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Basic Finance: Internal Rate of Return

This is the second in a series about finance. Because saving for a down payment can have such an enormously positive impact on which property you can buy, I thought I’d explain a few things about how to invest your savings as wisely as possible.

The idea of investing can feel quite intimidating, but once you know how to compare various investment opportunities, you’ll be able to figure out which ones will earn you the most money. Last week, I reviewed the concept of compound interest (earning interest on your interest). Now, let’s talk about how to measure your return—what you earn.

When you consider the best way to invest, you need to know how much you will earn over what period of time. Be cautious if any investment advisor who gives you gross return (overall earnings) numbers without including a specific time frame or someone who simply uses payback time to measure your return. These are methods used to conceal some aspect of the investment—to dupe unsuspecting investors.

With gross return, if an investment advisor says you’ll earn $1,000,000 over the life of the investment, but fails to mention what the term is, you may have to live to be 125 years old to enjoy those earnings. If an investment advisor tells you the payback time on an investment is three years, that sounds great—you’ve recouped your investment in three years. But what it doesn’t tell you is how much you could have earned on a different investment with a slightly longer payback time.

Because the idea of payback time is simple, I often hear people use this measurement when deciding whether to make a particular investment. Let’s say we invest in $10,000 worth of widgets. We get back $3,333 per year for three years the total investment is “paid back.” On the other hand, if you invested that $10,000 in something that paid you $3,000 per year for five years, your internal rate of return would go from zero to about 15 percent, a far higher return. This is why I avoid payback time as a measure of return. Using the payback method, you would choose the first investment instead of the one with higher return.

I mentioned “called internal rate of return” just now. This is the very best way to measure investments because it allows you to compare investments with different interest rates and payment schedules over time.

The internal rate of return is the rate at which net present value (today’s value) of a set of cash flows equals zero. The cash flows include two things: the initial investment (as a negative number) and the returns (as positive numbers). Confused? Let’s use an example to clear things up.

Let’s say you have $10,000 in your bank account and you want to buy a house ten years from now. You don’t know whether you should invest your money at 1 percent for ten years or 2 percent for five years. If you only cared about gross return, these two investments would be indistinguishable: they both earn $1,051. However, the internal rate of return looks at the time it takes to earn the money. If you can earn $1,051 in half the time and then reinvest your earnings, clearly the second investment (the one with the higher rate) is a better choice.

If you want to play with numbers (one of my favorite pastimes), there’s a great website that allows you to calculate all manner of things: calculator.net. You can calculate payments and returns related to mortgages, taxes, all manner of loans, investments, and more.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.

 

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Basic Finance 101: Compounding Interest

When it comes to buying real estate, many people tend to get a little overwhelmed by the financial side of things as they try to understand the short-term and long-term effects of the down payment, interest rate, points, and other financial factors. So, I thought I’d write a little series to explain some important financial concepts.

When you try to qualify for a home loan, lenders want to know your debt-to-income ratio. They calculate this by adding up all your monthly debt payments (car loans, student loans, revolving credit card debt, etc.) and dividing them by your gross monthly income (the money you earn before taxes and other deductions). Lenders’ primary goal is to make sure you can repay the loan. So, while it’s okay to have some debt, it’s best to have as little as possible.

To pay down your debt, the best approach is to consistently pay at least the minimum required to stay in good standing on all your loans. Hopefully, you have money left over, and if you do apply it to the debt with the highest interest rate. Also, try not to be tempted by credit card teaser rates, because when those zero percent offers jump to 24.5 percent a few months later, your bill will skyrocket.

Once you’ve paid off your debt, it’s time to start saving and this is where the power of compound interest puts you on an accelerated path to purchasing your own home. Albert Einstein called compound interest “the eighth wonder of the world.” He said compound interest is the most powerful force in the universe and the greatest mathematical discovery of all time. That’s pretty strong language for a guy who took his numbers seriously.

So what is this amazing force? Compound interest is the addition of interest to the principal sum of a loan or deposit. Said another way, it allows you to earn interest on your interest. Compound interest is the result of reinvesting interest rather than paying it out, so that interest in the next period is earned on the principal plus previously accumulated interest. The longer you allow the investment to grow by reinvesting the interest, the greater the magnification of this effect as compared to simple (non-compounding) interest.

Here’s an example. If a 25-year-old invested $1,000 on January 1, 2018 at 5 percent per year, then on December 31, 2018, the new balance on the investment would be $1050. A year later, the new balance would be $1102.50 (the 5 percent interest was earned on $1050), and so on. After 40 years, the original $1,000 would have grown to $7,040. Without compound interest, the original $1,000 would have only grown to $3,000 ($1000 original investment + $50 per year x 40 years).

Here’s a fun fact. In 1626, Europeans bought Manhattan Island from the local Indians for about $29 worth of beads and other goods. If those Indians had the opportunity to invest their $29 at an annual compounding rate of 5 percent, they would now have $5,262,336,110. Some investments have monthly compounding. If that were the case for the Indians, they’d now have $8,118,216,133. Whether it’s $5 billion or $8 billion, it’s a lot of dough.

Now, I recognize that most of us can’t wait 392 years for an investment to grow; however, even over a shorter period, money can grow at an impressive rate, especially if it compounds monthly, daily, or even continuously, and there are investments that do this.

Recognize that compound interest can also work against you. If you are in debt, especially revolving credit card debt, your debt will grow just as quickly as your investment would, which brings to mind another Einstein quote about compound interest, “He who understands it earns it. He who doesn’t pays it.”

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you’d like to read previous articles, visit my blog at www.richardselzer.comDick Selzer is a real estate broker who has been in the business for more than 40 years.

Homeowners Insurance

Homeowners Insurance and Wildfire Coverage

If your home burned in last fall’s wildfires, you may be interested in the following bills going through the state legislature right now.

AB 1797Replacement cost coverage

With a few minor exemptions, this bill would require an insurer that provides replacement cost coverage to provide an estimate of the cost to rebuild or replace the insured structure that complies with specified existing regulations. This estimate would need to be updated every other year or when it’s time to renew the policy.

It’s still up to policyholders to select the coverage limits for their homeowners insurance. This change would go into effect July 1, 2019.

AB 1875Online insurance finder

This bill would require the California Department of Insurance (CDI) to establish an online tool called the California Home Insurance Finder to help homeowners find and compare residential insurance options. To do this, the CDI would gather information via an annual survey of insurance brokers. It would then promote the online tool and make it available in various languages starting no later than July 1, 2020.

In addition, if an insurance agent does not offer extended replacement cost coverage that meets certain criteria, that agent has to let the homeowner know that other providers may offer this type of coverage.

AB 1923: Wildfire debris removal

When the governor declares a state of emergency after wildfires like those we faced last year, authorities can activate consolidated debris removal programs for large-scale clean up. This new bill would allow local governments to pay for the clean up by collecting money from the insurance companies of covered homes in the area, as long as the homeowner grants access to their property through a right of entry form.

AB 2611Appealing wildfire insurance decisions

Right now, insurance companies cannot cancel policies or fail to renew them just because a property sustained fire damage. Assembly Bill 2611 would create an appeal process for disagreements between homeowners and insurers about whether a policy is issued and/or the premium for that policy based on a wildfire risk model.

The insurer has 30 calendar days to respond to the homeowner’s appeal, during which the insurer can’t cancel, increase the premium, fail to renew or make any other adverse underwriting decisions toward the homeowner.

If the insurer denies the appeal, the insurer must provide factual evidence for the decision and let the homeowners know they can appeal again, this time to the Department of Insurance.

AB 3166: FAIR Insurance plans

The Fair Access to Insurance Requirements (FAIR) Plan Association assures that basic home insurance plans are available for homeowners who don’t qualify or can’t afford more comprehensive homeowners insurance. Although mainstream insurers have these basic plans, they don’t always publicize them. This bill would require insurers to inform homeowners about these FAIR Plan Association policies so homeowners know their full range of insurance options.

AB 1772: Extending insurance collection times

Insurance companies limit the time homeowners can apply for benefits after fire-related loss or damage. This bill would extend the minimum time limit during which a homeowner may collect the full replacement cost of a loss relating to a state of emergency from the current 24 months to 36 months—that is, from two years to three years—with additional extensions of 6 months for good cause.

If you’re interested in local fire recovery efforts, visit www.mendocinocounty.org/community/fire-recovery.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.

 

 

Water Rights

Water Rights for Homeowners

Many of us don’t think much about the water we use. If we turn on the tap and water comes out, we’re satisfied. When we hear ominous warnings about droughts, we stop watering our lawns (or limit watering to early mornings), but deep down, we’re not too concerned. The tap has never stopped working, so we expect that to remain the case.

However, if you are considering buying a property, whether it’s residential, commercial, land or industrial, one of the most important considerations is the water supply—is there enough water to do what you want to do year-round? Since droughts really are taking a toll on California ground water and other water sources, water rights will continue to have an enormous impact on real estate. Here’s how.

First, some places will have moratoriums on new water hook-ups, so if you plan to build a home in a place where all the other houses have water, you still may not be able to get it. Several years ago, this happened in Brooktrails north of Willits, Redwood Valley, and in the Ukiah Valley for properties in the Millview County Water District. Those moratoriums have since been lifted, but they and others could go into effect again if the shortage isn’t addressed.

Second, rationing could go from voluntary to mandatory. When we all do our part to cut back, there’s enough water to go around, but at some point, there may not be. This is when you’ll get nasty looks from neighbors if you leave a hose running while washing your car or you’ll stop getting invited to neighborhood parties because of your lush, green lawn. Rationing could come in the form of tiered water pricing: the more you use, the more you’ll be charged per gallon. That’ll make everyone (except teenagers) think twice about those 20-minute showers.

Even without a moratorium or rationing, access to water can be difficult and expensive to acquire. Right now, water hook-ups in the Ukiah Valley cost about $6,000 each, which is cheaper than the cost of drilling a well or developing a natural spring. If your property is off the beaten path, the hook-up to the water main is only the first cost. You then have to pay the construction costs of getting the water from the water main to your property.

In some areas, the cost of getting and/or using water may have an impact on your ability to develop the land. One of the problems local farmers face is the cost of electrical service to run the pumps that protect crops against frost. Even when farmers have almost limitless water rights, they find themselves in a financial bind because they have to pay PG&E a stand-by power charge—the fee for the privilege of using the pumps a couple hours every now and then. To be fair, it’s not unreasonable for PG&E to charge a fee since PG&E has to maintain the infrastructure to deliver the power to all the farmers’ pumps (at the same time) the moment a frost hits.

The next challenge occurs when there’s a misunderstanding about property boundaries and water rights. Even though your boundary line may go to the middle of the Russian River, you may not have enough water rights to get a watering can’s worth of water to soak your tomato plants. Property boundaries do not convey water rights. And that well you drill three feet from the river may be legally determined to be river water, and thus, illegal.

In this world, there are four types of laws: criminal, civil, railroad and water. The bookcases full of laws pertaining to water make sense when you think about it. Water is the life-giving, industry-sustaining substance we all depend on. To that end, California just passed a groundwater management plan that’s destined to have a significant impact on water rights, so before you buy property, make sure you know your water rights.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you’d like to read previous articles, visit my blog at www.richardselzer.comDick Selzer is a real estate broker who has been in the business for more than 40 years.

 

ARMs

Adjustable Rate Mortgages

When you get a loan to buy a house, you can choose a fixed-rate or an adjustable-rate mortgage. A fixed rate means the interest rate stays the same for the life of the loan. An adjustable-rate mortgage (ARM) has a variable rate.

Most ARMs provide lower interest rates at the beginning of the loan, and then the rate varies depending on the index it is tied to. If you’re buying a house that you’re sure you will only be in for a few years, you can usually save a significant amount of money with an adjustable-rate mortgage.

Some ARMs have fixed rates for the first year (or even the first several years), but eventually the rate changes. The amount of the change depends on the index and the margin of the loan. Lenders often use the U.S. Prime Rate as their base lending rate, then add a margin based primarily on the amount of risk associated with a loan. Other common indices include the 10-year Treasury bill, the cost of funds index (COFI), and the London Interbank Offered Rate (LIBOR). Margin is a specified rate above the index, usually 1 to 3 percent. This margin gives the bank the incentive to lend money to you or me and not just buy treasury bills at the index rate.

Before you sign on the dotted line, be sure you understand which index your adjustable interest rate is tied to and what the margin is. Some indices are more volatile than others.

Try to avoid the temptation of low interest rates associated with an ARM if you don’t plan to move in the next few years. While telling themselves, “I’ll probably move,” people sign up for the ARM and then get stuck with higher interest rates than they would have if they had started with the fixed-rate loan.

This is especially true when the ARM begins with an introductory rate that’s a teaser rate—a rate that isn’t fully indexed. Let’s say your loan is tied to the LIBOR at 2 percent with a margin of 2 percent. That would make the fully indexed rate 4 percent. An introductory rate less than 4 percent is a teaser rate, and people fall for teaser rates all the time.

If you qualify for the ARM based on a teaser rate, but you will not be able to afford the mortgage when the rate becomes fully indexed, this is not a good plan. However, if the initial interest rate allows you to qualify for the loan and you know your financial circumstances are about to improve (your spouse is returning to work once Junior goes to kindergarten next year, for example), then it’s fine.

The best way to figure out which type of loan is right for you is to work with your Realtor and a local lender. Be up front about your financial resources and your plans as they relate to your income. Lenders have many loan programs to choose from, so the more information you provide, the better they can help you find a loan that best meets your needs.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.

 

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What Are Landlords Responsible For?

Many people rent rather than own their homes. If this is true for you, you depend on a landlord to maintain your residence in good working order. At a minimum, landlords are responsible for ensuring homes are habitable and safe.

The legal definition of habitable means the structure should be weather-tight with functioning heat, electricity, running water, and sewer or septic. In the middle of summer in Ukiah, you may believe that air conditioning is required to make a place habitable (I’m inclined to agree with you), but legally, air conditioning isn’t required.

Under a normal rental or lease agreement, responsibility for maintaining habitability cannot be passed on to the resident. It is the owner’s obligation not only to have everything in good working order when residents move in, but throughout the term of the lease.

This means landlords must attend to repairs in a timely manner; however, “timely” means different things to different people, and different situations call for different responses. Emergencies require immediate attention, while lesser problems can wait a day or two, or sometimes longer. This is where we employ the Prudent Man Rule (also known as the Common Sense Rule). What is prudent in this situation? What makes sense?

A slow drip in the bathroom on a Saturday night is an incredible annoyance, but probably doesn’t justify a 3:00 am call to the plumber. On the other hand, if sparks are flying from the breaker box, go ahead and make an emergency weekend call. (As a practical matter, the resident should know how to shut off electricity to the house.) The same logic goes for a broken gas line. Keeping in mind that the resident may have no way to contact the owner at 3:00 am, he or she must take some personal responsibility and address the gas leak immediately, then deal with the payment issue with the landlord later.

Who pays for emergency maintenance depends on two things: the cause of the problem and whether the issue was serious enough to warrant emergency action. One of my favorite sayings applies here: “Poor planning on your part does not constitute an emergency on mine.” If a gas line breaks because the resident backs his car into the meter, that’s on him. If a buried gas valve reaches the end of its serviceable life—which only seems to happen at the most inconvenient possible times—that’s the landlord’s responsibility.

The more details are spelled out in the lease agreement, the better. Who cares for the landscaping? Who is responsible for brush removal for fire safety? Many contracts call for appliance repair to be the responsibility of the resident, since appliances are not a habitability issue. If the contract isn’t explicit about who should maintain the appliances, maintenance falls to the landlord.

The type of the residence can also determine who is responsible for what. It may be perfectly reasonable to include landscaping upkeep as part of a lease agreement on a single family home with a small yard, but ridiculous to ask someone renting a small cabin on a 200-acre ranch to mow the whole property on a regular basis (unless the resident is compensated for that time with a reduced rental payment). As is always the case in these situations, it really helps if you read and understand the lease agreement BEFORE you sign it.

Although some maintenance issues are negotiable, safety issues are not. Landlords must install and maintain smoke detectors and carbon monoxide alarms. These are incredibly important (and inexpensive). Less immediate but also important are issues related to sewer or septic, mold, and dangerous but difficult-to-see hazards like small cracks inside the chimney. Landlords should inspect residences periodically for obvious and not-so-obvious threats.

Whether you’re a resident or a landlord, my best advice to you is to communicate to clarify expectations and avoid misunderstandings.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.

 

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The Accidental Realtor

In a typical real estate transaction, buyers and sellers each have a licensed real estate agent to represent them. Realtors are legally obligated to work in the best interest of their clients, and when each party has a Realtor, everyone’s roles and loyalties are well established. Sometimes, however, one or both parties in a transaction (buyers and/or sellers) opt to represent themselves and forego the assistance of a Realtor. This can cause significant problems for everyone involved.

Unlike many industries, no written contract is required for a Realtor to represent a client. A verbal agreement between a buyer or seller and a Realtor is all it takes for a Realtor to become a client’s legal agent. In fact, even without an agreement, as soon as a Realtor starts giving advice about a real estate transaction, that Realtor can be considered a buyer or seller’s legal agent. Odd, but true. Once a Realtor is in the role of legal agent, he or she becomes responsible for many aspects of that client’s transaction, not just the ones advised upon.

This is why it is unfair to ask your friend who is a Realtor to advise you unless that friend is representing you in the transaction. Realtors are friendly by nature (or they don’t last very long in the real estate business). They want to help you, both because they’re nice and, candidly, because they’re probably hoping for future referrals. However, you are putting your friend in a terrible fix by asking for advice, because as soon as your friend advises you, he or she takes on economic and regulatory liability. Your friend can be sued or fined for giving advice if the transaction goes poorly.

Realtors who represent half of a transaction when the other party has no representation need to be really careful how they walk the tightrope between making a transaction go smoothly for their client and accidentally becoming the legal agent of the unrepresented party.

Here’s an example of how slippery the slope can be. If the unrepresented party asks a Realtor who they recommend to do a pest and fungus inspection and the Realtor provides three local contacts, the Realtor has not become that person’s legal agent. If instead the Realtor says, “Hey, I’ll see my favorite pest guy this afternoon, I’ll have him call you,” now we’re in a gray area. If the Realtor agrees to review the pest and fungus report with the unrepresented party once it’s done, the Realtor is clearly signing up to be that person’s legal agent.

Let’s consider the classic for-sale-by-owner (FSBO) situation. To avoid paying a Realtor’s fee, a homeowner puts his home on the market and plans to represent himself in the negotiation. Buyers who are represented by a Realtor fall in love with the property and make an offer. The Realtor representing the buyers wants everything to go smoothly for her clients, so she finds herself in an awkward position when the seller starts asking questions about the sales contract. It is in the best interest of her clients that the seller understands the offer, but as soon as the Realtor starts answering the seller’s questions, she may inadvertently be signing up to represent him as well as the buyers.

Realtors can also accidentally become legal property managers simply by being helpful. For example, if a property owner finds a tenant for her investment property and asks a Realtor for help negotiating the lease, that Realtor has legally become the property manager. If the property in question is later found to have black mold and the tenant gets sick, the Realtor could be liable for damages as a property manager who didn’t adhere to regulatory requirements.

If you’re a Realtor, protect yourself by educating friends and clients about your legal liability when it comes to giving real estate advice.

If you have questions about getting into real estate, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.

 

carlos-muza-84523-Investing

Tax Benefits of Investing in Real Estate

Whenever I discuss the tax benefits of investing in real estate, I start with this disclaimer: I am not a tax professional and I am not giving advice here. My goal is to provide ideas for you to discuss with your tax professional.

If you’re looking for a long-term investment, real estate is a great option. Do you have small children who may go to college someday? Purchase an investment property now and in 18 years, that property may go a long way toward paying for your child’s higher education.

A huge part of the tax benefit of investing in real estate is the ability to write off depreciation. Depreciation is the reduction in the value of an asset with the passage of time. So in real estate, it’s the ability to deduct a portion of the value of the improvements on a property. In real estate, “improvements” refer to how you’ve improved the bare land, things like structures, wells, and other additions nature did not provide.

Although the tax code changes periodically, right now the government allows you to depreciate improvements on a residential real estate property over the course of 27.5 years. This is straight-line depreciation, which means you deduct the same amount each year.

Depreciation shows up on tax returns as though it’s an expense you paid that year, even though you didn’t actually pay that money to anyone. Here’s how it works.

Let’s say you bought a duplex for $400,000 and 75 percent (or $300,000) of that value is attributed to improvements. Divide $300,000 by 27.5 years and you’ll see the annual depreciation is $10,900. If you have a break-even cash flow, meaning your rent covers expenses like fees, maintenance costs, and loan payments, then that depreciation is saving you anywhere from $3,500 to $5,000 a year in state and federal taxes. Unless you are a real estate professional, you are limited to rental losses of $25,000 per year.

Looking at the long-term benefits, let’s say you purchased the duplex with a down payment of $100,000. You have a break-even cash flow and a 3.5 – 5 percent after-tax return (the amount you saved by taking depreciation). This is in addition to the appreciation of the property value (if any). Although no one can guarantee future real estate values, the last five years have seen significant increases and the last 50 years have seen an average annual increase of more than 5 percent.

When it comes time to sell this little jewel, remember the reason for buying it was to send your kid to college. Eighteen years from now, let’s imagine you sell the duplex for $962,647—a 5 percent annual increase in value. During the 18 years you held the property, you realized $196,200 worth of depreciation. On that, you’ll pay 25-35 percent in recapture taxes (the government likes to recapture the depreciation). So, between brokerage fees and closing costs, your total costs are $62,647. Your net proceeds are therefore $900,000. (All of this is at today’s tax rates, so the numbers are estimates, of course.)

Unfortunately, we’re not quite done. Now we pay a capital gains tax on profit, which runs about $150,000 plus the recapture of $65,000. Also, you have to pay back the original $300,000 you borrowed to purchase the property. This will leave you with an after-tax amount of $385,000. Remember, you put $100,000 down, so that makes your profit $285,000 (plus the annual tax savings from depreciation of $3,500-5,000 each year for the past 18 years).

This is a conservative estimate, as it assumes you never raised the rent. It also assumes an appreciation of 5 percent. Earning $285,000 on a $100,000 investment over 18 years amounts to an annual compounded interest rate of 7.78 percent after taxes (or a pre-tax rate of 12 percent), and that doesn’t include the annual depreciation benefits.

All investing includes risk, but historically, real estate has been a good bet.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.

 

Opportunity Zone

Opportunity Zones

Before I begin, please note I am not an attorney, nor am I an accountant, and the information currently available about the program I’m about to introduce is sketchy at best. Okay, with that disclaimer, let me tell you about something I recently discovered, something that sounds too good to be true, but from what I can tell, is completely legitimate.

In December 2017, the federal government passed a tax bill that paved the way for a new program called the Opportunity Zone program. Opportunity Zones correspond with census tracks and are designated by the state based on average income levels. It appears they are meant to replace the old Enterprise Zones.

Based on my initial research, the Opportunity Zone program offers tax incentives to encourage investment in low-income communities, and the map I’m looking at indicates that much of the Ukiah Valley is an Opportunity Zone. Here’s how I believe they work.

Let’s say I bought a rental property in Ukiah back in the 1970s for $15,000. Now it’s worth $300,000. If I sell it outright and use the proceeds to purchase another investment property that happens to be in an Opportunity Zone, I can defer the capital gains tax on that sale. If I hold that new property for a minimum of 10 years before selling it, I will pay no federal income tax on the whole transaction. The entire sale is federally tax-free. Incredible!

Let’s do the numbers. Using the example above, let’s say you’ve decided to sell that rental you purchased in 1973. You sell it for $300,000 and use the proceeds to purchase a commercial building in an Opportunity Zone for $1,000,000. You hold the commercial building for 10 years and then sell it for $1,350,000 (a 3 percent annual appreciation) (increase in value of an asset over time).

If I understand the Opportunity Zone program, here’s how much you’d save in taxes. The total depreciation (decrease in value due to the aging of an asset) on the original rental was $12,000. The total depreciation on the commercial building was $170,000. The total appreciation of the rental was $285,000 and total appreciation on the commercial building was $350,000.

If the commercial building were not in an Opportunity Zone, you’d pay 25 percent in recapture taxes on the depreciation of both properties (amounting to $45,500) and 20 percent in capital gains taxes on the appreciation of both properties (amounting to $127,000). However, when you sell the commercial building after owning it for ten years in an Opportunity Zone, from everything I’m reading, it appears you pay nada, zero, zilch in recapture or capital gains taxes for either property.

Because this program is based on the average income in each census track, the communities that qualify may have a blend of high-value and low-value real estate. I have sent inquiries to the IRS to get clarification on the specifics of this program (e.g., Does it include land or is it just residential or commercial properties?), but have yet to hear anything back. However, from what I can tell, the potential benefits of investing in Opportunity Zones is staggering. This is why I couldn’t wait to write about it. As I learn more, I’ll be sure to pass the information along. In the meantime, if you are interested in reinvesting income from the sale of your existing real estate, take a look at an Opportunity Zone map. Visit http://dof.ca.gov/Forecasting/Demographics/opportunity_zones/ and scroll to the bottom of the page for links to interactive maps and other resources. This could save you a bundle of money.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.

Craftsman Kitchen

What’s Hot?

Style trends come and go, so it can be pricey to continually chase the latest fads, but if you’re interested in selling your home, it’s smart to know what sells. Right now, here’s what’s hot. Statistics about performance are from the Home&Wealth newsletter.

Barn Doors – but not on your barn. People are wild for barn doors to separate indoor living spaces. They affix a metal rod above a doorway and slide the interior barn door like a curtain between rooms. Listings with barn doors sold for 13.4 percent above expected values, 57 days faster than expected.

Shaker Cabinets – simple, well-made, minimalist cabinets. No curly cues or intricate engraving. Listings with shaker cabinets sold for 9.6 percent above expected values, 45 days faster than expected.

Farmhouse Sink – big, deep rectangular sinks like you see in old farmhouses. Usually, they’re porcelain, but you can find them in stainless steel. Listings sold for 7.9 percent above expected values, 58 days faster than expected.

Subway Tile – rectangular tile (about twice as wide as they are tall), often white. Listings sold for 6.9 percent above expected values, 63 days faster than expected.

Quartz – countertop materials come in and out of fashion faster than teenage slang. Right now, quartz is hot and it’s beautiful,. Listings with these countertops sold for 6 percent above expected values, 50 days faster than expected.

Craftsman – unlike countertops fads, Craftsman style homes and décor have stood the test of time. They are perennially popular. Famous architect Frank Lloyd Wright was a fan and built many such homes. Listings sold for 5.4 percent above expected values, 14 days faster than expected.

Exposed Brick – this only works if you have the brick to expose, typically in older homes. If you go into local restaurants Patrona or Saucy, they’ve used this style to great effect. Listings sold for 4.9 percent above expected values, 36 days faster than expected.

Pendant Light – these hang down on a wire or cord and have an exposed bulb under a small shade, often made of glass. They can be modern or traditional, depending on the shade, and they’ve been popular for a while. Schat’s Courthouse Bakery has them above their baked goods counter. Listings sold for 4.6 percent above expected values, 48 days faster than expected.

Frameless Shower – these have glass with beveled edges rather than encased in metal. Listings sold for 4.6 percent above expected values, 38 days faster than expected.

Heated Floors – instead of stepping on to cold bathroom tile with bare feet in the middle of winter, heated floors keep things nice and toasty. Listings sold for 4.3 percent above expected values, 28 days faster than expected.

Stainless Steel – stainless steel appliances have been popular for at least the last decade. I worry they’ll go the way of the avocado refrigerators from the 1970s, but for now, they remain very stylish. Listings sold for 4.2 percent above expected values, 42 days faster than expected.

Granite – like I said for quartz, countertop preferences come and go. Granite is beautiful, but not always easy to maintain. Listings sold for 4.1 percent above expected values, 38 days faster than expected.

Backsplash – the tile or countertop lip that protects the wall from kitchen messes. It’s especially nice to have behind the kitchen sink and stove. Listings sold for 4.1 percent above expected values, 46 days faster than expected.

Tankless Water Heater – I am a big fan of having instant hot water, and if not for my son, Dan, who actually has fallen asleep in the shower, my tankless water heater would save me money. Listings sold for 4 percent above expected values, 43 days faster than expected.

Outdoor Kitchen – especially in areas with temperate weather like ours, outdoor kitchens almost seem to expand the square footage of the house. Listings sold for 3.7 percent above expected values, 19 days faster than expected.

If you have questions about getting into real estate, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.