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Location and Buying for Investment

May 15, 1988|DON G. CAMPBELL

The three most important factors in buying real estate, the old saying goes, are "location, location, location." But rules are made to be broken, sometimes.

Question: Yes, location is important, but it should be the main prerequisite only when you are going to live in the house yourself.

We have purchased all kinds of properties in the past 20 years. While ours is a small town with no really "bad" areas, some are preferred to others, but only if you plan to live there yourself.

Here are some reasons why these less desirable areas may be worthy of looking into: They are usually very affordable, the neighbors will love you for improving the neighborhood and you sell or rent to someone who may already live there and find it desirable for lots of reasons--it's near their work or relatives, or it's inexpensive.

This is the advice I give our children: If it's a bargain and has potential, go for it. I would hate to see your readers pass up a bargain when it is as simple as that.

Mrs. A.M.W., Brownstown, Ind.

Answer: You're quite right in that my emphasis on location, location, location is almost invariably aimed at the buyer shopping for his own home. But there's a broader meaning to location, too, and it has to do with appropriateness.

In the case of buying income property, aren't you emphasizing location to a large extent, too? Aren't you stressing the desirability of buying such property convenient to job sources, perhaps public transportation and shopping, and in areas where commanding prices are low enough to offer reasonable rents?

Q: My husband and I are in our early 30s and buying a newer existing home with an FHA 8 1/2% mortgage. The purchase price was $90,500. We are financing $66,000. We have excellent credit (this is our third home), and our only debt is a car payment. My husband's annual income is about $40,000, and we have about $37,000 in savings, stocks and a profit-sharing plan.

Why do we have to pay a 3.8% (or $2,500) mortgage insurance premium? It seems highly unfair, considering our financial position.

Mrs. P.A. Indianapolis, Ind.

A: I quite agree. It is unfair. Unfortunately, the "rules" (if we can flatter a practice that really has no rules), covering who pays and who doesn't have to pay mortgage insurance premiums, bounce all over the landscape.

Many lenders will waive the insurance if the homeowner has paid at least 20% down. Others don't. The FHA currently requires it, regardless of financial position or down payments. But, eventually--with the FHA, at least--you'll get most of those premiums back when you sell the home.

Q: A few weeks ago you answered a question regarding the sale of a home by owners who had a substantial gain, wanted to take the one-time (over-55) tax exclusion, and were purchasing a principal replacement retirement home. You suggested that they could defer the gain by purchasing the replacement principal residence and still use the exclusion, too.

In the example you cited, the people had a net sales price of $234,500. Against this they took the $125,000 over-55 exclusion which left them with an adjusted sale price of $109,500. And, since the retirement home they were going to buy was $175,000, and since this clearly exceeded the adjusted sales price of $109,500, the whole gain would be deferred. But isn't the IRS going to recapture the deferral when they sell the retirement home and, if so, how?

P.W.R., Del Ray Beach, Fla.

A: Once this retired couple gets around to selling their retirement home (I don't know why they would, but for argument's sake we'll say they do), then the fun and games are over, according to the Internal Revenue Service.

The key ingredient in all this--the exclusion of the $125,000 in capital gains--has been used up. Any subsequent sale goes back to the basic rule: Any profit they realize from the sale of their home will be deferred only if the replacement home costs more than the one they have just sold.

No, in this instance, at least, the IRS doesn't go back, retroactively, and try to pick up previous deferments.

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