Archive | Taxes RSS feed for this section

Monday Mixed Bag – Flooding, Appraisal Protests, and Prospecting Letters

10 Aug

I hope everybody is staying cool out there! We’ve been keeping plenty busy this summer – I recently got back from a trip to South Padre Island to pre-celebrate my sister’s wedding.

South Padre Island Beach

For the most part our rentals have been blissfully business-as-usual, but I do have a few notable highlights worth sharing:

Memorial Day Weekend Floods
You may have already seen this on the news: Central Texas experienced some extraordinary rain and flooding over Memorial Day weekend. On one hand we could use the rain, but things got a little cray cray there for a bit.

My cousin in central Austin!

My cousin in central Austin

Luckily our properties were not affected, but it did give me reason for pause at the time. We have homeowners policies but nothing that covers flooding – should we have a flood policy? Then again, this was a pretty darn good stress test and the properties passed with flying colors, so we ultimately decided to keep our current coverage.

On a related note, many moons ago an insurance agent shared this nifty website that estimates flood risk using a map interface. I don’t know how legit it is, but it might be worth a peak when considering a new property.

2015 Appraisal Protest Results
After last year’s unbridled success, Corey tried his hand at protesting our tax appraisals again. The proposed year-over-year increases were… steep.

Property 2014
2015 Proposed
% Change

Duplex #1 $179,362 $239,473 34%
Duplex #2 $149,488 $164,749 10%
Duplex #3 $151,313 $191,984 27%

Good-ness. But compared to our latest comps (and the appraisal district’s) the proposed values were reasonable – we simply didn’t have a lot of contrary data points to work with this year.

Corey still managed to knock a few thousand off the appraised value and saved $157 in taxes. Once that is applied to our mortgage pre-payment goal we’ll save another $255 in unpaid interest for a total savings of $412.

Reducing Competition in a Seller’s Market
As you’ve probably deduced, our real estate market is really hot right now. You might recall we were competing against multiple cash offers when we purchased duplex #3 last year.

We were recently the recipients of some crafty prospecting letters that were attempting to find duplex sellers BEFORE the competition can get involved:

Dear [Name], My wife and I live in the [city] area and we are interested in purchasing a duplex on [street]. If you ever consider selling your duplex, please let me know.

Would have been a little more convincing if there wasn’t a 2nd letter in our mailbox asking about a different duplex and claiming they live in a different part of town. 🙂  4 months later we received another letter (just one this time) from the same couple, with a refined message:

Dear [Name], My wife and I are interested in purchasing a duplex in [city] and came across your property on [street]. We are pre-approved with a local Austin lender and can close within 30 days of contract. Minor repairs and issues do not represent a problem for us. Please contact us if you have thoughts about selling.

Little white lies aside, I do wonder if there’s any merit to this tactic. It would be easy to recreate if you had a few neighborhoods in mind, and then cross-referenced those addresses against the county appraisal district’s website to get owner addresses.

Looking Forward
We’re gearing up for 2 vacancies in September and October. For the first time ever we’re going to let our property management company handle the majority of the make ready work, but I’ll still take a day off to inspect things for myself and tidy up loose ends. I find vacancies a LOT of work, so I’m looking forward to seeing how this higher cost/less hassle trade-off treats us.

Want to be notified of new posts?

Join 178 other subscribers

Investment Property Balance Sheet – 2015 Edition

23 Jun
Duplex Balance Sheet

(photo by frankieleon)

Our annual look at rental income and expenses, averaged across 12 months. We own duplexes so these numbers represent 6 units across 3 properties, purchased between 2011 and 2014.

We also perform this analysis when seriously vetting a new rental property to help spot unexpected surprises (property in a flood plain? outrageous HOA dues?) and verify cash flow.

Duplex #1

  • Total cost: $181,350, latest comp $245,000 (Feb 2015)
  • Down Payment: $45,350 (25%)
  • Mortgage: originally $136,000, currently $127,830
  • Estimated Equity: $117,170

Duplex #2

  • Total cost: $144,000, latest comp $189,000 (Apr 2015)
  • Down Payment: $36,000 (25%)
  • Mortgage: originally $108,000, currently $93,223
  • Estimated Equity: $95,777

Duplex #3

  • Total cost: $201,000, latest comp $216,000 (Apr 2015)
  • Down Payment: $61,500 (30%)
  • Mortgage: originally $139,500, currently $137,395
  • Estimated Equity: $78,605
Revenue Duplex #1 Duplex #2 Duplex #3 Monthly Total
Unit A $1,025 $975 $1,050  
Unit B $1,095 $950 $1,050  
Vacancies
-$41 -$37 -$40  
Total Income $2,079 $1,888 $2,060 $6,027
         
Expenses        
Principle & Interest $699 $531 $738 $1,968
Taxes $352 $365 $365 $1,082
Insurance $69 $76 $63 $208
Repairs
$150 $150 $150 $450
Carpet Fund ($800/5yrs.)
$13 $26 $26 $65
HOA $50 $0 $0 $50
Property Mgmt (10%) $212 $193 $210 $615
Leasing & Releasing (30%-60%) $80 $72 $79 $231
Umbrella Insurance $12 $13 $13 $38
Tax Prep
$12 $12 $12 $36
Total Expenses $1,649 $1,438 $1,656 $4,743
         
Cash Flow $430 $450 $404 $1,284

Some Highlights & Observations:

  • Stagnant Cash FlowLast year I predicted our cash flow to slowly increase past our typical $400/property/mo. average because I thought most expenses had been accounted for – but we found a few more. 🙂 Technically it has risen because we got property #3 to market rate, but we also added additional protections and conveniences like umbrella insurance and tax preparation fees. Maybe next year!
  • Rent Appreciation – While cash flow remained stagnant, property #1’s rent has increased 27.5% since our first balance sheet in 2011 – bringing in $457 more income (the cash flow equivalent of having a whole other duplex). Unit A is currently under market rate, so if you assume $1,095 for both sides that would be a $527 increase!
  • Average Cash Flow vs. Actual – Since spending tends to have peaks and valleys, I’ve been charting my actual monthly cash flow throughout 2015 so I can share that perspective in the future. The $150/property/month is really a best guess… some months are SURPRISE! and others months nothing remarkable happens at all – cha ching!
  • Umbrella Insurance – I was hoping to have an umbrella policy setup by now, but no dice – so this is merely a conservative estimate using the most promising quote I have at the moment. I’m guessing insurance agents must not make a lot of commission on umbrella policies, because they sure don’t seem eager to provide quotes for them.
  • Tax Prep Fund – This was the first year I realized we could deduct a portion of our tax preparation fees on our rentals’ Schedule E. Previously we’d been applying it as a miscellaneous itemized deduction… fat lot of good that did us. Oh well, live and learn. I cringe paying a professional for something I used to do myself with online tools, but I still don’t feel reasonably qualified to handle rental tax details like cost basis calculations, depreciation schedules, and improvements vs. expenses.
  • Vacancies & Leasing/Releasing Fees – A guestimate that assumes 1 unit from each property will be vacant for 2 week a year. Using these same vacancy assumptions, I budgeted one renewal fee (30%) and one releasing fee (60%) per year, per property.

Previous Statements:


“Plan specifically so you can implement flexibly.”  – Dallin Oaks

Want to be notified of new posts?

Join 178 other subscribers

Protest Alternative: Hiring a Property Tax Consultant

28 May Property Tax Appraisal Protest

Note: the information below is definitely Texas-specific, and possibly county-specific – so please take caution when applying it to your local area!

It’s that time again – property tax appraisal season.

Last year we shared Corey’s first-timer experience protesting our property tax appraisals (and saving $1,454) for two rental properties:

  1. Received Appraisal Notice, Reasons to Protest
  2. Filed Notice of Protest, Requested Appraisal District Documentation Letter
  3. Compiling the Evidence
  4. Informal Meeting & Outcome

A recent article by the Austin American-Statesman analyzed Travis County’s 2014 tax season: 74% of all protests resulted in reduced appraisal value, but once you account for withdrawn protests then 97% of those who completed the protest process saved money.

But I also accept that some property owners simply aren’t going to represent themselves. Maybe you’re busy, intimidated with the process, or don’t think the hassle is worth the benefit.

Property Tax Appraisal Protest - Agent vs Self Representation

Fair enough, but the good news is that many of you probably have access to a convenient and cost-effective alternative – hiring a property tax consultant.

What does a property tax consultant do?
A coworker told me about a service that handles his protests on a contingency basis – i.e. he only pays if they save him money. I’m sure the average homeowner is capable of doing it themselves, but consultants have the time, expertise, and data to navigate the protest system for you.

Call me naive, but I didn’t even realize this industry existed. I did a little research and found if they do lower your appraised value they get a cut of the tax savings – I’ve seen anywhere between 33-50% depending on location. That might sound like a lot, but remember you were going to pay more than that in taxes if you didn’t protest at all.

Property Tax Appraisal Notice

Using last year’s numbers as an example, we would have saved $1,454 in taxes and paid $480-$727 to the consultant for a net gain of $727-$974. That’s no chump change. Of course if you ARE willing to protest your own taxes you can pocket that consultant fee, but it’s a win-win either way.

Find one by searching your city or county name + phrases like:

  • Property Tax Counselor
  • Property Tax Consultant
  • Property Tax Consulting
  • Property Tax Professional
  • Property Tax Representation
  • Property Tax Appeal Service
  • Property Tax Service
  • Property Tax Agent

Sometimes the property tax consultant saves my coworker money and sometimes they tell him he doesn’t have a good case this year – either way he doesn’t pay anything unless they get a reduction.

If you’re tempted to try this for yourself, don’t delay – I know the deadline for our county is June 1st, which is right around the corner!

“A penny saved is worth two pennies earned . . . after taxes.”  -Randy Thurman

Want to be notified of new posts?

Join 178 other subscribers

Recent Reading: Income Taxes Explained in 100 Pages or Less

5 May

Note: this post uses referral links, but I was not asked to read this book. You don’t have to use our links, but we’re very grateful when you do!

Inspired by the recent tax season, a solid recommendation from Afford Anything, and the impressive tax savings by Root of Good, I set out to better educate myself on the US tax system. Lately I’ve had this nagging doubt about whether I should be taking more proactive steps to minimize my income taxes… somehow.

To that end, I picked up “Taxes Made Simple: Income Taxes Explained in 100 Pages or Less” and was immediately in love with the concept. What a great way to get a basic foundation about an otherwise complicated and intimidating topic. I’ve filed my own taxes before (though not since our first rental property), and even then only with the prompted assistance of online tools like TurboTax.

Bonus: at the time of this writing this book was FREE as a part of the Kindle Owners’ Lending Library – which allows Amazon Prime members to digitally “check out” books on Kindle devices.

My Personal “Aha” Moments:

  • Source of Income Matters, A Lot – I never appreciated how much a dollar of earned income ≠ a dollar of self-employment income ≠ a dollar of qualified dividend income ≠ a dollar interest income. I don’t know if there’s anything I’m going to do differently with this information, but I do now understand why some think the game is rigged!
  • Above-the-Line vs. Below-the-Line Deductions – I already knew this was relevant to the home mortgage interest deduction, but I gained more clarity on how all the parts fit together. I suspect many people claim deductions that offer no tax benefits whatsoever and don’t even know it.
  • The Disappearing IRA Deduction – While contributions to a traditional IRA do not have an income cap, the valuable above-the-line deduction does (IF you or your spouse have access to a retirement plan at work). I consider myself pretty retirement account savvy and I had no idea.

This material should be required reading in high school, and this particular book will now join Suze Orman’s “The Money Book for the Young, Fabulous & Broke” as my default graduation gift (I know, I’m fun at parties too).

Income Taxes

(photo by Alan Cleaver)

Our key takeaway is to reconsider our above-the-line deductions, specifically traditional IRAs and HSAs. On one hand, we’re hesitant to reduce our tax exposure at the cost of tying up our money until retirement age – money that could otherwise be invested in rental properties. Still, this could definitely be useful if we find ourselves at risk of getting phased out of Roth IRA eligibility and want to take proactive measures to reduce our AGI.

I sure hope the author writes a rental property-specific book someday. Eventually I’ll also check out “Independent Contractor, Sole Proprietor, and LLC Taxes Explained in 100 Pages or Less” from the same author. LLCs and rental properties seem to go together like peanut butter and jelly, but I still have a lot to learn before I’d be comfortable committing.

Want to be notified of new posts?

Join 178 other subscribers

2014 Goal Results & Highlights

22 Dec

Earlier this year I created goals for 2014 to keep me on-track. The results:

✔  Pay Down Mortgage Debt$3,522 applied to mortgage #2
✔  Expand Property Management – done!
✔  Mean Tenants – replaced with pleasant people at market rate
✔  Try Discounted Gift Cards – success!
✔  Another Property – technically, but we weren’t expecting a rental
✔  25 Blog Posts – squeaked in at 27 posts this year, yay!

Having goals was quite motivating – a way to ensure “someday projects” get prioritized. When reflecting on the past year, a few key initiatives stand out:

Buying Duplex #3
Our third purchase last May made three properties in as many years – not too shabby! It was also the second time we saved a down payment for a primary residence and ended up buying a rental property instead.

What can I say, we have a problem. 🙂

rental property living room 3

We stumbled on some legitimately good deals, but also wanted to maximize our advantage as DINKs (dual income no kids) while we could. It’s not hard to see a future where adult responsibilities stall our current momentum.

This acquisition was unique because the cash flow and appraised value were low for the purchase price, but our research suggested it still had potential. After a $200/unit rent increase (both tenants stayed!) and a new sales comp – we were back on track a mere 2 months later.

Series: How We Saved $1,454 on Our Property Taxes
Corey’s victorious quest to protest the tax valuations on two properties, broken into a 4-part series:

  1. Receiving a Notice of Appraised Value
  2. Filing a Notice to Appeal & Requesting Supporting Documentation
  3. Compiling the Evidence
  4. Appraisal District Meeting & Outcome

A good example of a financial skill that should be taught in public education, but usually isn’t. I group it in with preparing your taxes, the effects of compounding interest, and calculating student loan payments before a student chooses a college or major.

Aspirations / Running the Numbers
It’s fun to daydream about the future of our real estate empire. I noodled through hypotheticals like how many properties we’d need to retire and whether it would be faster to finance or buy outright.

day dreaming clouds

(photo by Kevin Dooley)

Turns out we could probably buy 13 leveraged properties faster than 5 paid off ones – all things being equal – while generating the same net income. Realistically, we’ll probably do a combination of both, and now that we’ve topped off our rental savings we’re cooking with pre-payment fire again!

Make Ready Kit + New Additions
I continue to adore our make ready kit, and got the opportunity to try it out in the field during a vacancy in November.

Make Ready Vacancy Kit Additions

Through trial and error, I’ve added to the inventory a bit:

Now the real question is whether to expand to a second bin….

Discounted Gift Cards
For those tempted to give discounted gift cards a try, I’d recommend waiting until just after Christmas. An influx of holiday gifts will likely upset the supply/demand model in your favor. More inventory = better discounts.

Also, a big thank you to those using our Raise and Cardpool links – any referral credits are going straight to our mortgage pre-payment efforts!

Cardpool Referral Credit

Previous Recaps:

“By three methods we may learn wisdom: First, by reflection, which is noblest; Second, by imitation, which is easiest; and Third, by experience, which is the bitterest.”  -Confucius

Want to be notified of new posts?

Join 178 other subscribers

How We Saved $1,454 on Our Property Taxes, Part 4

24 Nov

The final chapter of our appraisal protest series. Previous posts include: Receiving Our Notice of Appraised Value, Filing a Notice to Appeal and Requesting Supporting Documentation, and Compiling the Evidence.

Corey received a letter assigning him a specific day and time for two back-to-back hearings at the county appraisal district.

Appraisal District Office

In the interest of time, many appraisal districts begin with an informal meeting that attempts to resolve the issue (like a plea bargain before trial). Corey was escorted to the cubicle of an associate appraiser who heard his case.

Appraisal Disctrict Appointment

Duplex #1’s Outcome
For reasons lost to the sands of time, each unit of this property was taxed independently (an owner-occupant probably wanted to claim the homestead exemption on their half). However, there seemed to be some discrepancies related to what had and hadn’t been split between both units. For example, the improvements (building/garage/patio) were split 50%, but the land value was applied in full and effectively counted twice.

The appraiser consulted with her superior, and came back with a proposal to use the average of the 3 sales comps (which were all complete duplexes) to provide a better apples-to-apples valuation. She also began the process to merge those two units under 1 property ID moving forward.

Duplex #2’s Outcome
This objection related to the selection of comparables. The property is on a street with 20 or so identical duplexes, plus 2 “luxury” duplexes that were built on the end several years later – and at a significantly higher cost.

One of these things is not like the other.

Two of these things are not like the others…

Using photos and year built information, it was pretty easy to convince the appraiser to throw out the outlier and use the average of the rest instead.

Next Steps
If Corey had not come to an agreement with the appraiser, he would have proceeded to a formal hearing with the Appraisal Review Board, a committee of 3 citizens. The results of that hearing could be appealed to district court.

Instead, Corey simply signed a 1-page “Final Agreement and Waiver of Protest” for each property that noted the corrected values.

Appraised Value – Before & After

Property 2013
2014
(Before)
2014
(After)
Difference
(B vs A)
Duplex #1 $173,740 $216,948 $179,362 -$37,586
Duplex #2 $131,569 $169,105 $149,488 -$19,617


2014 Estimated Taxes – Before & After

Property Est. Taxes (Before) Est. Taxes (After) Change ($)
Change (%)
Duplex #1 $5,187 $4,288 $899 -17%
Duplex #2 $4,784 $4,229 $555 -12%


Would He Do It Again?
Corey says most definitely. If nothing else, the system simply can’t give too much attention to every little challenge, so they’ll probably cut you a deal to make the issue go away. Perhaps we wouldn’t bother if the appraised value/housing market was fairly stagnant year-over-year.

Since the appraisal process is automated, I think there’s a good chance we’ll see those higher-priced duplexes incorporated into duplex #2’s comps again – that error alone would have cost us a little over $500. We also have duplex #3 to contend with next year.

Want to be notified of new posts?

Join 178 other subscribers

How We Saved $1,454 on Our Property Taxes, Part 3

8 Oct

Note: these appraisal protest experiences are Texas-specific (and possibly county-specific) so please be careful applying them to your own district.

Once Corey received our appraised value and filed our notice to protest, it was time to compile any value-supporting data. Below are some places to start, and a notation about whether they corroborate an excessive or unequal protest.

Paperwork

(photo by striatic)

Appraisal District’s Supporting Documentation
We previously sent a letter requesting all documentation the appraisal district intends to introduce at the hearing. Our district provides different reports depending on the reason(s) for protest – so again, check both when you file!

Comparable Sales Report (Excessive)

Subject
Comp1
Comp2
Comp3
Address
126 Street 118 Street 200 Street 100 Street
Year Built 2006 2006 2006 2011
TotValue $169,105 $169,105 $169,105 $162,618
Value/Sq Ft $48.87 $48.87 $48.87 $48.87
Sale Date 1/22/13 1/8/13 7/31/13
Sale Price $150,000 $143,000 $182,000
Adjusted Price $153,060 $145,917 $191,252
Indicated Value $153,060

The comparable sales report included 3 other properties sold recently, then made square footage, year built, and sale date adjustments to estimate the market value of our property. Notice that property #2’s indicated value is significantly less than the $161,105 appraisal, and that comp #3 is a considerable outlier in sales price relative to the other properties.

Equity Comparable Report (Unequal)

Subject
Comp1
Comp2
Comp3
Address
126 Street 112 Street 112 Street 112 Street
Sq Ft 2006 2007 2007 2006
Year Built 3,460 3,460 3,460 3,184
Appr Value $169,105 $170,607 $170,607 $169,105

Each equity comparable report gave us the appraised value of 10 similar properties relative to our own property’s appraised value.

3rd Party Sales Comps (Excessive)
Request comparables from a real estate agent or property management company, or search online listings (Redfin.com filters by past sales). Our realtor provided a “Market Analysis Summary” with ~10 similar sales for each property:

Address Unit Mix
SqFt
Sold Price
Sold Date
212 Street Dr 3/2 3,460 $129,000 3/5/12
112 Street Dr 3/2 3,460 $138,000 6/8/12
220 Street Dr 3/2 3,460 $136,000 7/13/12
200 Street Dr 3/2 3,460 $143,000 1/11/13
118 Street Dr 3/2 3,460 $150,000 1/31/13

The ultimate goal of the appraisal process is to determine the value of the property on Jan 1st of the current year. Properties sold within 24 months of that date can be considered (36 months is allowed if there are limited comparables). This means we’re interested in sales from 2012 and 2013, but the most recent comps have more weight when determining the Jan 1st value.

Appraisal District Website (Unequal)
There is a wealth of information on the appraisal district’s website, included the appraised value of every property in your neighborhood. If you find similar properties with significantly lower appraisals (perhaps they are homesteads – which means the rate of increase is capped at 10% per year), they could support an argument that your property has not been equally appraised.

Appraisal District Property Results

While you’re there, verify the information the appraisal district has about your property. Pay extra attention to the square footage and number of bedrooms and bathrooms – it’s possible the appraisal district used inaccurate information to calculate the appraised value.

Recent Settlement Statements (Excessive)
We didn’t know this at the time, but we could have also used our HUD-1 Settlement Statement to support a lower market value since property #2 was purchased in the previous year.

If you have used any other data sources when protesting an appraised value, please share them for others in the comments below.

Next post – Corey’s meeting with the appraisal district

Want to be notified of new posts?

Join 178 other subscribers

How We Saved $1,454 on Our Property Taxes, Part 2

22 Sep

Earlier this year, Corey successfully protested the tax valuation of our investment properties – this series shares his experiences and lessons learned along the way. The information below is definitely Texas-specific, and possibly county-specific, so please take caution when applying it to your local area.

Step 1 – File a Notice to Protest
After reviewing our tax appraisal notice, we needed to schedule a hearing with the Appraisal Review Board. Form 50-132 requested owner information, property details, asked us to declare the reason(s) for our protest.

Notice-of-Protest-Reasons Checked v2

Our reasons would determine what evidence could be presented at the hearing. We wanted to get our hands on the appraisal district’s documentation first, but we couldn’t do that until after the protest form was filed. The solution: check both over market value and value is unequal to give us the most flexibility later.

Make a notation if you’d prefer an evening/weekend slot (if available). Be sure to make a copy of the completed form before you turn it in – you’ll need it in Step 2.

Tip: protesting multiple properties in the same appraisal district?
File Form 50-131 to schedule the hearings on the same day.

Step 2 – Request the Appraisal District’s Evidence
Next, we sent a separate letter (template below) requesting the documentation the chief appraiser will use at the hearing to justify our valuation. This provides 2 HUGE advantages for the property owner:

  1. At least 2 weeks to review the appraisal district’s rationale for the valuation, and prepare any counter-arguments.
  1. The evidence the appraisal district can introduce at the hearing is now restricted to only those materials.

We would be provided different documents depending on whether we protested market value (comparable sales report) or unequal appraisal (equity comparable report) – another reason to check both boxes when you file!

Next Appraisal Protest Post: Compiling Your Evidence

[Month DD, YYYY]

Via Hand Delivery
[Name], Chief Appraiser
[Name] County Appraisal District
[Address]
[City], [ST] [Zip Code]

Re: Request for property appraisal information at [Property Address], [City], [State] [Zip Code] (account #) Property [#]

Dear Sir/Madam:

Enclosed please find the Property Tax – Notice of Protest Form 50-132 regarding the above described improved real property.

Additionally, pursuant to section 41.461 of the Texas Property Tax Code, please provide a copy of the data, schedules, formulas and all other information the chief appraiser plans to introduce at the hearing to establish any matter at issue.

It is my understanding that information, “not made available to the protesting party at least 14 days before the scheduled or postponed hearing may not be used as evidence in the hearing,” according to 41.67(d) of the Texas Property Tax Code.

Please notify me when a copy of the above referenced information is available and I will make arrangements to pick it up and remit payment for it.

Sincerely,

[Signature]

[Name]

Want to be notified of new posts?

Join 178 other subscribers

How We Saved $1,454 on Our Property Taxes, Part 1

12 Aug

Earlier this year, Corey successfully protested the valuation of our investment properties – this series shares his experiences and lessons learned along the way. The information below is definitely Texas-specific, and possibly county-specific, so please take caution when applying it to your local area.

A Rising Tide Floats all Boats – And Taxes
The official “Notice of Appraised Value” is sent by the Texas County Appraisal District (TCAD) in April or May of each year. You’ll only receive a mailed notice if the valuation has increased, but you have the right to protest regardless.

Pro Tip: keep your “owner address” updated with TCAD to ensure you receive these notices. You can verify the address on file and find
address correction forms at the appraisal district’s website.

This year, both of our duplexes were slated for significant increases:

Property 2013
2014
(Proposed)
Change
Estimated
Taxes
Duplex #1 $173,740 $216,948 +25% $5,187
Duplex #2 $131,569 $161,105 +22% $4,784

With the local real estate market heating up, we weren’t surprised to see an increase – but a hike that steep warranted a closer look.

Always Challenge Your Tax Appraisal
Too often, homeowners are intimidated or don’t want the hassle of disputing their tax valuation. In truth, we get complacent because most of us don’t feel the sting of writing a giant tax check once a year (that’s intentional by the way – hiding the total cost by using “3 easy payments” is an age old marketing trick).

sdfsdfsdf

(photo by rxb)

Knowing what we know now – we could easily make that the argument that you should protest your valuation every year, regardless of the amount.

Reasons include:

  • You won’t know what the appraisal district is basing your valuation on until you begin the protest process and request the supporting documentation. Like us, you may find they used an inappropriate comparable or based their analysis on inaccurate data. At the very least, make sure the comps check out and then decide whether to proceed from there.
  • Consider the immense scope of an appraisal district’s responsibility. Hundreds of thousands of properties with unique qualities are being assessed annually – best case there is a considerable opportunity for honest mistakes. Like many instances in real estate investing (and life) – nobody is going to look out for your best interest like you will.
  • Texas has no state income tax, and a heavy reliance on property and sales tax revenue. Our notice even tried to compare the 2009 valuation (the height of our area’s bubble) to the proposed 2014 value in an attempt to distract from the significant year-over-year increases. Make no mistake – they have a duty to be fair, but they also really want your money.
  • Give some thought to the potential ROI of your time – Corey’s 2-3 hours of work netted him the equivalent of $485-$727 an hour of after-tax income.
  • Now assume that $1,454 is applied as a pre-payment on our mortgage – we’d save another $2945 in unpaid interest for a total savings of $4,399. This bumps up the ROI to $1,466-$2,200 an hour of after-tax income.

Just remember: there’s a significant potential for savings, you only get what you ask for, and they’re not going to penalize you for trying. 🙂

Coming Soon: Filing your protest, early strategy, and documentation requests.

Want to be notified of new posts?

Join 178 other subscribers

2013 Rental Profit/Loss Statement (Schedule E)

16 Jun

Now that taxes are behind us, I have a fresh look at our profit/loss statement for 2013. This version includes an additional duplex, so the interest of space each column is summarized by property instead of unit.

Income Duplex #1 Duplex #2
Rents received $23,703 $16,334
Expenses Duplex #1 Duplex #2
Advertising $29 $53
Auto & Travel $292 $1,364
Cleaning & Maintenance $553 $810
Insurance $772 $822
Legal and other professional fees $188 $187
Management Fees $0 $1,154
Mortgage interest paid to banks, etc. $6,134 $3,890
Repairs $996 $3,181
Supplies $524 $588
Taxes $4,154 $3,482
Utilities $58 $416
Depreciation expense or depletion $5,684 $4,284
Other: HOA Dues $600 $1,104
Other: Office Expenses $115 $233
Other: Transaction Fees $33 $15
Other: Meals $0 $2
Total Expenses $20,132 $21,585
Subtotal $3,571 $-5,251

Actual Cash Flow vs. Estimated
For tax purposes, we reported a passive activity loss of $1,680, compared to a net gain of $886 in 2012. In actuality, depreciation provided a tax shelter for 25% of the income, or almost $10k. This means actual cash flow is $8,288, which averages out to $690 per month.

Compared to our last balance sheet, we’ve not too far off from the $811/month cash flow estimate. I attribute most of the discrepancy to three things:

  • Purchase Expenses – 1-time costs incurred when buying duplex #2 – including the appraisal, inspection, etc.
  • First-Time Vacancies – I have a theory that the “first-time” vacancies for a unit are relatively expensive since we’re usually addressing deferred maintenance and getting things the way we like them. We had 3 in 2013, and expect another 3 in 2014 (whew!).

We’ve incorporated more property management fees in 2014, so I’ll be interested to see how well rent increases offset that additional expense. As long as we remain cash flow positive before depreciation, I’m happy, because I still believe the long-term benefits are more valuable than short-term cash flow.

Tax Implications
Generally, only passive income can be offset by passive losses, but there is an exception that allows up to $25,000 of the passive activity loss to be applied against other income. It begins to phase out depending on adjusted gross income, so we were only able to realize a $583 loss in 2013.

Want to be notified of new posts?

Join 178 other subscribers