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REIHelp.com Monthly
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"News, Analysis and Insight for Real Estate Investors"
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Publisher: Donna Robinson Issue: February 2004
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Do Taxes Threaten the Future for Residential Investors
in Atlanta?
Higher taxes on top of a high LTV can destroy your cash
flow
by Donna Robinson drobinson@reihelp.com
Over the past year or so, I have been concerned that rising property tax
rates will eventually threaten the
livelihood of rental property owners in the in-town Atlanta market.
As if to partially confirm my concerns, I have recently been contacted by two
different investors who have
been recent victims of property tax hikes that took them from a positive to a
negative cash flow. In both cases
we are talking about a doubling of the property tax bill in one single
year. In fact, I recently sold a
property to another investor. This property was located in Dekalb county. I was
shocked to find the property taxes for
2004 went up a bit more than 100%.
I feared that the sale might fall through, due to the taxes
eating about $212 per month of the cash
flow on this property. Fortunately, the investor who was buying this
property had access
to an extremely low interest rate, and he only financed 80% of the value, so the
numbers "worked",
even at the higher tax rate.
This investor will still manage a decent positive cash flow of about $200 per
month. But two things had to
happen in order to make this deal work. The investor had a 4.5% interest rate,
and he was careful not to
over leverage himself with a high Loan to Value ratio. (this is the percentage
of the value of a property
that is financed by the loan)
My first thought is, "How many investors have a secure full time job, a
perfect credit score, and
access to really low interest rates? Not too many. And, had I not bought this
house really cheap, I
might have found myself in a negative selling position, due to the higher property
taxes. It all worked out in the
end, but most deals don't include a perfect credit buyer and a seller with lots
of room to cut a deal
As it happened, I could afford to sell at 80% of the total value and still make
a decent profit. Most
sellers of property in excellent condition, as this one was, are not willing to
sell that cheaply. .
To further complicate the tax issue are the problems with the sewer system and
the likelihood that these
costs are going to be passed along to property owners and tenants over the
next several years.
Investors and owner occupants should keep in mind that there is no single entity on the face of the earth that
can affect an entire segment of a real estate market the way that government can. They can change the rules
in midstream, force you
to pay up or else, and only government, (especially local government), has the
power to affect every single
property owner in a given city, or county. Even bankruptcy won't rescue you from
the clutches of the tax man.
The power of government over property owners is a scary thought when you
consider that politicians
seem to have no imagination or creativity, and as a result, the answer to every
single problem is to raise taxes.
The general rule of thumb for residential property investing is that you
should never exceed 80% financing
on your income property. You should plan for higher taxes and keep your LTV at a
reasonable
level. While there are 90% and even 95% loans out there for investors, it can be
dangerous to take out
such loans as the risk of negative cash flow is much higher.
Despite the "get mega cash now - tax free!" seminar crowd, most investors should be very
cautious about refinancing residential properties to pull additional cash out. A
higher loan amount, combined with a large tax assessment could put you in the
red overnight.
If your strategy is to buy and hold, be very cautious about exceeding an 80%
Loan To Value.
Over-financing can cost you a whole years profits to compensate for a two month
vacancy.
If your rent rates have to be artificially high in order to cover loan
payments and taxes, you may not be
able to find a suitable tenant. Vacancies and negative cash flow have a way of
turning you
into a motivated seller rather quickly.
The great thing about real estate is that it cannot be manipulated like stock
prices can, and it is a tangible,
real, asset. But governments can add a significant cost of doing business via
rising tax rates.
If the politicians in Fulton and Dekalb county as well as other areas of metro
Atlanta
cannot find ways to manage resources and tax dollars more efficiently, then
local investors and homeowners
will be among the first to pay for it.
The issues facing Atlanta and the metro area in the 21st century are complex
and are way beyond the knowledge and expertise of most local politicians. We
must find new ways to manage infrastructure and utilities and their costs.
Keeping lots of equity in your properties is the only real
way you have to protect yourself from
negative cash flow caused by rising property taxes.
Send your comments to drobinson@reihelp.com
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This newsletter is copyright 2004 by Donna S. Robinson
and may be quoted without permission as long a link to the entire article is
included.
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