Property taxes, millage rates and cash flow are just three of the thousand moving pieces that make evaluating real estate investment properties a challenge!
- Rock bottom prices (for dozens of reasons)
- Abundance of tenant demand (for dozens of reasons)
- Reduced competition to purchase
- Increased cash flow
- Increased sustainability for high returns
- Etc, etc.
Truth is, purchasing real estate investment properties has so many upsides right now that it may be easy to overlook the simple things, such as property taxes which can drastically alter your cash flow and total ROI.
In many areas throughout the US, we pay real estate (property) taxes in arrears. So for the real estate investor, we are paying taxes based on last year’s tax value. The values of properties have been falling, so investors are thinking taxes fall along with them. This is true, however many cities are looking to raise these tax rates to help offset the reduced tax revenue coming in to the municipalities. To do this, they raise their millage rate (the amount per $1,000 that is used to calculate taxes on property).
To give you the best and truest returns, you will want to look into the proposed tax rate or millage rate for the upcoming year. Most importantly, you will want to compare millage rates from location to location. You may find as an example, a $100,000 investment in one location having a tax liability considerably higher, by as much as $1000’s of dollars higher, which comes directly from your cash flow.
Another consideration that may need to be forecasted is property taxes and insurance on a distressed sale. I have seen many people buy properties at basement discount prices which is great. In some markets, the taxes and the insurances is calculated as a percentage of the home purchase price. While this has become a universally accepted practice to forecast expenses, there is one big consideration – if you bought a higher priced property than you actually paid for.
For example insurance is said to cost between one-half a percent and one percent of the value of the home and taxes can vary between maybe one and three percent. If indeed you bought, say a $100,000 property, and you only paid $50,000, you will need to double your assumptions for projecting expenses as you will need to project based on value of the property, and not the price of the property. This simple mis-calculation may be the difference between a great deal and an OK deal.
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