Understanding Your Property Tax
As soon as you purchase a property either from the homeowners or at an auction, you become the official owner of the property even though you may not be able to take immediate possession of it. As owner, you're in charge of insuring the property and paying property taxes i Pay the property taxes as soon as they're due. (You may need to pay back taxes when you purchase the property.) i File an affidavit proving you paid the insurance and property taxes. If the homeowners decide to redeem the property, an affidavit enables you to recover any taxes and insurance payments you made during the redemption period.
In addition to monthly principal and interest payments on your loan, you'll have to figure on paying property taxes and hazard insurance. Many lenders won't trust you to make these payments on your own, especially if you are borrowing at a high loan-to-value (80 percent LTV or higher). Lenders estimate the annual payments for taxes and insurance, then collect these payments from you monthly into a reserve account (called an escrow or impound account ). The lender then makes the disbursements directly to the county tax collector and your insurance company on an annual basis. Thus, the total amount collected each month consists of principal and interest payments on the note, plus taxes and insurance hence the acronym PITI.
Delinquent property taxes are almost always processed at the county level, so your county offices are the most logical places to find information about tax sales. If your county has a website, it should supply most of the information you need, so the clerks don't have to spend most of their days answering questions.
A review of the expenses for most rental properties indicates that the property tax expense is often one of the largest costs in owning real estate. In many parts of the country, property taxes are tied to the value of the real estate. If that's true for your area and real estate values decline, contact your local assessor and inquire about getting a reassessment. A lower assessment leads to a direct reduction in your property tax bill and a corresponding increase in your cash flow. You may feel helpless against the bureaucracy, but remember that tax assessors have been known to make clerical errors or to fail to take all factors into account when valuing rental property. If you feel that your assessment is too high, contact your assessor. She may be willing to make an adjustment if you back up your opinion with careful research and a good presentation. Or you may need to make a formal property tax protest. Protests are often first heard within the assessor's office or a local board...
Property tax is usually an ad valorem (imposed at a percentage of the value) that an owner of real estate or other property pays on the value of the property. Some state tax is based on the size and use of the land. The taxing authority performs or requires an appraisal of the value of the property, and the tax is assessed in proportion to that value. within their jurisdiction. In many circumstances, the property tax increases quite frequently through several special assessment charges based on improvements, voted-in measures, schools, or emergency services. These charges can be a percentage or a flat rate, depending on how it was voted in by the people or governmental agency. Keep in mind that building and land are appraised separately. Most states have systems in place in which a property is reassessed or revalued periodically. Then, the higher your property is valued, the higher the property tax. Property taxes in most states are typically paid twice a year. Property tax is a...
If you think that your property taxes are too high, writes tax consultant Harry Koenig, you're probably right Research shows that nearly half of all properties may be assessed illegally or excessively. While Koenig probably overstates the situation somewhat, millions of property owners do pay more in property taxes than they need to. With just a little attention and planning, you can avoid this trap by taking several precautions 4. Learn tax assessment laws before you improve or rehabilitate a property. The property tax laws of every state list the types of property improvements that are taxed and the applicable millage rates. Once you discover the detailed nature of these laws, develop your property improvement strategy to add value without adding taxes.
Yet, since the early 1970s I have seen all types of booms and busts. I have seen 18 percent mortgage interest rates. I've lived through the of double-digit rates of inflation, the disastrous 1986 Tax Reform Act (which killed off the most profitable real estate tax shelter techniques), and the recent market of sky-high prices. Yet I (and nearly all other savvy investors) have figured out how to make money in every one of these market situations and all of the other types of markets in between.
The process for figuring out the cash flow for a 30-unit apartment complex is the same as the process for a single-family home. For instance, say you bought a three-bedroom, two-bath home and you're renting it for 1,200 per month. As the landlord, you're responsible for property taxes, insurance, and a landscaper. All those expenses total 300 per month. You also pay 800 per month for your mortgage. The tenant pays all other expenses. Here's a quick formula for figuring out cash flow per month
H Example Consider a 100,000 property that brings in 10,000 per year in net income (net means gross rents collected, less expenses, such as property taxes, maintenance, utilities, and hazard insurance). The 100,000 in equity thus yields a 10 percent annual return on investment ( 10,000, the annual net cash flow, divided by 100,000, the equity investment).
The truth of the matter is that investors have no real control over how much a property-flipping transaction will ultimately cost them. The reason for this lack of cost control is that the actual amount of the holding cost is unknown when flipping a property. Holding costs include debt service, insurance, property taxes, maintenance, and security. And the single largest cost of holding on to a piece of property is its debt service or monthly loan payments. The problem with being the proud owner of a piece of investment property is that the mortgage meter is always running, whether the property is occupied or vacant. I learned this lesson the hard way when a property-flipping deal, which I thought was going to be a slam-dunk, turned out to be an air ball instead. When I was young and dumb, I bought a run-down single-family house in South Tampa with
When you find a piece of real estate that you would like to purchase, you direct your administrator to purchase the property within your IRA, just like you do when your IRA invests in mutual funds. You are not taking a taxable distribution from your IRA you are simply making an investment within it. All the income from the investment goes back into your IRA, and all the expenses, such as maintenance and property taxes, are paid from the IRA.
In some states, when purchasing a property, you are responsible for paying a supplemental tax. This is usually a local tax paid to your county tax assessor. In California, for example, you receive a supplemental tax bill to be paid in two payments. The amount due is a percentage of the previous owners' assessed value as compared to the price you paid currently for the property. For example, if the previous owner paid 200,000 and you paid 400,000 for the same property, the property is reassessed, and the new value is the price you paid 400,000. Your local tax office sends you a supplemental tax bill due in two payments for a percentage of that 200,000 difference. This bill is in addition to your normal property tax bill, but (thankfully) it doesn't exist in some states.
When homeowners or real estate investors fail to pay their property taxes, local governments place a tax lien against the property. If the taxes remain unpaid, the government will eventually sell the property via a tax deed. The free and clear infomercials of Ed Beck promise to show investors how they can make money buying up these tax liens and tax deeds.
It was already clear in August 1921 that the adversaries of the taxation of material wealth were so strong as to be able to wreck, in the Reichstag, every project designed with this object. Faced by the violent opposition of the interested classes, the Government, in the fiscal projects published in August, definitely abandoned the idea of a mortgage title in favour of the Reich on rural and urban property and of a participation in industrial and commercial enterprises. The proposal of a new property tax and of a tax on increase in capital were no longer the kernel of the reform, as the Socialists wished, but a mere ornament beside the heavy taxes on consumption goods.
I When you buy a property at an auction in an area that has a mandatory redemption period, you may need sufficient funds to hold the property for several months to a year until you see your profit. (If you're using your own money, you need just enough cash to insure the house and pay the property taxes. If you borrowed the money, you may need additional cash to cover the monthly payments. For more about financing your purchase, refer to Chapter 5.)
I Deliver a title commitment and chain of title, showing the history of ownership and any claims against the property. This ensures that the person selling the property is the person who owns it and makes you aware of any liens against or property taxes owed on the property.
Real estate owners who fail to pay their property taxes in a timely manner find that the local county files a lien on their property. A lien is any legal claim or charge against real or personal property for the satisfaction of a debt or duty that includes the right to take the property if the obligation isn't discharged. The county ultimately sells the property in a tax lien certificate sale auction to generate the funds necessary to satisfy the unpaid real estate property taxes, along with the accrued penalties and fees. Tax lien certificates can be a good investment regardless of the economic cycle, because some property owners will always be unable to pay their property taxes. When you buy a real estate tax lien, you're simply providing the government entity with the funds for the delinquent taxes and buying the rights to collect those taxes from the property owner (plus penalties and a fixed rate of interest that can range from 12 to 24 percent per year). Tax lien certificates...
There are also other, smaller property sectors that REIT investors might want to consider. Triple-net lease REITs own properties leased primarily to single tenants who pay for all maintenance expenses, property taxes, and insurance. The cash flow growth for these types of REITs is likely to be significantly lower than those in other sectors, but the risk is low if the properties are not built for specialty tenants and if the credit quality of the tenants is strong the yields on these shares are also significantly higher than that of the typical equity REIT. Like health care REITs, their shares are more sensitive to changes in interest rates.
To book that profit you would have to sell the property. Realtor fees when you sell, plus property tax, insurance, and repair costs, might bring the net gain down to around 380,000. (Realtor fees at 6 percent would equal 60,000 on a 1 million house. Property tax at, for instance, 1.5 percent on a 1 million house would be 45,000 over three years. Insurance would be another 5,000 over three years, and repairs perhaps another 10,000.)
When it comes to finding distressed homeowners, a little detective work also comes in useful. Search public notices and courthouse records for owners who are delinquent on their property taxes or are in some stage of the foreclosure process. There's a good chance these people are having money problems and may be eager to sell their homes before a foreclosure is complete.
That is a gain of 0 percent. The cost of real estate fees when you sell, plus property tax, insurance, and repairs, might bring your net investment down to around negative 120,000. (As before, real estate fees would be 60,000 on a 1 million house. Property tax at 1.5 percent would be 45,000 over three years. Insurance would be another 5,000 over three years and repairs perhaps another 10,000.)
However, owning a second or third property as a rental property or an investment property is not something I recommend unless you are someone who will not stress out over bad tenants, lost monthly rent when tenants leave and you cannot re-rent it for a month or longer, lost monthly rent when the tenants don't pay you, the hassle of possible evictions, repairs on the house, property tax, property insurance, liability insurance, and being responsible for a second and third mortgage to a bank.
Currently, the property barely produces enough cash flow to pay expenses, property taxes, and mortgage payments. The owner wants to turn this money pit into a moneymaker, but lacks the will to invest time, effort, money, and talent. Property taxes 6,888 Maintenance and upkeep Advertising Insurance Property taxes
In addition to checking the title for any property tax liens, head down to the county treasurer's or assessor's office and ask for the following i The property tax formula. Currently in Michigan, a house is generally worth 2 to 2.2 times the SEV, so a house with an SEV of 200,000 is worth 400,000- 440,000. Ask the assessor what formula he uses. This can often provide you with a rough estimate of the property's market value. i Whether property taxes are currently paid up and whether the assessor's office has a property tax lien on the property.
T&I represents the amount you must pay monthly for property taxes and homeowners insurance. MI represents the monthly mortgage insurance premium you may have to pay if you put less than 20 percent down. HOA represents the monthly amount you may have to pay to a condominium or subdivision homeowners association. To keep things simple, let's say that your household income (including anticipated rent collections) equals 7,000 a month. To buy the property you want, you need a loan of 235,000. You decide to go for a 30-year, fixed-rate loan at 7 percent interest. This loan will cost you 1,563 per month (235 X 6.65 see Table 8.1). Property taxes and homeowners insurance on this property will total 400 per month. No mortgage insurance applies, but you must pay the homeowners association 125 per month to maintain the community swimming pool, tennis courts, and clubhouse. Here's how to compute your housing cost ratio for this example
Most out-of-town or absentee property owners become that way because they either inherited a property or, for whatever reason, were forced to relocate and failed to sell their property before they left town. Or, the property is owned by a business entity such as a corporation or limited liability company located outside the county. How do you know if a property belongs to an out-of-town or absentee owner Simply check the property owner's post office mailing address listed for the parcel on your county's property tax roll. If the owner's mailing address is out of your county, then the property belongs to an out-of-town owner. And the farther out-of-town owners live, the better your chances are of being able to buy a low-cost real estate option on their property. I suggest that you contact the customer service department at your county property appraiser or assessor's office to see if they maintain a database of property owners residing outside the county. If not, ask if they know of a...
I recently discovered an eight-unit property that is up for sale. This apartment building generates 40,800 a year in rents. The seller is asking 245,000.2 Operating expenses (maintenance, property taxes, insurance, management, yard care, etc.) for the property total about 18,000 per year. After allowing, say, 3,000 per year for vacancy and collection losses, an investor would still net (before mortgage payments) 19,000 a year.
I Miscellaneous lender duties At this point, many things jump into action on the lender's side, including a review of property tax returns, proof of funds to close, a survey review, a title review, a borrower entity review, a proposed property management review, and so on.
I Quality of the lease agreements Lenders determine the quality of the lease by looking at things such as lease renewal options, lease termination, the number of years that are on the lease, whether rent increases are possible, and whether the lease payments include property tax, insurance, and maintenance.
If people don't pay their property taxes, the government taxing entity will demand payment and force a tax foreclosure. You can buy the property at a tax sale, or, in certain states, you can buy a tax certificate for the amount of the back taxes. By (1) They hope to get the property for the amount of back taxes due. For example, if a 200,000 house has 8,000 of property taxes not paid and goes to a tax sale, investors want to buy it for 8,000, the amount of the back taxes. Of course, several investors bidding can actively raise the price, but you can still find good deals at tax sales.
(ftNG The issue of vacancies is particularly applicable to many new real estate investors who begin either by retaining their current homes as investment properties when they move up to larger homes or by purchasing rental properties as investments. Novice investors often simply compare the monthly rental rate that they plan on charging to the monthly costs for paying the mortgage and any other recurring expenses (property taxes, utilities, homeowner's dues, and so on). This practice can be dangerous if you don't have sufficient cash reserves for the unexpected like being unable to find or retain tenants or having to evict a tenant who stops paying.
I Discrepancies in the financial records For example, say that a seller provides an income expense statement that shows that the property produced 250,000 in income for the year, but the property tax returns list the income as 200,000. Which document does the lender believe And if the actual income is 50,000 less than what he thought it brought in, he'll probably wonder whether it's worth what he has already offered. Findings like this definitely aren't the way to get on your lender's good side.
If this research doesn't reveal the owners' names and addresses, you can next contact the county property tax assessor's office. There you can learn where and to whom the property tax statements are mailed. It's not unusual to find that out-of-the-area property owners are actually sleeping sellers. That is, they would like to sell, but haven't
I do not know about you, but as far as I am concerned, the Internet is one of the greatest inventions of all time and ranks right up there with flush toilets, incandescent light bulbs, and air conditioning For real estate investors, the Internet is the single best property due diligence research tool available, especially for investors who are located in counties where the property tax rolls are available online. And if your county's property records are available online, you can quickly find out who owns a property, when it was purchased, how much it cost, and its tax-assessed value. For example, here in Tampa, I can log on to the Hillsborough County Property Appraiser's web site and, armed only with a property's street address, I can almost instantly obtain the current owner's name, mailing address, sale price, and dates for the latest and prior sales and the tax-assessed value of the property broken down by land and improvements. I can also get a site map plotting the improvements...
The name of virtually every property owner in your county is available at your county property appraiser or assessor's office on what's known as the property tax roll. The property tax roll lists every parcel of land in a given county. Depending on where you live, each parcel is assigned a separate tax identification number, either an assessor's parcel number (APN) or an appraiser's folio number. To find out if your county's property tax roll is available online, simply type the name of your county and state into an Internet search engine, such as www.google.com, and click on search. Be aware that in so-called nondisclosure states, only the principals and any real estate licensees involved in a real estate transaction know the sale price. The sale prices of real estate transactions aren't publicly disclosed in the following six nondisclosure states
The system provides for two separate lists of years, the shortest being the General Depreciation System (GDS), and the Alternative Depreciation System (ADS). Understand that this book is not a tax guide, and that although I touch on many different aspects of real estate tax, mostly as these aspects affect different financing techniques, the information I provide in that context may or may not apply to your specific situation. All IRS tax codes can be, and often are, very complex. There are many possible cracks in the rules that might be modified, or changed by some other rule or code. What I am telling you now, and frequently throughout this book, is to get a good tax advisor who knows real estate tax rules, and hope they guide you down the right path.
If the property needs fix-up work that the lenders would prefer not to remedy, they may accept offers at deep discounts from market value. Just as important, prior to closing the sale of their REOs, lenders normally clean up title problems, evict unauthorized occupants, and bring all past-due property tax payments and assessments up to date. Some lenders, too, permit buyers to write offers subject to an appraisal or professional inspection (contingency clauses).
You should be able to locate the owner of a vacant property by looking up the street address on your county's real property tax roll. The tax roll will have the name of the owner of record along with the post office mailing address where the property tax bill is sent. However, sometimes the address listed on the tax roll is incorrect. When this happens, go to the following sources in the county and state of the property owner's last known address, and check the
II Property taxes I Homeowner's insurance When I flip properties, I use 100 per day as the average holding costs, but that includes utilities. During the redemption period, you pay only property taxes, homeowner's insurance, and interest if you took out a loan to pay for the property, so your holding costs may be less than 100 per day. (ftNG Make sure you know your state's tax foreclosure process and the total taxes owed on the property before you bid. If the tax redemption period runs out during your redemption period and you didn't pay the taxes to protect your investment, the foreclosing bank or mortgage company thanks you for your donation, and you just lost your collateral. Tax liens trump most every other lien, so be aware of any unpaid property taxes.
County recorder or prothonotary's office Check the grantor and grantee or mortgagor and mortgagee indexes, federal tax lien index, public assistance liens, conditional sales contracts such as contracts for deed, agreements for deed and land sales contracts, notices of lis pendens index, writs of attachment, judgment liens such as mechanic's and materialmen's liens, and property tax liens.
General obligation bonds are municipal securities whose scheduled payments of principal and interest are backed by the full faith and credit of the issuer. Most GOs also have the added security that municipalities can raise property taxes to assure payment. These bonds, which must be approved by voters, are regarded as very safe.
I'm sure your REO list is full of properties that gobble up your department's valuable time and resources. I'm also sure that you and your staff have more important things to do than worry about property taxes, maintenance expenses, mandatory waiting periods, and all of the myriad other headaches that come with bank-owned real estate.
In the bookkeeping process and for tax reasons, keep accurate records of your income and expenses. You have rent coming in, accountability for the security deposits, and perhaps garage income if you have the ability to rent garages separately. On the other hand, you have many expenses you must account for mortgage payment, insurance, property taxes,
The classic major boom-bust construction cycle occurred in Texas in the mid to late 1980s. Properties that could be built new for 75,000 to 100,000 sold for as much as 125,000 to 150,000. Condominium and apartment projects multiplied like dandelions after an April rain. Back then, large real estate tax shelter benefits added fuel to the fire. In a situation similar to the dot-coms and tech stocks in the late 1990s, rapid price increases fed on themselves until the real estate bubble burst.
The preliminary title report indicates the current legal owner of the property and any mortgage liens, unpaid income tax liens, property tax liens, judgment liens, or other recorded encumbrances against the property. It also shows any easements, restrictions, or third-party interests that limit your use of the property such as the Covenants, Conditions, and Restrictions (C, C, and Rs) commonly found with planned unit developments, community associations, or condominiums.
Tax-assessed value is the value established by the local taxing authority for a parcel of land and the improvements placed upon the land for property tax purposes. For example, in Florida, owner-occupied single-family houses are generally assessed at around 70 percent of their fair market value by county property appraisers.
(ftNG Most of the tax sales you hear about in real estate investment books, articles, and on late-night TV are property-tax sales. Your average investment guru typically over-hypes the available opportunities in this area. They lead would-be investors into believing that they can pay 4,000 in back taxes at a
Your county treasurer's office or property tax division is the best place to start your search for information about tax sales, particularly property tax sales. Visit the treasurer's office or whichever county office handles the tax sales and try to obtain the following information Property list As the date nears for the property tax sale, the county treasurer may offer a list of all the properties that will be auctioned. The problem with such a list is that it's generally a list in progress up until the date of the sale. Regulations If your bidder's packet does not contain information about how redemptions are handled for property tax sales, ask. Different states and counties may handle this differently. During the writing of this book, Michigan's tax sales gave homeowners no redemption rights. Once you purchase a property at a tax sale, the homeowners have no chance to redeem it. Find out the rules that govern tax sales in your county.
Step 2 Search your county's property tax rolls for recent sales of three to five properties that are comparable in size, amenities, and features and located within one mile of the property under consideration for purchase. Step 3 Carefully analyze any comparable properties that you find, and make sale price adjustments for differences in amenities, special features, and the property's physical condition. 11. Amount of annual property taxes _
In the worst-case scenario, your profit is limited to the interest you charge the homeowners on the purchase price you paid. If the homeowners manage to redeem the property, they must pay you the purchase price plus interest and reimburse you for any property taxes and homeowner's insurance you paid out of pocket.
When you know where all the lien holders stand, you can begin calling them and negotiating your short sales. You can't negotiate the property tax lien, but you can negotiate short sales on the other liens. The following sections provide some guidance on how to proceed, but every situation is different, so use your noodle and plan the strategy that you think is likely to be most effective. If the property has a property tax lien against it, use that to your negotiating advantage. Tell the lenders that if they don't work with you, they can expect to incur another 5,000 expense (or however much the tax lien is). This lets the lender know that it can automatically offer you a 5,000 discount without losing anything. To make it worth your while, request a discount in excess of what's owed in property taxes. If the lender discounts from 25,000 down to 20,000, and you have to pay 5,000 in taxes, you're not really getting anything. If it discounts down to 17,000 or 18,000, you immediately...
Say you own a 2-story, 20-unit apartment building, and you've collected the rent from your tenants for the month. This is your gross income. Now, you have to pay normal property expenses such as property taxes, hazard insurance, maintenance, repairs, water, electricity, and trash. These are your operating expenses.
When most people buy a house, the lender requires the creation of an escrow account out of which property taxes and insurance are to be paid, because the lender knows that homeowners often forget to set aside enough money to pay their property taxes or they simply forget to send in their payments. When homeowners fall behind on their property taxes, unpaid taxes along with the penalties and interest quickly add up, particularly if the homeowners are behind on their mortgage and other bills. In some cases, the homeowners may not even be receiving the notices that their property taxes are
To avoid getting socked with a high, unpaid utility bill, call the utility companies and ask for any account balances on service provided for the home. Let the utility companies know the date on which you plan to take possession of the house, so you don't have to pay for utilities you didn't use, such as electricity and gas. The water bill usually stays with the house or is tacked on to the property tax bill. Make sure you have the seller pay the water bill at or just prior to closing, so you don't get stuck with a huge bill.
Although the homeowners retain the right to reside in the property until the redemption period expires, insuring the property and paying the property taxes to protect your investment are pretty good ideas, even though they're not technically required. Here's what you should do Pay the property taxes. The county treasurer sends you the tax bills. Simply pay them by the due date printed on the bill.
You make your profit when you buy a house. Make sure you buy at a price that enables you to earn at least 20 percent on your total investment, which includes the purchase price, holding costs (monthly loan payments, property taxes, insurance, and utilities for the duration of the project), the cost of repairs and renovations, and the cost of selling the property.
Distressed homeowners often overlook the power of the equity they've built up in their properties over the years. They experience a temporary financial setback, fall behind on their property tax payments to the tune of a few thousand dollars, and relinquish themselves to losing their home in foreclosure even though they have tens of thousands of dollars in equity built up in it.
Cash flow activities are commonly categorized as either operating, investing, or financing activities. Cash inflows from operating activities as they pertain to income-producing properties include income collected from rents, deposits, utility income, laundry and vending income, and interest income. Essentially, any source of cash that flows through the income statement under the heading of operating revenues qualifies as a cash inflow from operating activities. Cash outflows from operating activities includes expenditures made, such as those for management, repairs and maintenance, landscaping, property taxes, insurance, and payments to suppliers. Essentially, any source of cash that flows out of the business under the heading of operating expenses qualifies as a cash outflow from operating activities.
Prior to obtaining any new material, make sure you have obtained all the items mentioned earlier. Become acquainted with them. Pay particular attention to the use of the local government web pages and surf through them to see what is and is not provided. Practice as much as you can at learning different facts. Of all the data that you will find, the most useful will be found in two areas. The first is the tax assessor's office or department. There is a wealth of information that is at your fingertips. It contains specific information that, if up to date (some older records that predate computerization may not be accurate even if available), will give you a wealth of information. For example, it will provide the property owners' names, transaction dates, buyer and sellers data, price paid, real estate tax appraisal values, amount of tax assessed, dates of major improvements that have valid building permits attached, value of those improvements (cost basis), and much more data. If you...
Have the property taxes prorated using the 365-day method. The only item that cannot be calculated and included on the HUD 1 Settlement Statement at the time it is signed by the optionor and optionee is the amount of the property tax prorations. Property tax prorations cannot be calculated until the actual sale date is known. However, I always stipulate on the settlement statement that the property taxes are to be prorated using the 365-day method. This method of proration is based on the assumption that every year has 365 days. For example, if the annual property tax bill for a small rental property is 4,200 and the seller owned the property for 270 days, the seller's prorated portion of the tax would be 3,108 ( 4,200 + 365 days 11.51 per day x 270 days). However, if the property taxes for the current year cannot be ascertained, stipulate in the closing statement that any tax proration based on an estimate shall be readjusted on receipt of the tax bill.
Did you know that you can argue with the tax man that your property taxes are too high and get them reduced We didn't know that either until one day we received a tax bill two years after purchasing the property it had increased by 200 percent After fainting and taking medicine for heart palpitations, we called the tax assessor's office and asked for an explanation. We were told that in our state, taxes are reassessed every three years. And the reassessment is based on market value, which happens to be the purchase price. The owner prior to us bought the property 17 years ago, so his tax bill was based on the price he paid. So, to make a long story short, we presented our case to the tax assessor board of appeals with the aid of an attorney who specializes in tax appeals. In the end, we were able to prove what we thought our property should have assessed for. The taxes still increased, but the percentage was much more manageable than 200 percent. The best advice we can give you is to...
When you do raise rents, provide evidence to justify the increases. Give your tenants the results of your market survey of competing properties. Let them know you've registered 16 names on your waiting list. Show them how your property taxes, property insurance, and maintenance expenses climbed 12 percent this past year.
The next area to manage when you want to sell your property is your expenses. There are two kinds of expenses fixed and variable. The fixed expenses are your property taxes, utilities, insurance. The variable expenses are management costs, payroll, administrative, advertising, repairs, and maintenance items. You'll have a lot more impact on the variable expenses, so you'll want to focus on those first. The goal is to minimize them as much as possible. Not for the
1 Ace The property tax collector generally holds the Ace, because foreclosure can wipe out all other liens except the property tax lien. If you can purchase the tax lien, you almost always hold controlling interest in the property. The tax lien holder, however, must adhere to some strict regulations regarding the notification of other lien holders. The lien hierarchy is determined primarily by the dates on which loans are recorded against a property. The property tax lien is the strongest position, typically followed by a first mortgage, because that's the loan the homeowners took out to buy the property, and then followed by other loans in order of the date on which loan was recorded. In other words, if the homeowners took out a first mortgage to buy the house, then financed new windows, and then took out a second mortgage, you would probably be looking at the following hierarchy (listed from strongest to weakest) i Property tax lien (strongest). i First mortgage.
The second incident involved Orange County, California. In the early 1990s, investors still had hopes of earning high yields on their short-term investments similar to those earned in the early 1980s. But interest rates were in a decline that began in 1982 and persisted through 2006. Some investors came to believe that they could earn high yields with very low risk by using derivatives. One of those investors was the government of Orange County, California. Local governments tend to have irregular cash flow. They usually receive property tax payments once or twice a year. That gives them large cash balances that have to last the rest of the year. The cash is invested to earn some interest income. But the investments must be safe, so that no principal is lost. The investments also must be liquid. The government must be able to sell them on short notice to pay bills.
Just before your transaction is complete and escrow is closed, you receive a closing statement from the escrow officer. Besides the actual purchase price, there are several expenses incurred in the process of purchasing real estate that must be worked out between the buyer and the seller. For example, the seller may have paid the property taxes for the balance of the year, and the buyer should reimburse him for the amount attributable to his ownership period after the close of escrow. Prepaid property taxes Be sure to keep a copy of the closing statement, because this document establishes your initial cost basis when you go to sell the property and need to determine your capital gain. Also, some of the expenses paid at the close of escrow may be deductible on your tax return, such as prepaid interest or points on your loan and property taxes and insurance.
A major threat to your investment property during the redemption period are other investors who may try to convince the homeowners that you're ripping them off. Another investor can step in, assist the homeowners with redeeming the property, and then buy it from them, cutting you out of the deal. Whatever you paid for the house at auction along with property taxes and insurance premiums you paid and filed an affidavit as having paid plus interest, are refunded to you upon redemption, but you lose the house.
Real Estate Taxes I low about the next line in our expense table Real Estate Taxes Real estate taxes 425 3,400 3,400 3,400 Real estate tax expenses are simple to determine with almost pinpoint accuracy. The data is usually available on the Internet in most areas. Simply go to the county assessor Web site and locate the property search area of the site. Then just type in the property address to get the current figures. In most cases you'll see not only the prior year property tax amounts, but also projections for one or two years out. Focus on the future and use the next year's assessment as your projection. Understand that property sales often trigger tax increases, so you may want to consult with your real estate tax team member about this. For the purpose of the expense evaluation, I'll just say I found the seller's figures to be accurate. Next is the insurance expense line.
I Property tax bills Obtain the past two years' worth of property tax bills. Verify the amounts with those given on the seller's expense statements. Again, if the numbers don't match, put up a red flag and investigate the discrepancy. Reevaluate to see if it's still a good deal. Also, call the tax assessor's office and find out how the property will be reassessed and how often after you become the owner. It's a good idea to figure this property tax increase into your expense calculations as the new owner. It also varies from state to state. For example, in California the tax rate is roughly 1 percent of the sales price, but in Texas, the tax rate is about 3 percent of 80 percent of the purchase price.
During the redemption period, the person who purchased the property at the sale gets to insure the property and pay the property taxes, but the foreclosed-upon homeowners have the right to redeem the property. To do so, the homeowners have to come up with enough cash to pay off the mortgage in full along with any interest and penalties. Depending on the rules that govern redemption in your area, the buyer may or may not have the right to recover expenses (including property taxes and insurance) from the homeowners. Consult your real estate attorney. i Pay the property taxes, and file an affidavit proving payment.
Perhaps more common is the situation where you are negotiating terms with a prospective tenant. If you're dealing with commercial property, there may be many matters to settle. You need to agree not only on the initial rental amount and the length of the lease, but also on the rate and timing of rent increases and on the amount and timing of other payments such as the tenant's contribution to real estate taxes, utilities, or insurance. Suppose you have a prospective tenant for a retail space in your strip shopping center. Your advertised price is 2,000 per month on a five-year lease beginning in April. The tenant is responsible for a share of the real estate taxes, payable in July of each year. This year's share is 1,000, and your experience has been that taxes in this location increase about 10 per year. (Take a quick side trip to figure out the tenant's share of the property tax bill. You know it's 1,000 in year 1, and it will increase 10 each year. Does this sound like something...
A real estate tax must be paid by all owners, whether private individuals or companies. The amount is calculated based on the total surface area of the property. A residential tax is paid by the occupants, based on a measurement of the occupied area. This tax differs from one locale to another, though generally the differences are not large. It should be noted, however, that the residential tax is the only source of revenue for some municipalities, and it may actually exceed the real estate tax. A professional tax is only paid by companies it is based on factors such as the company's revenues and number of employees.
Tenants in common (TIC) real estate investments have been heavily promoted as the common man's opportunity to own a piece of institutional-grade, (commonly known as trophy) properties that the average investor could never acquire on her own. Due to a March 2002 IRS real estate tax ruling, tenants in common real estate ownership has been gaining momentum.
All real estate improvements are subject to property tax, which is appraised by a government agency. It must be paid according to the official assessment value, which is usually the declared value on the sale document. The tax varies depending on the value of the property. Property tax has priority over all encumbrances on the property. It typically is paid in three installments, at the end of April, August, and December.
Borrower must have a minimum of debt. Lenders look at the ratio of your monthly debt to income. Your regular monthly expenses (including mortgage payments, property taxes, insurance) should total no more than 25 percent to 28 percent of your gross monthly income (called front-end ratio ). Further-
If people do not pay their property taxes, the government taxing entity will demand payment and force a tax foreclosure. You can buy the property at a tax sale, or, in certain states, you can buy a tax certificate for the amount of the back taxes. By using a certificate, you get interest on your money or on the property. Some tax certificates pay anywhere from 10 to 30 percent interest. People buy at tax sales for two reasons 1. They hope to get the property for the price of back taxes. For example, if a 200,000 property has 8,000 of property taxes not paid and goes to a tax sale, they want to buy it for 8,000, the amount of the back taxes. Of course, others may bid against you and raise the price. Still, you can find good deals at tax sales.
After Rich Dad Poor Dad was published, many people asked, Is he saying that a person should not buy a house The answer to that question is No, he was not saying do not buy a house. Rich dad was only emphasizing the importance of being financially literate. He was saying, Don't call a liability an asset, even though it is your house. The next most asked question was, If I pay off the mortgage on my house, will that make it an asset Again, the answer in most cases is No, just because you have no debt on your home, it does not necessarily make it an asset. The reason for that answer is again found in the term cash flow. For most personal residences, even if you have no debt, there still are expenses and property taxes. In fact, you never truly own your real estate. Real estate will always belong to the government. That is why the word is real (meaning royal in Spanish), not physical or tangible. Property has always belonged to the royals. Today it belongs to the government. If you doubt...
Learn how to use depreciation to your advantage. If you hold a property as a rental, you can deduct mortgage interest and property tax payments as well as other operating expenses. You can also take depreciation for the structures in fact, you're required to do so under IRS rules. For example, if a property is valued at 150,000 and the land is valued at 50,000, you would depreciate the 100,000 structure over 27.5 years according to the federal income tax rules. The annual depreciation deduction for a 100,000 structure according to the IRS schedules is about 3,600. In this example, you can have 3,600 a year in positive cash flow without owing any taxes on this income. If you have less than 3,600 in income from this property,
There are a few different methods that you can use to determine your annual depreciation allowance. The most common method relies on using the land-to-improvement ratios found on your property tax bill. Don't be concerned if the actual dollar amount shown on the tax bill doesn't mesh with what you're paying for the property it is the ratio we are looking for. The idea is to use the ratio numbers to get the percentage you need to determine the value of the improvements. To do this, use the following calculation
In the case of office buildings, the lessees might pay their pro rata portion of the increased operating expenses, including higher insurance, property taxes, and on-site management costs. Similarly, retail owners have, over the last several years, been able to obtain reimbursement from their lessees for certain common-area maintenance operating expenses, such as janitorial services, security, and even advertising and promotion.
Net operating income is the potential (not actual) rents the property will command, less average vacancy allowance and operating expenses. Operating expenses include property management, insurance, property taxes, utilities, maintenance, and the like, but not mortgage loan payments.
Improvements is certainly unambiguous, but allocating the property's purchase price between land and buildings requires a judgment call on your part. The most common and defensible approach is to use the proportions that you find in your assessments for local property tax. If the town or city assesses your property's land at 25,000 and its buildings at 75,000, then regardless of what you paid for the property, you should be able to assume that 75 of the purchase price went to pay for the buildings.
Tax liens are a great way to invest with very few dollars. If property taxes in North Carolina are, for example, 1,000 a year, and a property owner has not paid the property taxes, the city or county is going to auction that lien. Lisa has bought tax liens in Wyoming for 300, and you could buy a tax lien for as low as 200, depending on what the lien is. Lisa started buying tax liens when she was looking to buy some real estate in Wyoming. At that time, she lived in Colorado, about 45 minutes from the Wyoming border. She thought Wyoming was a great investing opportunity because real estate was reasonably priced, it was a great retirement area, there was no state income tax, and property taxes were very low all of which made it a great area to rent property to people who were retiring there. She decided it would be a good market, with not a lot of competition. Areas like Arizona and Florida have higher-priced liens because the real estate taxes are higher. Therefore, buying tax liens in...
In accounting terms, property insurance is a fixed expense (like your property taxes), which means that although you may be able to turn off the natural gas (a variable expense) when your property is unoccupied, you must have insurance coverage even if your property is vacant. In fact, insurance is likely more important if your property is vacant for an extended time frame.
Equity sharing arrangements are governed by Section 280A of the Internal Revenue Code (IRC). Labeled a Shared Equity Financing Agreement (SEFA), IRC Section 280A permits the nonresident partner investment property tax benefits (namely depreciation). In addition, the resident partner can take advantage of the benefits of owning a principal residence (namely, the mortgage interest deduction).
A joint ownership arrangement can be problematic if the resident does not maintain the property or make the mortgage, insurance, or property tax payments. Furthermore, if the property does not go up in value, the nonresident party who put up the credit or cash may not realize any profits. Like any real estate investment, the shared equity arrangement should be approached with profit and not just financing in mind. In other words, make sure you buy the property at a good price and or in the right neighborhood at the right time.
Research state and local government laws regarding rental property management, because these vary greatly from one area to another and definitely affect your bottom line. Find out about business licenses, property taxes, special tax assessments, rent leveling calculations, and other laws, as well as restrictions concerning landscaping, exterior color schemes, parking, curfews, and so on.
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