This topic has come up recently with a couple of landlords and I just wanted to shed some light on how we handle real estate taxes. I suspect that most landlords who have investment properties such as mobile home parks and other properties have either commercial or other loans in which the property tax is not escrowed by the lender.
Nothing irritates me worse than thinking I have all expenses covered and rolling along only to receive a large real estate tax bill that had not been anticipated.
Here is what has worked to even out the cashflow and reduce stress for us.
For those who may have heard Scott and I speak or read our material, you will recall that we are big on PAYING YOURSELF FIRST. By that we mean that you write yourself in as an expense that gets paid just like any other bill and most importantly, gets figured in as an expense before deciding what amount of mortgage payment the property can support.
If you don’t pay yourself first, you never seem to get paid. Something always comes up that robs you of your cash out of the deal if you don’t treat your profit like an expense. Write that check or transfer those funds just as if you were paying an electric bill.
I recommend that you do the same with real estate taxes. If your lender is not escrowing taxes then create your own escrow account at your bank.
Take last years real estate tax bills and round up to say the nearest $1,000 (or more if you like). Divide that by 12 and that is the amount you need to transfer from your companies checking account into its escrow account each month.
This way when the tax bill arrives at or near the end of the year, you already have the funds set aside to pay them. If for some reason your bill jumped a bit then it is not likely to be any real hardship to make up that increase but trust me, if you have forgotten to set aside some funds until then, you are going to have one big nut to crack and most likely your cash flow will not cover it. This means that there is a good chance you are going to have to come up with personal cash or use cash to pay the taxes that you had otherwise intended to use to buy more investment income properties.
Just some food for thought for those of us who hold properties long term.