Real Estate Investments Are Faster Road to Riches Than Saving Money

QUESTION: My husband and I own our 4-bedroom home. We agree it was the best investment we ever made when we bought it about seven years ago. Although we had to pay 14% interest, we refinanced and are now paying only 9.5% interest on our mortgage.

But, I can’t get my husband to buy any more real estate. We have about $60,000 in various certificates of deposit earning from 7% to 10% interest. Although that is good, I feel we should take some of this money to buy a nearby rental house as an investment. But, my husband is perfectly satisfied to keep earning meager interest on our money, which, after income taxes, is a pretty poor return. What do you advise?

ANSWER: Keep trying to persuade your husband that nobody ever became rich by saving money. The meager yields paid on savings seem high, but after income taxes and inflation you are lucky to break even. To earn big profits you must take risks, preferably as small as possible.

By contrast, sound, well-located homes usually appreciate at least 5% annually. More important, thanks to the magic of leverage, you can earn annual yields of 50% or more.

To illustrate, suppose you buy a $100,000 home for a $10,000 cash down payment and obtain $90,000 financing. If that house appreciates 5% in market value in the next year to $105,000, that $5,000 increase is a 50% increase in your $10,000 investment. Even if you have a small negative cash flow, meaning the rent is less than the expenses, over the long term such a rental house should be a very profitable investment.

Lender’s Insurance Doesn’t Protect Buyer

Q: We were caught in a very bad situation. The man from whom we bought a house forged his ex-wife’s signature on a deed to him. Then he sold the house to us. She was out of the country, but when she returned, she claimed her half of the house. The title insurance company paid off the mortgage, but left us twisting in the wind. They say the lender’s title insurance doesn’t protect our $45,000 equity. Is this correct?

A: Yes. There are two types of title insurance. One is a lender’s title policy, which protects the mortgage lender from loss due to unexpected title risks, such as forged signatures, claims of undiscovered heirs and many other risks. The other is an owner’s title policy, which for a slight extra cost would have insured your equity. It was foolish economy not to buy an owner’s title policy. Please consult your attorney regarding your claims against the dishonest seller.

No Tax Benefits for Buying Vacant Land

Q: I want to invest in vacant land, which I would hold several years until it appreciates in value. Are there any tax benefits of land investments?

A: No. Vacant land is probably the worst investment unless you are 100% certain that it will go up in market value. There are no special tax benefits. Of course, you can deduct mortgage interest and property taxes, but land is not depreciable.

Improvement Loan Less Than Refinancing

Q: We are planning to spend about $25,000 to upgrade our home. Should we finance these improvements with a home-improvement loan or refinance our entire first mortgage, which currently has a 9.75% interest rate?

A: I wouldn’t touch that nice 9.75%-rate mortgage. Your best alternative is to obtain a bank home-improvement loan, currently around 12% to 13% interest in most areas.

Is Time Good to Start Selling Real Estate?

Q: One of my friends recently went back to work selling real estate. In her first month, she earned about $5,600 in sales commissions. Although I don’t have a real estate sales license and would have to take classes and study for the exam, do you think today is a good time to get into real estate sales on a part-time basis?

A: If you are just becoming a real estate salesperson for the high income, please don’t do it. But, if you sincerely want to help property buyers and sellers, while earning a high income for yourself, then you should get your sales license and give realty sales a 100% effort.

However, if you can’t devote full-time to selling real estate, perhaps you should find another line of work because it is very difficult to become successful on a part-time basis.

Why Are So Many Deals Falling Apart?

Q: I am a real estate agent who has been selling homes for more than 10 years. But I have never had so many home sales fall apart as in the last few months. The buyers have various reasons, such as change of mind, problems obtaining mortgages, financial reverses. One couple decided to divorce, and several buyers found other houses they liked better. I realize I could sue for the sales commissions, but my firm does not believe this is good public relations. Do you have any idea why so many home sales are falling apart?

A: My real estate agent friends share your problem. There is no easy solution, other than to constantly remind the buyers that they are getting a good deal. Your aim should be to prevent buyer’s remorse, that dreaded illness that affects virtually every home buyer, especially first-timers.

The most successful realty agents prevent home sales from falling apart by anticipating problems. These difficulties can include inspections, financing and closing problems. Failure to remove contingencies on time is another major trouble spot.

One of the most successful realty agents I know uses the “we” strategy. For example, she says, “I think we should do this” and “Our next step is to do this.” By leading the buyer gracefully, but firmly, she remains in control and never lets the buyer wander or get lost in the home-buying maze. Perhaps you should adopt a similar strategy.

Book on Buying Home With Little Cash

Q: Please recommend a book or other source on how to buy a home and investment property for a low down payment. As we have no alternative, but have good income, we need all the help we can get before realty prices go higher.

A: The best book about buying real estate with little or no cash is Robert G. Allen’s “Nothing Down,” available at larger bookstores and libraries. Study it very carefully and you will find at least 53 ways to buy real estate with virtually no cash.

Are Apartments a Good Investment?

Q: You often recommend buying single-family homes for personal use and for investment as rentals. But, I can’t recall your recommending apartments for investments. As a novice investor who realizes most fortunes are made in real estate, what do you think of apartments?

A: As a former apartment investor, I can say with great authority that houses are much easier to buy, finance, manage and resell profitably.

When I owned apartments I learned that I had to increase net income to increase the property value. However, the market value of houses depends on neighborhood supply and demand rather than net income. If you own well-located houses in good condition, you can enjoy rental income while inflation drives home prices gradually up. Better yet, do as I do and buy run-down junker houses that can be fixed up for resale profit.

But, a special word of warning: Watch the quality of the school district especially closely. Families will flee bad schools, thus hurting the value of even the best-located homes.

Is Title Insurance Required by Law?

Q: I am buying some rural land for cash. Someday I want to build a retirement home there. A local attorney is handling the title transfer. But the realty agent says I have to buy title insurance. Is this true?

A: No. Title insurance is not legally required in any state. But you would be a fool not to buy an owner’s policy to protect your equity.

Although I’m sure you have great confidence in the attorney handling the title transfer, if he makes a mistake or fails to carefully check the title status and can’t pay your resulting loss, you are up the creek. Title insurance is cheap peace-of-mind protection for property buyers, especially those who don’t have a mortgage. If you had a mortgage, the lender would insist that you obtain title insurance.

Delays Buying Home, Fearing Recession

Q: My husband is reluctant to buy a home because he thinks tough times are coming and we might lose a home we buy. He says we should continue saving our money and forget about buying a home until the economic conditions settle. What do you think?

A: I think your husband doesn’t want to buy a house and will use any excuse he can find to avoid buying. The country is booming, economically. Employment was never higher. The unemployment rate is dropping.

There is never a perfect time to buy a home. Yet millions of homeowners took a chance, bought their homes and now realize it was the best investment they ever made. You can either join them or continue wasting money paying rent.

How to Sell House in Competitive Market

Q: Several months ago, I inherited a house from my late father. As I live about 350 miles away, I decided to sell the house. It has been listed with a fine realtor, who is trying hard to find a buyer. The asking price is slightly below recent neighborhood sales prices. But, the problem is the market where the house is located is overbuilt. For every house that sells, the realtor tells me there are six houses still for sale. Any suggestions?

A: To sell a home for top dollar in a good or bad market, wrap it in an attractive package. In a very competitive market, your house must offer special advantages.

First, check the home’s physical condition. Be sure it is freshly painted inside and outside. Also, make necessary repairs, clean up the grounds and landscape if necessary.

Second, look at the home’s financing package. Make certain the realtor has mortgage alternatives lined up for prospective buyers.

Third, if you can carry back financing for the buyer at an attractive below-market interest rate with a low down payment, you will make the home stand out from the crowd. Since you inherited the house and paid nothing for it, providing seller financing will give you welcome extra income from both principal and interest.

What Is Best Way for Group to Invest?

Q: My brother, a cousin and I want to pool our resources to invest in run-down properties, which we will fix up to resell for profit. Should we form a corporation to hold title?

A: I do not like holding title to real estate in the name of a corporation because it can be difficult to pass through all the ownership benefits to the shareholders.

Another alternative is to form a limited partnership to hold title. This method limits the liability of the partners, just like a corporation. However, if the partners actively participate in managing the property, the limited liability benefits are lost.

Still another possibility is a general partnership. But, a serious drawback is that any general partner can obligate the partnership assets without approval of the other partners.

While none of the methods of group ownership is perfect, you definitely need a written agreement to specify the obligations and benefits each investor will encounter. I do not recommend just taking title as tenants in common and hoping everything works out as planned. Consult a real estate attorney to draw up a written contract to prevent misunderstandings.

Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent to the Real Estate Section, Los Angeles Times, Times Mirror Square, Los Angeles 90053.