Monthly Archives: July 2014

Routine Maintenance on Your Home

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Last week, my wife smartly scheduled a company to come and clean out our dryer duct. She noticed that the dryer wasn’t as efficient in drying our laundry and that there were linty remnants raining down the side of the house beneath the duct vent. Upon a quick inspection, the technician said it was clear that we were long overdue for a cleaning. That got me thinking… what other routine maintenance should I schedule to be performed on the house? After all, regular maintenance on a home is so important in keeping a house at its optimal condition. When it comes time to sell, it’s easy to see which houses have been well maintained and which ones have been neglected. Deferred maintenance can cost a seller a significant amount when it comes time to negotiate the price.

Here is a checklist of maintenance to be mindful of from time to time:

Change out HVAC filters: Experts say to change out the filters monthly. If you are a pet-free home and have minimal allergy issues, you can change them out every 2-3 months. Look up at your vents and see if there’s a collection of dust along the grates. If it’s visible on the outside of the grates, then the filter is likely to be maxed out.

Have your dryer ducts cleaned: Having the ducts cleaned increases the efficiency of your dryer. The filter in the dryer that you clean out every time you use the dryer catches only 10% of all the lint. The rest gets built up inside the ductwork that vents to the outside of your house. Not only will a cleaning reduce your monthly utility cost, but it may actually prevent an accident as a clogged ducts can lead to a fire inside your dryer.

Test smoke/carbon dioxide detectors: Good rule of thumb is to test these every 6 months. Push the text button on each detector to see if it emits the alert signal. Better yet, just replace the batteries every 6 months so that you won’t have to deal with a low battery warning signal at 4am!

Clean out the gutters: Spring is a good time to clean gutters and rid them of the grime and sediments from the winter weather conditions.

Have your AC serviced: For single family homes with central air conditioning units, getting it routinely serviced by a professional is a really good idea. If you don’t, inevitably on the hottest day of summer, the AC will cease to work and a technician will be hard to come by during their peak season.

Have your heating units serviced: Conversely, in preparation for the winter, get your furnace inspected and serviced annually. Make sure all heating vents are venting properly and not blocked by furniture.

Have the chimneys cleaned: Getting your chimney cleaned once a year before cold weather sets saves you from surprise issues for that moment when you actually go to use your fireplace.

Conduct a quarterly pest control: There are many companies that come out on a quarterly basis and spray the exterior of your house to rid you of common household pests such as spiders, silverfish, ants, earwigs, etc. More difficult insect problems such as cockroaches, fleas, termites and bees might require more specialized pest control services. Routine applications decrease the presence of these bugs and prevent future infestations from occurring.

Test your water heater’s pressure relief valve: This will prevent mineral and corrosion buildup, which safeguards against leaks. It will also help your heater run more efficiently.

We are lucky to live in California, and in Southern California no less, where we experience less volatile seasonal changes so we can be a less vigilant about protecting the home from weather extremities. But do be mindful and conduct visual checks on the exterior of your house looking for cracks in the pavement, damage to window frames, proper drainage function and potential issues on the roof. And while this is not a comprehensive list, this is a good place to start. Lastly, if you are like me, always get your outdoor BBQ serviced and cleaned in time for Memorial Day to kick off the summer right.

Listing Agreement: What Does It Cover?

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You’ve decided to sell your home and you’ve engaged a real estate agent to get the job done. The agent will subsequently present you with a listing agreement, the contract between the seller and the agent that sets forth the conditions of the listing. It’s important to understand the terms of the agreement because once executed, you will be bound by them for the duration of the agreement. And while the listing agreement protects the agent because it obligates you to work with the agent for a minimum amount of time, it also protects you by detailing the agent’s responsibilities and what recourse you have should he/she not fulfill them.

Here are the key terms of listing agreements:

1)   Length of the listing period.

The listing agreement defines the start date and the end date. During this time period, your agent has the exclusive right to sell your property. Generally, the agreement is written for 3 to 6 months. While sellers typically prefer to have shorter time frames in case a sale doesn’t happen as quickly as imagined, it’s important to recognize that it takes a fair amount of time, effort and expense for the agent to prepare the house for sale, take it to market, and generate interest around the property.

2)   Sales price.

The listing agreement also defines the mutually agreed upon initial list price for the property. The sales price can be further amended during the listing agreement period with the execution of an addendum document.

3)   Amount of commission.

The commission rate is the percentage of your sale that is paid out to the brokerage companies that sponsor the real estate agents involved in the transaction. Typically this is set forth at 5-6%, to be split between the listing broker and the selling broker. The listing agreement should also specify exceptions to the commission as well. For instance, if your agent “double-ends” the sale, meaning that he/she also represents the buyer on the transaction, the commission rate for that scenario should be spelled out.

4)   Duties.

The agreement should lay out all the necessary activities the agent is authorized to conduct on your behalf to sell the property. In addition, the agreement will also specify how you will handle disputes should there be a disagreement between you and the agent. Generally, the contract calls for mediation or binding arbitration.

The listing agreement is the first of several forms a seller will be asked to review and sign during a sale transaction. Read it carefully and have your real estate agent walk you through any portions you don’t understand. Make sure you are comfortable with the terms and clear on how things will proceed.

1031 Exchange: What Is It?

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In keeping with our discussion on real estate investing, there is a powerful tool available to taxpayers called the 1031 Exchange that allows a person to sell an income, investment or business property, and replace it with a “like-kind” property while the capital gains on the sale of the original property are deferred.  Essentially, the profit made on the sale of the original property will not be hit with the capital gains tax which can run as high as 15 to 20% between state and federal taxes combined.

In effect, one can change the form of your investment without cashing out or recognizing a capital gain.  The investment can in theory continue to grow tax deferred in perpetuity, as long as you follow the stringent rules as specified in the tax code.  There’s no limit to how many times you can roll your investment via the 1031 exchange.  But the tax code is tricky and difficult to navigate, and there are specific stipulations and time constraints that must be adhered to.  Here are a few basic tenets of a 1031 Exchange:

1)   A 1031 is not for personal use.

The 1031 provision is written for investment and business properties only, so one may not swap a primary residence for another.

2)  “Like-kind” is a broad term.

Most exchanges must merely be “like-kind,” which is a fairly liberal term.  You can exchange a house for an apartment building, a building for land, a land for a strip mall, etc.

3)  You can “delay” an exchange.

An exchange in theory is a simplae swap of one property for another between two people, but the likelihood of finding someone with the exact property you want and wants your property in exchange is slim.  For that reason, most exchanges are “delayed,” and have an intermediary party that holds the cash after the sale of your property and uses the funds to buy the replacement property.

4)  You must designate a replacement property. 

Once the sale of your property occurs, you have 45 days to designate replacement property to the intermediary, specifying the property you want to acquire.

5)  You can designate multiple replacement properties.

The IRS states that you can designate up to 3 properties as the replacement property as long as you eventually close on one of them.

6)  You must close within 6 months.

You must close on the new property within 180 days of the sale of the original property.  The clock starts to tick the day your original property is sold.  If you take 45 days to designate a replacement property, then you have 135 days from that point forward to close.

7)  If you receive any cash, it will be taxed.

If there’s cash leftover after the intermediary acquires the replacement property, it will be returned to you at the end of the 180 days and that cash, also know as the “boot,” will be taxed as a capital gain.

A 1031 Exchange is a great tool for real estate investing and building wealth over time.  But there are a lot of exclusions and time constraints involved with successfully executing a 1031 exchange.  Employ a trusted real estate advisor like a realtor before you embark on an exchange.  A realtor should have valuable insights on how exchanges work and help you buy and sell the properties for the swap.  Furthermore, they should be able to refer you to a trusted intermediary who will be the foremost expert on the tax code and instrumental towards facilitating the transaction to an effective close.

Real Estate Investment: What to Consider

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Without a doubt, the real estate game can be a lucrative investment strategy that produces positive return on investment above and beyond traditional investing, which is what makes investing in real estate so attractive.  But owning a rental property isn’t as easy as buying a house, renting it out and collecting the rent month after month.  There are many challenges, often financial, that can erode your returns.

The secret to getting great returns on real estate lies in understanding the fundamentals of what makes a great real estate investment within your own set of financial parameters and capabilities.  Here are a couple of important considerations to think about before you buy your first investment property.

1.  Are you ready to invest?

Investing in real estate isn’t for everyone.  Buying a property for the explicit purpose of letting others live in it doesn’t preclude you from taxes, insurance, HOA dues, and other recurring costs above and beyond the cost of the house.  And the financial commitment is only part of the equation.  Do you have the bandwith to make capital improvements, market the property, select tenants and deal with tenancy issues and repairs?

2.  What kind of property suits your investment needs best?

There many different strategies you could adopt when it comes to real estate investing.  Some people look for “flip” opportunities, buying a house cheaply, renovating it and selling it for a quick profit.  Others prefer the long-term stability of single-family rentals or multi-family units.  Others just want to bankroll other investors to earn a passive return.  There are so many opportunities in real estate, you just have to understand your own personal finances and see what fits your lifestyle best.

3.  What is the neighborhood like?

The importance of location is no less vital when it comes to choosing a real estate investment.  Often times, people buy investment properties in a different neighborhood from where they reside, and hence have less first-hand knowledge about the location.  Who are your potential tenants?  What kind of industries do they work in?  How are the schools in the area?  What is the crime rate?  Do your homework and make sure you are comfortable with the neighborhood of your investment property, keeping in mind that as the landlord/manager, you will likely be making many trips to the property.

4.  What are your investment expenses?

A common oversight of first-time real estate investors is underestimating their expenses.  Above the occasional unknown repairs that inevitably pop up, are you ready to shoulder expenses to cover:

  • Utilities
  • Garbage/sewage
  • HOA fees
  • Landscaping
  • Insurance
  • Vacancy costs
  • Scheduled maintenance
  • Capital improvements
  • Fuel (if you are driving frequently)
  • Marketing costs
  • Accounting
  • Legal fees

5.  What can you charge for rent?

Within the neighborhood of your interest, what are comparable units charging for rent?  After expenses, will you net positive cash flow on the property?  With every rental, there are months of vacancy from time to time.  Make sure when forecasting income, to build in loss for vacancy.

6.  Will you self-manage or hire a property manager?

Whether or not you should manage your property depends on your personality, resources, skills and availability.  A typical property manager may cost between 8%-12% of the monthly rent, but a good property manager should also decrease vacancy and maximize rents.  They also handle all the tenant issues and building repairs.  Some companies even manage construction projects on your behalf.

Even when property values are declining, investing in real estate can be profitable.  The long-term historical appreciation rate for housing is over 8%.  So if you buy low, even if prices go lower in the short term, you can still do very well if you hold the property for the long haul.  When you find your ideal rental property, keep your expectations realistic and make sure that your finances are in a healthy state that you can wait for the property to start producing cash flow.