Understanding Your Property Tax

Property Tax Consulting Course

Learn everything you need to know about Property Tax Consulting in this detailed and carefully-written ebook. You will learn how to set up your business legally and quickly, and what states you need special permissions and licenses in. You will also learn how much you should be billing and what kind of contingency fees you can charge to your clients. Not only will you learn what you should charge clients; you will also learn how to attract your first clients when you start your business. And you DON'T have to be an expert in the Property Tax Consultant business when you start out; you can quickly learn what you need to know as you go along. You can become an expert very quickly It usually only takes one client to become proficient! You will always have business; the property tax field is FULL of people who are interested but know very little. You can take advantage of this market gap! Continue reading...

Property Tax Consulting Course Overview

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Operating Expenses and Real Estate Taxes

Once a building is constructed and occupied, the owner's attention shifts to property management and control of operating expenses. Operating expenses and real estate taxes vary quite widely according to property type, tenancy, age and design of structures, climate, and regional and local fiscal policies. In the setup, operating expenses are often lumped together on the basis of a per square foot or per unit allowance. However, as in the case of construction cost estimation, research into the component costs will always be fruitful. Building operating expense categories are as follows Real Estate Taxes. Real estate taxes, especially in the East and Midwest, are the largest element of the expense budget and are usually listed separately in the setup. Real estate taxes are an annual charge, generally based on the value of property, which is made by units of local government. Value may be determined arbitrarily by local assessment customs or may be based on the market. Knowledge of both...

Home Free Sort of Property Tax Exemptions

Some properties are exempted from paying real estate taxes, and other property owners may actually pay reduced taxes for one reason or another. In this section, I tell you about the most common situations in which tax exemptions and reduced taxes are in effect. All information in this section is subject to state and local law, so you need to check to see what kinds of properties are fully or partially tax exempt in your state and what exemptions are available for certain groups of people.

Real Estate Taxes

Real estate taxes can also be prorated between the seller and the buyer. Assume we are having a closing on April 14 and the real estate taxes are to be prorated between the seller and the buyer. Annual real estate taxes are 1,000, and the first half of those taxes are due and payable on May 15. In other words someone has to pay 500 for those taxes on May 15. In order to calculate the prorated amount, start by taking the 500 and divide it by 6 to get the monthly amount, as shown in Equation 9.5. The same value could be obtained by taking the annual amount of 1,000 and dividing it by 12.

Property Taxes

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 (How to Lower Your Property Taxes, Simon & Schuster Fireside Books, 1991). While Koenig may overstate his point, no doubt, millions of property owners do pay more in property taxes than they need to. With just a little attention and planning, you can avoid falling into this trap by taking several precautions Look for unequal treatment. Under the law, assessors must tax properties in a neighborhood in an equal (fair) and uniform manner. This means that you might argue successfully for lower taxes even though the assessor has accurately estimated the market value of your property. How Show that the assessor has assigned lower values to similar nearby properties. (All property tax data are publicly available.) If faced with this issue, the assessor will have to cut your taxes because...

Six Costs That Eat Up Profits When Flipping Properties

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

Capacity Monthly Income

As another underwriting guideline, mortgage lenders will evaluate your monthly income from employment and other sources, as well as the expected NOI of the property you're financing. For owner-occupied properties, a lender will (directly or indirectly) emphasize qualifying ratios. A qualifying ratio is the percentage of your income that you can safely allocate to mortgage payments (principal, interest, property taxes, and insurance, or PITI). If a lender sets a 28 percent housing-cost qualifying ratio and you gross 4,000 a month, the lender may limit your mortgage payments (PITI) to 1,120 a month. Property taxes and insurance equals 2,360

Land and Acquisition Costs

Accordingly, the capital budget may reflect the cost of all of the components of final land value. These might include the costs of obtaining approvals carrying costs, such as interest and operating expenses, property taxes, landscape maintenance costs, etc. and land development costs. Land development costs must sometimes be allocated between the costs of developing a particular site and those attributable to a larger project. For example, in a large scale Planned Unit Development (PUD) or New Town, land development costs may include townwide costs, sector costs and subdivision costs, in addition to those attributable to a particular lot. In addition to roads and utilities, the cost of amenities and common facilities may be included as land development costs. of the cost between components. This may be done variously by estimating the cost of the components or appraising their market value. Property tax assessments may also provide a basis for allocation. Other acquisition costs are...

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Now, some of you will be thinking that 17.63 percent yield is good but not spectacular. My response is to remind you that I am not particularly interested in yields. With a mortgage of 56,000 (70 percent of 80,000) and a purchase price of 59,000, the total capital I had invested in this deal was only 3,000. The mortgage interest rate at the time of just under 10 percent meant I was paying 5,400 a year in interest. Because this was a commercial property, the tenant paid the outgoings (property taxes, insurance, etc.). Therefore, my net return was the rental income less the mortgage interest, or 5,000 per year. Given I only had 3,000 invested, my cash-on-cash return was in fact 167 percent per annum. In other words, I was pulling more out of this property every year than I had put into it in the first place.

Taxes Services and Fiscal Solvency

As you ferret out neighborhoods and communities (counties) in which to invest, check their property taxes, government services, and fiscal fitness. Does the community offer a high level of services and programs Are the public finances of the community well managed Does the tax benefit ratio for the community compare favorably with other areas Consider all taxes and services. Do community governments provide residents relatively good value

After Tax Return on Equity

In this equation, Total Required Income is the sum of operating expenses, real estate taxes, and debt service payments. Break-even calculations are particularly useful in assessing the likelihood of achieving certain milestones and relating the investment to possible consequences of failure. For example, in the rental apartment development discussed above, an increase in debt service constant payments will also increase the break-even occupancy, and therefore the risk of operating at a deficit. Thus, in the case of the highest interest rates, the owner must not only accept a lower cash return on equity, but also must accept increased risk.

More individuality Condominium ownership

Individual condo owners are responsible for paying their own property taxes, so defaulting on your tax obligations can result in a foreclosure on the unit but not on the entire complex. (For more about foreclosures, see Chapter 15.) Condominiums often are associated with complexes in the suburbs and are thought of as low-rise one- and two-story attached housing units. Condominiums, however, may also be found in high-rise buildings in urban areas.

Who gets paid first Priority of liens

The first person paid from a court-ordered sale of a piece of real estate is the government. Real estate taxes take first position in the payment of liens. If several liens are attached to the property and one is for unpaid real estate taxes, the real estate taxes are paid first, including any special assessments, or special taxes above and beyond the general real estate tax. Payment of general and special assessment taxes takes priority over all other liens, regardless of when the liens were attached. (For more on tax liens, see One size doesn't fit all Types of liens, later in the chapter, and Chapter 16.) Sometimes, because of too many liens, a property may not be able to be transferred or sold, primarily because not enough money can be gained from the proceeds to pay off the debt. Once in a while, some of the lien holders will take less money just so the property can sell. Quite often it is the second mortgage holder in a foreclosure sale. Other than real estate tax liens, all...

One size doesnt fit all Types of liens

A tax lien is placed on real estate for unpaid real estate taxes. Remember the government organization or agency placing the lien is paid first, if the property is sold. Different levels of government from cities, towns, and counties can place tax liens on property. School districts and water and sewer agencies also can place tax liens on property. Tax liens are involuntary and specific.

Put Your Numbers to Work

Real estate tax, monthly I called you yesterday about your 3-Year Real Estate Book. I bought my first single-family home rental property from an investor the first week in October with zero cash down on a 30-day note. The seller will also pay the attorney fees and the real estate taxes due. Mississippi

Limited Time to Apply for Loan

Explanation When the seller of a piece of real estate is not a United States taxpayer, The Foreign Investment in Real Property Tax Act (FIRPTA) requires that the buyer or an agent of the buyer such as the title insurance company or attorney withhold income taxes from the proceeds. If this is not done, the buyer can be liable for them.

The Government Has Its Say Other Public Limitations on Property

Most local governments depend on property taxes to pay for their services like schools and road maintenance. Because land doesn't go anywhere, it is always there, is hard to hide, and unlike salaries, it's value is fairly predictable from year to year. In other words, it's a very dependable source of funding for the governments.

Doing Your Own Title Search

When you conduct a title search, you'll confirm the legal owner(s), so you know you can legally buy the property from the person you're dealing with. You'll also find out what mortgages are on the property if the real estate taxes are current if there are any liens for special assessments if there are any judgments, federal tax liens or other government liens, or mechanic's lien claims if there are any pending court proceedings that may affect the title (a foreclosure is such a proceeding) any deed restrictions that apply and whether easements are present. If you find any title issues, go back to the seller to see if they can be cleared up. Some will be fairly easy to handle others may take so long to resolve that you won't be able to prevent the foreclosure.

Negotiations And Submitting Offers

Remember the funeral parlor I bought The offer I wrote out in front of the reluctant agent had a clause whereby the seller agreed to lease a specific portion of the premises comprising 800 square feet at 6.25 per square foot plus outgoings (property taxes, insurance, etc.) for a period of six years with a right of renewal for a further six years, with rent reviews (upward only) occurring every two years.

How to Use the Internet to Perform Due Diligence Research on Properties

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...

Proration as of Closing Future Adjustment

And personal property taxes shall be prorated based upon the most recent available information. If closing occurs at a date when the current year's millage is not fixed, and current year's assessment is available, taxes will be prorated based upon such assessment and the prior year's millage. If current year's assessment is not available, then taxes will be prorated on the prior year's tax provided, however, if there are improvements on the property completed by January 1st of the year of closing, which improvements were not in existence on January 1st of the prior year, then taxes shall be prorated based upon the prior year's millage and at an equitable assessment to be agreed upon between the parties, failing which, request will be made to the property appraiser or assessor for an informal assessment. Any tax proration based upon an estimate may, at the request of Buyer, be subsequently readjusted upon receipt of the tax bill. Prepaid rents and other tenant deposits shall be...

Preview InspectionResearch

Consider this possible scenario Art Auctionbuff makes a bid of 500 on a house he hasn't seen. He recognizes the neighborhood from the address and knows that houses in that area typically sell at 50,000 to 60,000. How could he lose Here's how First, the house needed about 13,000 in repairs. If that were all, he still would have gotten a bargain. But had he done his research, he would have uncovered liens for outstanding real estate taxes Check with your local tax collector's office to see what types of charges (such as real estate taxes, water, sewer, garbage pickup, school taxes, etc.) might be outstanding. Ask what taxes and charges are levied against the property and who the responsible official is. You may find that some taxes are a separate town levy. After doing the math, you may decide these liabilities are worth assuming, but don't let them be a surprise. Also, touch base with the local official of the Internal Revenue Service. The IRS could have prior claims on the property...

Deep in debt Foreclosures

jjjW Foreclosure is losing your property involuntarily to pay a debt. The most common types of foreclosure are the result of unpaid mortgage loans or unpaid property taxes. Failing to pay back borrowed money or taxes in a timely manner can result in a foreclosure. The lender or community to whom the debt is owed initiates foreclosure proceedings in court. These proceedings enable the lender or local unit of government to sell the property and collect the unpaid debt from the proceeds of the sale. I discuss foreclosures that result from unpaid mortgage loans in Chapter15. I cover the sale of property for unpaid taxes in Chapter 16.

How to Locate the Owners of Vacant Properties

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

Check the Public Records to Verify That All Recorded Liens Are Uncovered

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.

The Difference between Assessed Value and Appraised Value

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.

Comply With Laws And Regulations

How will the authorities find out Complaining neighbors, drive-by patrol, your buyer's prepurchase property inspector, property tax assessment appraisers, and other tradespeople who may at some later date visit the property to give repair estimates to name just a few. Build the cost of regulations and permits into your cost estimates. Noncompliance risks big dollars to save pennies.

Seeking an appraisal Why you need one

1 Property taxes Real estate taxes are based on assessed values, which, in turn, are based on market values. Appraisals are sometimes done for clients who want to argue with municipal (city, town, and village) tax assessors for lower assessed values to obtain a reduction in taxes (I talk about taxes in Chapter 16). 1 Taxes other than property taxes Taxes often are due when someone gives a piece of real estate to an acquaintance as a gift. Alternatively, there may be a tax benefit in the form of a deduction if someone gives real estate to a charitable organization. In both cases, an appraiser comes in to determine the property's value.

Use My Eight Step Approach to Estimating a Propertys Current Market Value

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 _

Going to market value that is

Many people commonly misuse the word assessing when they really mean appraising. Assessing and appraising are two different tasks. A real estate appraisal is an estimate of value. A real estate assessment is a certain type of value estimate done for the specific purpose of collecting property taxes. Because a whole chapter on property taxes explains assessments in detail (Chapter 16 if you're really curious), I don't go any further than that here. Just remember, an appraisal isn't an assessment, and the appraiser appraises property and doesn't assess it.

Word on the DueOnSale Clause

If you have not been maintaining your lien you could find that the property has been sold without your knowledge, even if you have placed a due-on-sale clause within the contract. Unfortunately, this occurs more often than you may think. This is another reason why you need to perform regular maintenance on your lien. Usually either the property tax office or the insurance company will know who the new property owners are. If you believe the property owners defaulted on any clause within your contract, always seek the counsel of a competent real estate attorney.

Residential Real Estate

Commercial tenants tend to pay for all outgoings associated with their tenancy, such as property taxes, insurance, and maintenance of all aspects of the property apart from the exterior water-tightness. With residential real estate, the burden of paying these expenses falls on the landlord, thereby eroding the returns.

Capitalizing the income

Building expenses fall into three categories fixed, variable, and reserves. Fixed expenses are expenses that don't change with the occupancy of the building, like property taxes and insurance. Variable expenses are pretty much all other expenses, some of which may vary with the occupancy of the building. These expenses include snow removal, utilities, management fees, and so on. Reserves, sometimes called reserves for replacements, are funds that renters put aside for items that have to be periodically replaced but not on an annual basis. Cooking stoves in an apartment are an example of a reserve item because you want to put money aside each year so that you have the funds available when you have to replace them. Note that the expenses don't include mortgage payments or building depreciation.

Go Figure Calculating Taxes Step by Step

As a friend of mine who is a tax assessor observes, If you think you're paying too much in taxes, go down the hall and complain to the mayor. But if you think the assessment on you property is too high, go see your tax assessor. The key elements in calculating the property taxes owed on an individual piece of property are its assessed value and the community tax rates. In this section, I explain terms like assessed value and assessment ratio and show you how to do the calculations that you need to be able to do for the exam. (For extra practice on tax math, see Chapter 18.) I also discuss equalization rates for figuring county taxes (a good thing to know for the exam).

Oh so Valuable Assessing property for taxes

The word assessed really means to assign or give a value to something. The assessed value is not necessarily the actual dollar value of the property. A municipality may, for example, assess property at 50 percent of its market value. Market value is the price the property would bring in a fair and open sale on the real estate market (find more about market value and appraising property in Chapter 14). The assessed value is the value of the property that is used for real estate tax purposes. The percentage that is used to calculate the assessed value is called an assessment ratio.

The numbers game Understanding tax rates

Although calculating tax rates is not something you specifically need to know how to do for an exam, it is something you need to understand in general to answer nonmath questions about the process. Knowing how to calculate taxes also isn't a bad thing to know, because you probably pay property taxes and may want to know how these guys at city hall come up with their numbers.

A nice balance Using equalization rates

You may have to do a problem using equalization rates, sometimes called equalization factors, to figure out a county property tax (as opposed to a city, town, or village property tax), so I'll explain what they are and how to use them. In a simple situation, several towns, cities, and villages within one county all levy their own taxes to pay for their own services, but the county also needs to collect taxes from all the residents in the county, and it may use the tax assessments from each town, village, and city. Equalization factors are needed in situations where county property taxes are being collected from several different towns, cities, and villages (municipalities) that are using different assessment ratios within that county. For example, House A in Town A has a market value of 200,000 and House B in Town B has a market value of 200,000, but Town A uses a 50 percent assessment ratio (for more about assessment ratios, see Oh so valuable Assessing property for taxes earlier in...

Nothing to give Fully taxexempt properties

Government-owned properties, or properties owned by federal, state, county, town, city, village, township, borough, and any other level of government, are tax exempt to the extent that governments don't pay taxes to themselves nor do they generally pay taxes to a higher or lower level of government within which the property is located, provided that the property is also located within the borders of the government that owns it. So a town not only won't usually pay taxes to itself for a town park, but it also won't pay real estate taxes to the county for that park. The opposite also is true. The county won't pay taxes to the town for a county park within the town's borders. Federal government-owned and state-owned lands likewise are exempt from paying local real estate taxes. The one exception to this exemption is where property is owned by one government and is located in a completely different governmental jurisdiction. For example, Town A owns a reservoir in Town B. Town A may very...

Just a small piece Partial tax exemptions

Different states have different rules and programs that may exempt a portion of property taxes. You probably won't get a question on an exam about specific exemptions in your state, but you nevertheless need to check them out just in case. Some states also provide different assessment ratios for different types of properties. I discuss assessment ratios in Oh so valuable Assessing property for taxes earlier in this chapter. For example, commercial properties may be assessed at higher assessment ratios than residential properties. What that means is that if you have a residential and a commercial property that have the same market value, the commercial property pays a higher amount of property taxes than the residential property of equal value.

Pay or Lose Tax Liens and Sales

Individual state laws dictate the details of what happens when real estate taxes go unpaid. You're unlikely to get questions that deal with that level of detail. A number of practices are commonplace, however, and I discuss the ones that you need to be familiar with here. But just in case, you still should check out the details in your home state.

Review Questions and Answers

One other thing Don't let the size of the numbers throw you. You may think 3,800 is an outrageous amount of property taxes to pay and therefore incorrect, so you pick another answer that seems to make more sense. I think 3,800 in taxes is outrageous, too. And I think so every time I pay my property tax bill, which is more than that. So learn the math and trust your skills in doing these problems.

Whats Tax Lien Investing

Tax liens are investments made possible by state law. Governments love to use tax money, but they really don't like being in the tax collection business. And they especially don't like to be bankers. Governments want their money now, so they can balance their budgets. So they have a serious challenge when a taxpayer, for whatever reason, decides not to pay his property taxes on a particular parcel of real estate. In fact, sometimes it takes years to collect the taxes from the owner of the property, and sometimes the owner never pays the taxes owed. As much as governments hate being the bank, they hate being property owners even more. What they really want is the cash, and they want it now.

Step No 4 Due Dili Gence

The biggest risk with respect to the property owner is a property owner's bankruptcy. If the property owner files bankruptcy, you will not be able to foreclose on the lien until after the bankruptcy is resolved. Of course, bankruptcy courts normally respect property tax liens and give them a high priority when the bankruptcy is resolved. However, in a Chapter 7 bankruptcy, the bankruptcy trustee could have the tax lien subordinated to administrative expenses. In this case, the tax lienholder could become an unsecured creditor and wind up with little or nothing. Luckily, there are steps you can take to guard against this. Finally, there is the off chance that the lien is on government-owned property. Since the government is normally exempt from property tax, once the lien is corrected, the investor will likely receive his her investment back but may not receive any interest. Good research will prevent this and other owner problems because you can easily determine the owner of the...

On the Way down Tax deductions and tax credits

A tax deduction is something you can deduct from an investment property's income to reduce your taxes. A tax credit is something you can deduct from the taxes you owe. The federal and sometimes state governments create programs that permit tax credits or deductions to encourage certain activities with respect to investment properties. Historic preservation and energy efficiency are the kinds of things the government periodically tries to encourage. Within certain limits, property owners are permitted to deduct the interest payments on their mortgage loans and local property taxes. For more about real estate taxes, check out Chapter 16.

Percentages Pinpointing What You Really Need to Know

Using percentages is another type of real estate math problem. Commissions usually are figured on a percentage basis. Shared ownership of a property may be on a percentage basis. Vacancy rates usually are expressed as a percent. You'll work with percents to figure out the selling price of a property. Property tax calculations may also involve percentages. So I think you can see the importance of understanding and being able to answer exam questions about percentages.

Residential or Commercial Which Is Right for

Having said that, if you are serious about having a growing portfolio, then for me I would rather have a large amount of money tied up in commercial property than in residential property. Imagine if you wanted 20 million worth of properties. That would be a lot of homes, with a lot of plumbing, roofs, gardens, and wiring to maintain On the other hand, a commercial portfolio of 20 million may comprise just a few properties, with much less management overhead. Furthermore, the tenants of commercial properties tend to pay the outgoings (property taxes, insurance, maintenance, and so on), they have a vested interest in keeping the properties looking good, there is much less government interference, they

Reporting Rental Income And Deductions

You report rental income and expenses on Schedule E of your federal tax return. You report the gross rents received, then deduct expenses such as mortgage interest, property taxes, maintenance costs, and depreciation. The net income is added to your other taxable income. If you realize a loss, you can reduce the amount of your other taxable income within certain limitations (see passive loss limitation rules, discussed earlier). Real estate taxes. Property taxes are deductible, but special assessments for paving roads, sewers, or other public improvements may have to be depreciated or added to the cost of the land.

Four Things That Must Be Done in Conjunction with the Closing

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.

Tax Rate And Mill Rate

Taxpayers often assume that if their assessed value goes up, their tax will automatically go up also. That is not the case as long as everybody's assessed value goes up. If all property values go up, then the tax rate will go down to compensate for that increase. There are only two ways for your property taxes to go up. Either your assessed value has to increase faster than everybody else's in your tax district, or your local and country governments are spending more money. So, either the numerator goes up in Equation 5.3, or your assessed value goes up and all other values stay the same so that the tax rate is virtually unchanged but it is multiplied against your higher assessed value to give you a greater tax liability.

Leverage Pros and Cons

In this example, you pocket the full 10,000 of net operating income (rental income less expenses such as insurance, repairs, maintenance, and property taxes). However, if you finance part of your purchase price, you will have to pay a mortgage payment on the amount you've financed. If we assume you find financing at 8 percent for 30 years, you will have to pay your lender 7.34 a month for each 1,000 you borrow. Now, using various percentages of leverage, the subsequent examples show how to magnify your rates of return.

How to Locate All of the Outof Town Property Owners in Your County

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...

Business Pmnciple No 5 Taxes

The single biggest expense for most people is taxes. In the United States, which is routinely considered to be a low-tax country, the average business owner earning 100,000 pays more than 50 percent of his earnings to the government in some form of taxes. These include income taxes, property taxes, transfer taxes, sales taxes, employment taxes, and excise taxes, not to mention estate taxes.

TurninG Lemons into Lemonade

They also activated the equity in a lot that had cost them money for years in property taxes. The elderly man moved into the smaller, more comfortable home that was safer for him and much easier to manage. He also received an extra lot in the process that required no upkeep, unlike the big yard he left behind. The extra lot gave him an option to either sell it to augment his income or keep it and leave it to his heirs at his passing. Mr. Welch disposed of the land he had been sitting on. He no longer has the negative cash flow associated with paying the property taxes. He has two condos that are rented for a positive cash flow. He also has an increase in basis of 80,000 that he can begin to depreciate, thereby providing him with tax shelter that he didn't have on the land. He also paid no capital gains tax on the sale because the transaction qualified as an exchange under IRS Code Section 1031.

Where to Find the Names of All the Property Owners in Your County

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 Search

Penses as heating, electricity, common area cleaning, insurance, maintenance, replacement reserve and real estate taxes. These might total 10,000, leaving a net income after vacancy and collection losses of about 12,000 per year. But the asking price for the building would be 150,000 or more. This would mean a cash return on asset cost of only 8 . Jeff thought this a low return and wouldn't come close to covering his interest costs.

Financing

The maximum amount that FNMC would provide could be calculated by adding Jeff and Maiy's personal income to the income they planned to receive from rentals, then allocating 28 of that against the total of mortgage debt service payments, real estate taxes and real estate insurance. Furthermore, the bank's appraiser would have to examine the property and satisfy himself that the combined value of the property and any renovations proposed would be 125 of the loan amount. These criteria were quite firm, since most mortgage notes were re-sold by the lender in a secondary market or to Fannie Mae, the Federal National Mortgage Association. These secondary buyers could not, obviously, ascertain the soundness of the notes they bought in bulk unless the primary lender applied a stringent and consistent screening to each individual note.

Construction

Jeff continued developing a capital budget (see Exhibit 3) by tabulating his estimates of the indirect costs which would be associated with the project. Legal fees were estimated by the bank and by his attorney. Boston City Hall told them howr much the building permit fee was likely to be. Real estate taxes on the property were presently 2,400 a year and would be unlikely to increase. They therefore allowed a budget for taxes for the five months it would take to construct.

Deciding on the Rent

Let us suppose that you (and your significant other, as applicable) purchased a condominium in Miami, but your primary residence is a house in New York City, where your business is located. Your plan was to spend a few months of the year in Miami (preferably during the winter), but your business would not allow it, and now you have to decide what to do with the property. The condo has a mortgage as well as monthly assessments, known as maintenance. For our purposes, suppose the mortgage is 1,000 per month. In addition, the maintenance is 450 per month, and the property tax is 4,080 per year. The board of directors has announced a 4,800 per year special assessment for the next three years, to be paid monthly in equal

What Is Market Value

To the naive, terms such as appraised value, sales price, and market value all mean the same thing. But they don't. Appraised value could refer to an insurance appraisal, a property tax appraisal, an estate tax appraisal, or a market value appraisal. Sales price, itself, merely refers to the nominal price at which a property has sold. That sales price could equal, exceed, or fall below market value. Market value equals sales price when a property is sold according to all of the following five conditions

Minnesota Example

The example here is neither advocating the Minnesota property tax system nor is it an endorsement or request for you to move to Minnesota. It is just another example of how property taxes may be determined. Table 5.2 contains the relevant calculations of the tax liability for a 250,000 home.

Cash Flow

Cash flow from the property is crucial for you to pay property tax, interest, maintenance, and other expenses. In the case of real estate, cash flow is generated by rent. Cash flow is not the only sign of a good property investment. Since vacant land generally doesn't have rental income, it is not even an investment under this definition. For the same reason, banks are reluctant to lend money secured against vacant land. And even if they did, then the mortgage interest as well as other costs of the property (property tax, weed control, insurance, improvements) are not currently tax deductible. This is because the property must be generating taxable income before expenses can be claimed as a tax deduction. Property tax.

Cashon Cash Return

Notice that the property is the same, the purchase price is the same, the rental income is the same, and yet the return has gone from 10 percent to 17 percent. And we have only just started, because we still haven't taken account of property taxes, maintenance, property manager fees, the vacancy rate, repairs, gardening, principal repayments, mortgage application fees, appraisal fees, or spiderproofing, to name just a few expenses. Nor have we taken into account the depreciation you can claim, and the subsequent increase to your cash flow.

The Market Study

Prudence called Frank after the meeting and explained her conclusions. They agreed that Frank would provide an either or cost for a new sixth floor. Prudence asked him to consider the implications of lifecycle costing on the building mechanical systems, a concept which she had read was becoming increasingly important, and also to allow for separate floor-by-floor metering of all utilities. Mr. Bagges had explained that changes had been noticed in his survey regarding commercial lease agreements they were increasingly being negotiated with escalators for real estate taxes, utilities, and other operating costs, and sometimes even for the base rents themselves. Frank said that he had finished his first cut at design, and was meeting Mr. Gil Bane, his local contractor friend, the following day.

Home Office

Once you have established a legitimate home office expense, you can then take a pro-rata portion of the home-related expenses such as mortgage interest, property tax, insurance, utilities, maintenance, and the like as a deduction. This pro-ration is determined by dividing the square footage of the business use by the total square footage. You can also depreciate a prorata portion of the home.

Expenses

The types of expenses that may show up on the closing statement include sales commissions, title opinions, title insurance fees, appraisal fees, origination fees, recording fees, mortgage registration tax, state deed tax, real estate taxes, insurance premiums, discount points, credit report, document preparation, abstract extension, home warranty fee, and others. Some of these expenses typically fall under the buyer's responsibility to pay, and some typically fall under the seller's responsibility. There are by no means hard-and-fast rules and could vary depending upon the state in which the closing is taking place.

Prepaid Expenses

Expenses can be classified as either prepaid or accrued. Expenses that are prepaid have been paid for, but not fully used up. Let's look at real estate taxes that can be prepaid in certain instances. In Minnesota real estate taxes are paid twice a year. The first half of the real estate taxes is due on May 15 of the year. This payment covers the taxes for the first half of the year, from January 1 through June 30. If the closing is to take place on May 30 of the year, the first half of the real estate taxes will already have been paid by the seller on May 15. In this situation the real estate taxes will be prepaid as far as the seller is concerned. This means that the seller will have already paid the taxes for the use of the property from January 1 through June 30, but the seller is not going to be on the property for the month of June the buyer will be using the property then. As a result, the buyer will have to pay the seller for the real estate taxes for the month of June at the...

Buy Safely

Lenders normally clean up title problems, evict unauthorized occupants, and bring all past-due property tax payments and assessments up to date. Some REO lenders, too, permit their buyers to write contingency offers subject to appraisal and professional inspection. Buying an REO typically presents no more risk than buying from any other property owner.1

Accrued Expenses

Accrued expenses are those expenses that have been earned but not yet paid. An example of an accrued expense can again be real estate taxes. If in the previous example the closing was to take place on March 30, the taxes would indeed be an accrued expense to the seller. The seller would have been in the property for all of January, February, and March and would not have paid any taxes for that time period. It would be the buyer that is in the property on May 15 when the check would have to be written for the taxes. The result is that the seller would have to

Sellers Statement

The real estate taxes appear on the seller's statement because they are often prorated. If they are prorated, the amount that appears on the seller's statement will be the same amount that appears on the buyer's statement, only in the opposite column. If they are a debit on the buyer's statement, they will be a credit on the seller's statement, and vice versa. If it is a buyer's market, the parties may agree that the seller will pay all the taxes due in the year of sale. In that case they would not appear on the buyer's statement, but only on the seller's. On the other hand if it is a seller's market, the buyer may pay the full year's taxes. In that case they would not appear on the seller's statement, but only on the buyer's. Real estate taxes are very often a negotiable item. Insurance is typically an item that does not appear on the seller's statement because it is usually the buyer's expense. In certain strange circumstances the annual insurance premium may be prorated and would...

Form Ipm4408 1 page

The 'Property Tax Report form is another at a glance report which allows you to see where you stand regarding annual property taxes. We pay taxes in a wide variety of counties and municipalities. Each county has their own system and dates of tax collection. This results in our paying taxes to some government or another every month of the year. In some cases some governments collect several payments. This improves our cash flow, so we want to take advantage of it. Without a system, you could easily miss a payment due date. It becomes more challenging when you have free and clear properties or mortgages with no escrow for taxes. As you acquire properties this will become a very important report. Property taxes impact cash flow significantly and you need to be able to budget for them. The other benefit is so you can quickly spot when it appears that a property valuation is out of line and should be protested. By keeping track of the property tax valuations I have been able to...

Chapter Four

Community organizations across the country are telling NTIC that home foreclosures are ravaging their neighborhoods, leaving behind abandoned homes, depleted property tax revenues and displacing families. The city of Chicago, which experienced a nearly 20 increase in homeownership in the past decade, has been hit hard by foreclosures. Annual foreclosures started in Chicago increased 74 from 1993 to 2001, from 4,927 to 8,556. Several community areas on the south and west sides of the city experienced over a 300 increase in the number of foreclosures started. There is a similar story from Cleveland where foreclosures started increased 200 in the past four years.

Rentals

More particularly, with residential properties, usually the total rental figure for the property is quoted, whereas with commercial it is usually quoted per square foot (or per square meter). Furthermore, residential rentals are typically quoted as an all-inclusive figure, whereas commercial rentals are quoted as so much per square foot plus costs (where costs include things like insurance and property taxes).

Authors Note

I would like to thank Mark Manoil, Esq., for his assistance with this chapter. Mark is the foremost authority in Arizona for tax lien investing and his book, Arizona Property Tax Liens, was the source of much of the technical information included in this chapter. Mark was also gracious enough to spend some of his valuable time giving me his personal insights into tax lien investing.

Tax Lienstax Deeds

If you believe that you can easily earn big profits through tax liens or tax deeds, you've been watching too many infomercials. You can earn profits in this arena only if you work hard to research markets, research properties, and research legal procedures. Then bid selectively when your research indicates a satisfactory trade-off between risk and reward. For a realistic view of tax liens tax deeds and a state by state listing of legal procedures, I recommend Profit by Investing in Real Estate Tax Liens by Larry Loftis (Dearborn, 2005). What's the true market value of the mortgaged property (Remember the seller may have jacked up the selling price and sucked in a naive buyer with easy financing). Is the buyer (borrower) a good credit risk What's the buyer's payment record to date What's the quality of the property's title Is the buyer current on senior liens (i.e., the first mortgage, property tax, assessments)

The Income Approach

Then deduct the annual operating expenses for the property from the effective gross income to get the net operating income (NOI). These expenses will include snow removal, accounting expenses, management fees, real estate taxes, and any other operating expenses for the year. This will not include financing charges. This NOI is the income that the investor is buying and the income that the appraiser is valuing.

Buyers Statement

- Interest Real estate taxes Insurance The real estate taxes show up on the buyer's closing statement because they are commonly prorated between the buyer and the seller. Depending on the common practice in a given market and the time of year that the taxes are due in that market, those taxes may appear as either a debit or a credit on the buyer's statement. Insurance may show up on the buyer's statement in regard to a homeowner's insurance policy. That amount may show up as a debit if the buyer has yet to order a homeowner's policy, or it may show up as a credit if the buyer has already prepaid a one-year policy. The mortgage lender is going to require that a one-year policy be in place to protect the lender's interest in the event of a protected catastrophe occurring during the term of the mortgage. The title insurance item may appear on the buyer's statement, as it does here, or it may show up on the seller's statement depending on local market practices. As mentioned earlier, in...

Cold Call Owners

If this research doesn't reveal the owners' names and addresses, you can 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 as yet awoken to the idea. With luck and perseverance, you could become their alarm clock.

Debt Service

In the setup for income producing property, the net operating income is called Free and Clear income. This is defined as gross potential income less vacancy allowance, operating expenses, real estate taxes, and replacement reserves. The income-generating potential of a particular

Net Operating Income

Investors define net operating income as annual gross potential rental income from a property less vacancy and collection losses, operating expenses, replacement reserves, property taxes, and property and liability insurance. Here's how a net income statement might look for an eight-unit apartment building where each unit rents for 725 a month 13. Property taxes 13. Property taxes. This item includes city, county, and state taxes annually assessed against the property. BEWARE Nationwide, tax assessors are revaluing properties to reflect their new greatly appreciated values. Your future tax bills could jump 30 to 40 percent over the amount of the previous tax years. Are property tax assessments headed up Are vacancy rates (or rent concessions) increasing Have utility companies scheduled any rate increases Has the seller deferred maintenance on the property Has the owner allocated enough maintenance expenses to cover replacement reserves Has the seller self-managed or self-maintained...

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