in a small real estate limited partnership such as you describe. There are a few buyers, however, for shares in some of the large limited partnership syndications. But they demand huge discounts. If the general partner is not aware of any resale market for the shares, there probably isn’t any. However, check up on the property. Is it producing a cash flow? Who is receiving it? Maybe you can sell your shares to one of the other limited partners or even the general partners.
Q– I’m considering buying a six-acre parcel of land as an investment. It’s in the “path of growth” outside of town. The monthly payments are affordable and it’s within a mile of an interstate interchange. Do you think this will be a good investment?
A–I do not recommend investing in vacant land. The risks are so high and the profit potential so limited.
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Please note: Real estate laws vary from place to place. Be sure to check the laws of your state and municipality before making decisions on real estate matters. You may need to consult a lawyer.
Write to Robert Bruss at Tribune Media Services, 435 N. Michigan Ave., Chicago, Ill. 60611.
