Don’t Zone Out

Every property has a special designation that defines how it can be used, and knowing this before you buy the property can make a huge difference in what you can do after you buy it. I’m talking about zoning. Here in Mendocino County the following zoning categories exist: residential, civic, commercial, industrial, agricultural, and extractive.

The county defines a zone as “an area to which a uniform set of regulations relating to use of the land and the size of and location of buildings on the land, in order to assure the health, safety and general welfare of the County applies.”

Within the big categories, there are sub-categories. For example, residential zones are typically broken down based on how many residences or “units” are allowed per square foot.

R-1 Zoning says the minimum lot size upon which a second unit may be placed is 5,000 square feet for an interior lot, and 7,000 square feet for a corner lot.

R-2 Zoning says it’s okay to have a single-family dwelling on a 3,000 square foot lot.

R-3 Zoning says for each family unit intended to occupy any building or group of buildings on such building site area, there shall be at least 1,500 square feet of site lot.

And so on. There are way too many designations for me to provide all the details of each subcategory, but basically for residential zoning it comes down to density. If you want to build an apartment complex, be sure you don’t buy property zoned where you can only build one unit per 5,000 square foot lot.

Zoning not only limits the structures you can build on a property, but also whether you can have animals and livestock, and if so, how many. I know a family who bought property so they could have their horse there. Zoning required a minimum of 40,000 square feet to keep a horse, but it was only after the deal closed that they realized the property was 39,990 square feet. Thanks to a complaining neighbor, the horse could not stay.

Once a property is zoned a certain way, it does not need to remain that way forever. In fact, Mendocino County housing officials are struggling to comply with the stipulations of a recent lawsuit by actively seeking land to re-zone to R-3, so higher density, lower cost housing can be built. County officials are also busy creating a new commercial designation, which if implemented, will prevent chain retail and restaurant businesses from locating in the vast majority of unincorporated Mendocino County. The exception to this prohibition would be in the area along Highway 101 and north of Ukiah up to Lake Mendocino Drive.

Zoning designations are critically important to prospective new businesses, because they must know whether their project is in compliance with zoning ordinances well before beginning expensive and time-consuming research. They invest in projects under the assumption that zoning and building codes will remain constant. Sadly, because our city and county officials have not always agreed with their predecessors, Mendocino County has been inconsistent with regard to zoning requirements, costing some developers hundreds of thousands of dollars. While those who do not want any growth here may celebrate when they hear this, I’d like to remind them that no growth leads to economic stagnation. If investors do not invest here because they do not trust our government to keep its word, our town will slowly crumble. No one will take the risk of building new houses here when they can purchase land in the next county and build with little to no worry that regulations will change like quicksand under their feet.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. 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.

Real Estate Investing – What Are My Options?

When it comes to real estate, you can invest in several types of properties. The question is, why would you? Well, because it can pay handsomely.

A reader asked, “If I were interested in investing in real estate, where should I start?” Well, there are several different types of real estate investments: single family homes, duplexes to four-plexes, residential buildings with five or more units, commercial real estate, raw land, limited partnerships, or notes secured by deeds of trust.

Today, I’ll talk about single-family homes. While many of the investment issues are common among all types, most folks start with single-family homes. Bear in mind, all consideration of buying a new residence applies to buying an investment property. Do your due diligence: complete all recommended inspections and listen to your realtor’s advice. Remember, lower priced properties will have a much better rent-to-price ratio. A $200,000 home will probably rent for $1,200/month, while a $750,000 home will likely rent for $3000/month. In addition to a better rent (income)-to-price ratio, you’ll probably have shorter vacancies with a less expensive property. More people are in the market for a $1200/month property than for a $3,000/month property.

For the purpose of this column, I’ll assume we’re talking about a $200,000 house in good condition. You should anticipate expenses in the neighborhood of 3-4 percent of the purchase price per year, or $6,000 – $8,000 per year. This includes taxes, insurance, and maintenance costs. Taxes alone are about $2,400. Now, you won’t spend the additional  $3,500 – $4,500 every year, but the year you need a new roof, paint inside and out, and new carpet, you’ll make up for any money you didn’t spend in previous years.

On a $200,000 house with 20 percent down, your monthly payment will be about $800. I recommend that you treat the expenses mentioned above as a monthly bill. Take $550/month and put it in a separate “reserve” account, so you’ve got the money you need when that paint job or property taxes come due.

On the upside, you’ll have depreciation (a non-cash expense) as a tax benefit. Depreciation is a bookkeeping expense that allows you to deduct the value of improvements over time. As long as you take good care of the property, it will last many years past the “depreciable” life. Consequently, depreciation is only a taxable expense, not a cash expense. This means, you have the ability to save on your income tax expense to the tune of $150-200/month. This savings pretty much offsets your negative cash flow, and income tax savings IS a cash savings. You can reduce your withholding or your quarterly tax payments to provide cash to deposit to your reserve savings account for future property expenses.

So now, you own a $200,000 rental property that takes no significant time to manage or maintain, and that has about a break-even cash flow. You invested $45,000 (a 20 percent down payment plus $5,000 in closing costs), and your benefit is the potential appreciation in the value of this property. If values rise at three percent a year, that equates to $6,000 per year on a $200,000 house—that means you made $6,000 on a $45,000 investment or a 15 percent return. This is called leverage. Compared to other investment options, real estate looks pretty darn good!

In addition to the increased property value, over time rents will also increase. And while expenses go up with inflation, mortgage payment (your biggest expense) won’t go up over time. The bottom line is, if you can afford to buy a $200,000 rental today, by the time junior heads to college in 10-15 years, you should have an asset capable of paying for much of his education.

If you have questions about real estate or property management, contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. 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 35 years.