Understanding Property Taxes

property taxesProperty taxes are calculated as a percentage of the purchase price and vary from state to state and often between counties. Some states have complicated formulas to arrive at the final property tax, but it still usually boils down to a percent of the property value. The county assessor’s website can give you the exact amount.

Taxes are usually re-assessed annually or when a major improvement that requires a building permit is issued, such as for a room addition or putting in a pool.

Here is an example: If the purchase price of the property is $150,000 and the tax rate for the area is 1%, the annual property tax would be $1,500.00.

How often are property taxes paid? The county where you purchase the property is normally the collector of property taxes and they usually bill twice a year, half in April and the other half in December. Property taxes are used to cover things like police, fire, schools, parks, roads and city administrative costs. If there are additional school bonds or other infrastructure taxes attached to the property, they will be billed together with the property taxes. Property taxes left unpaid can cause serious penalties and liens to be placed against your property. It is important to you and the mortgage company not to have a tax lien placed on the property as they are given a priority position over all other liens. Liens can lead to foreclosure if not paid.

Appealing your property tax:  If you feel that your property taxes are too high, perhaps because of a decrease in the value of your home, you may appeal to the county to lower your property tax. The appeal process will vary by county but the forms or information on how to appeal will be available on the county website or the assessor’s office. It is usually not too difficult to apply for and is usually granted if your claim can be substantiated.

How impound accounts work:  Most mortgage lenders will offer to set up a free impound account to pay the property taxes for you when they are due. They do this by collecting 1/12th of your estimated property tax each month when you pay your mortgage and distributing it when due to the county. Since it simplifies bookkeeping for you, and there is no extra charge, we recommend you take advantage of this service. The same can be done with your insurance payments. It helps you to streamline your bill paying.

Which states have the highest/ lowest property taxes? The 3 lowest property tax states are:  Alabama, West Virginia, and Louisiana.  Low property tax states often have lower population densities that require fewer governmental services.

The states with the highest property tax are:  New Jersey, New Hampshire, Connecticut and New York. Higher population densities require more county and city services, such as police, fire, schools, street repair, etc.

Pros & Cons of California Prop 13: As originally drafted by Howard Jarvis in 1978, Prop 13 was designed to assist the elderly on fixed retirement incomes to be able to afford to stay in their homes without fearing property taxes would escalate and force them out. The property tax rate was fixed at 1% of the purchase price with an inflation cap of 2% per year. The other part of Prop 13 requires a two-thirds majority vote in both legislative houses for any state tax rate increases. Local governments have gotten around Prop 13 to some extent by adding Mello-Roos infrastructure liens and/ or school bond liens to the property tax bills. Since most homes in California are re-sold after about 7 years, the revenue loss to the state and counties has been minimal.

It is recommended that you always research the property taxes for the city and county where you are buying. The tax the seller has been paying may or may not be the tax you will pay after purchase. Check with the county assessor’s office prior to purchase. Your agent or title company may be able to do this for you.

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Should You Pay Off Your Loan Faster?

paid loanThe answer to this question is not the same for everyone and is largely dependent on where you are in life and your finances. Typically when you are in your 30’s, 40’s and 50’s (the high income producing years) you benefit from the leverage and the tax shelter of having as many homes as you can afford and using the mortgage interest you pay the bank as a tax write-off. As you approach retirement, it usually makes sense to begin paying off the loans in favor of increased cash flow.

Many of us find it difficult to get ahead when the state and government takes so much out of our paychecks each pay period. As the saying goes, “The more you make, the more they take.” There are many investment opportunities out there, but only rental real estate offers the tax shelter benefits we all desperately need. Think of it as giving yourself a raise at work without having to ask the boss!

By investing in rental income real estate, you can legally create a tax shelter for your income, a way to re-coop some of the taxes they take out of your paycheck. While your employer will still take the taxes out each pay period, you will get a bigger refund when you file your taxes at the end of the year. The tax shelter benefit of owning as few as 5 rental income homes or 2-3 well located multi-units is often enough to legally zero out your income tax responsibility. Ask yourself if you could use an extra $15,000 or $20,000 dollars annually put back into your investing budget?

By purchasing rental real estate and using the tax code to your advantage, you can write off both the interest on the loans and the depreciation allowed by the IRS to help you build a tax shelter. Since it will vary based on your income tax bracket, we suggest you work with a CPA who is knowledgeable in investment real estate to prepare your taxes. Until you can put some of those tax dollars back to work for you, it is difficult to get ahead financially. Without tax shelter, you end up working the first 3 or 4 months of the year for the government. That’s 25% to 35% of your income gone forever.

During your high income producing years it makes sense to create shelter for your hard earned dollars. Create a plan with your Marshall Reddick Real Estate Advisor to purchase enough rental income property to shelter your income. Tailor the loans or adjust your monthly payments so they are paid off by the time you plan to retire. This will give you maximum tax shelter for your income when you need it and maximum cash flow for your retirement when you need it. Investing in rental income real estate makes a lot of sense from a financial planning perspective.  As a bonus, real estate in high appreciating markets can double in value every 10 to 15 years. For example, if you control a $500,000 portfolio of rental income properties in your 40’s and 50’s, you will very likely add $1,000,000 to your net worth by the time you retire.

If you are considering a 15-year fixed interest rate loan because you want a lower interest rate, be aware that the monthly payments will be close to double of a 30-year fixed interest rate loan. If you want monthly cash flow, it makes much more sense to go with a 30-year loan and when you are ready, start paying off the principle when and how you want rather than being forced to make higher payments because that was the loan you chose up front. If you are much more interested in tax benefits than cash flow, it might make sense to go with a 15-year loan so you can show a loss on your rental homes.

Investing in rental real estate is one of the best vehicles to create tax shelter while you are working. Your rental income will become residual income for you in retirement while building a lasting legacy of wealth for the future.

Do the math.  Use conservative figures.  Prove it to yourself.

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St. Louis, MO – Market Data Packet

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How to Turn Liabilities into Assets in Real Estate

assets liabilitiesFor most people, debt is typically considered to be a negative thing. Reason being, debt is often misused by people who do not understand the high interest rates that credit cards, auto loans and student loans often have, especially for those who do not have good credit. However, debt isn’t always a bad thing, especially when the interest rate is fixed, low, and it is being used to purchase an asset that goes up in value e.g. real estate.

One of the biggest advantages of owning rental real estate is that when a property is strategically selected in the right market and property class, it can provide more income than the expenses that the owner carries. Regardless of any positive cash flow, if the income covers the expenses, the owner will benefit from something known as “principle pay down.” In other words, the tenant pays off your mortgage for you.

When you purchase the right properties, after making the initial down payment you should not have to put any more money out of your pocket into the property when the loan is properly structured.  In the meantime, you enjoy the interest write offs and depreciation tax shelter allowed by the IRS on rental real estate. Now combine that with the appreciation in value you will see in your property when held for a long enough period of time. But again regardless of any appreciation, each month that your tenant makes that mortgage payment for you, the principle balance on your loan is decreasing, and your net worth in increasing. That’s why conventional financing for rental income real estate is considered “Good Debt.”

Your net worth is calculated by subtracting your liabilities from your assets.

Net Worth = Assets – Liabilities

Income producing real estate has long been considered one of the best choices for investment diversification. From a financial planning standpoint it is a great tool as you can control the payoff of the loan to coincide with your retirement by selecting the term of the loan and amount of your payment.

There is another strategy that you might consider depending on your age, income and the equity in your primary residence. This formula typically works well for high income earners in need of additional tax shelter. This is how it works: borrow enough from your primary residence to cover down payment and closing costs on $1,000,000 worth of real estate. That would require a $250,000 to $300,000 loan and the purchase of 5-10 SFR’s or 4-6 multi-units in affordable markets. The idea is the interest on the new loans as well as the depreciation allowed by the IRS creates a huge tax shelter for your current income, and the tenants pay off the loans for you over time.

Structured properly, these loans will be paid off by the time you retire and you can enjoy the income from these investment properties for the rest of your life. These same free and clear properties can be eventually willed to your heirs before you pass away. The real beauty of using real estate debt is that eventually your loans will be paid off by your tenants, and what was once your liability is now your asset.

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Off-Market Cash Flow Homes in St. Louis, MO

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The Problem with Seminar Companies

sales pitchAt some point you’ve probably received an invitation to attend a real estate seminar hosted by a well-known expert, or what they are commonly referred to in the industry as a “guru.” You may have even attended one since it was “free” and they offered a complimentary gift just for attending. While the invitation made it look like the seminar was being given by the real estate guru himself, you might have been disappointed to find out that the “guru” had sent a professional speaker in his place.

While some good information may have been given, it is never quite enough for you to actually learn the secret of how to make the program work for you. For this you need to attend a weekend or even 3-5 day boot camp for only $$$$ where you will get the rest of the information. Oh, and by the way they have a special set of CD’s, books or videos that will help prepare you for the weekend. At the boot camp these sell for $999 for the set, but tonight they’ve received special permission to sell them for $499 to the first 6 who sign up for the boot camp. And so it goes. Their business model is to sell more seminars, more coaching, and more materials. Those are their primary profit centers. The speakers are rarely licensed real estate professionals and usually don’t own any investment property.

The real problem with this model is it erodes your hard-earned savings earmarked for down payment on real estate. You see, they don’t care if your goals match their program, or whether or not this makes sense for you, or if you even have a penny to your name after buying all their products because the truth is, you represent nothing more than dollar signs in the seminar world. If you buy into all their programs and continuing education, you could easily spend $15,000 to $50,000 and up before purchasing your first investment property. You end up spending a lot of time and money on information that is all available for free online or elsewhere, they just package it nicely. Remember the old adage; if something sounds too good to be true, it probably is. If someone is promising you a get-rich-quick scheme with little or no money down, no credit, only a few hours a week needed, etc. run the other way.

We always encourage you to do your own due diligence and work with licensed agents or brokers, not to mention those that actually practice what they preach and have a track record to back it up.

At Marshall Reddick Real Estate we are firm believers in education. We offer it free of charge because we don’t believe valuable education should only be made available to the few. Our business model is to help you invest in real estate, develop residual income and create a tax shelter for your income along the way so you can get real, proven, substantiated results. It’s not get-rich-quick, it’s not the sexiest strategy, and you probably won’t see us on HGTV, but it works.

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