Real estate investors need to be aware that cash flow may be lost in property taxes and insurance! We all know location is paramount to a sound investment in real estate as discussed in many of my blog posts. We also know that analyzing the investment once you find a great location is paramount to ensuring a great investment vehicle.
Do you know what two things to look for in analyzing both Location and the actual investment property? Taxes and Insurance. Taxes and insurance is the common denominator between both, looking for the best location AND looking for the best property.
Non Homestead Tax Base
As you evaluate Locations, you will see each state, county and city has its own set of Taxes which gets applied to real estate properties. Additionally each area has its own rules and regulations as it applies to Non Homestead property. Homestead properties, for our foreign friends, are properties which the owner resides in a significant portion of the year (usually more than 6 months).
Some counties have great programs for the owner occupied within the perspective county where they give great discounts to the owner occupied home. While this is beneficial for the home owner, it often comes at a detriment to the Non Owner occupied taxpayer. So when evaluating locations, you will want to find out what the tax base is in that area you are looking. Usually you will find taxes averaging between 1 and 3% of the home’s value.
So you can see with a large spread like, that an investment may appear to be solid and can quickly diminish when you add a high tax base to it. This is why you MUST do your diligence on taxes while evaluating markets. This does not mean that a high tax base market is necessarily a bad market, there are many factors to consider and taxes must be one of those considerations.
Insurance Rates and Cash Flow
Insurance works vary much the same way. Insurance companies evaluate areas based on its historic risk. For example, areas prone to hurricanes will be a higher risk and therefore a higher premium. Areas with low natural catastrophes will have lower premiums.
You can quickly see that an investment that appears to be able to be purchased cheaply but is in a high insurance premium area and a high tax base area can be easily replaced with areas of lower risk and tax base. This makes Insurance and tax questions paramount in the Location searching process of your investing.