Escrowing Taxes for Landlords


#1

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.

Tony


#2

Tony, Thanks for the information. What percentage do you figure in for your personal compensation?

DK


#3

I do not set my compensation as a percentage but rather I bid it like I would a job. If the property is a turnaround then I look at what is there and in most cases go by a house by house estimation.

In small parks you can do this. I drive by and say, that home is in pretty bad shape, is old and will likely have a very high turnover rate. I’m not going to manage that headache for less than $xxx per month (my management fee).

If it’s a lot lease then I may say $50 min is my fee. If the home is a nicer rental unit I will charge somewhere in between.

Honestly these costs will and should vary based upon just how busy I am on other properties. The reality is that we can only do so much and still be happy. I don’t mind extra work if I am rewarded more for it just like many folks don’t mind working overtime if they are paid time and a half for it. But if you ask that same worker to work extra hours for the same, straight rate they walk off. I am the same way with these small parks.

If everything is caught up or if this were one of my first properties I may be willing to work for less to manage these new units.

Only you can and should determine just how much is worth it for you. When I buy a property I don’t care if one person says they would not work for that much or another says I charged too much for my fee. I buy at the price that works for me. Those folks won’t be there when the property needs work, only I will. If I feel amply rewarded, who cares what they think?

In most cases, using this approach I still buy for less than they would but more importantly I am using real dollar figures just like you would in your checkbook. I use what I call “checkbook analysis.”

Checkbook analysis for me means at the end of the month when I collect all the rent I can write all the checks I have to pay the bills, pay myself first then pay the mortgage… and still have money left in the checkbook.

Tony