The real property tax that real estate investors must pay on their rental property is the result of a tax assessment.

The tax assessment is the amount of money charged by the local authority against the property and generally includes several items that are lumped together from the different taxing authorities within the county like school board, hospital district, city taxes, county taxes, and special assessments.

Most of these amounts are based on a percentage called millage, which is then multiplied by the assessed value. The underlying assessed value, however, is an evaluation that may not reflect the real value or the market value of the investor’s rental property, and when deemed excessive, can be challenged by investor.

Keep in mind that property assessed values rarely equal the market value, but the relative assessment of one rental property should be in line with all other income properties of similar criteria area.

If you have reason to believe that the property taxes on your duplex or triplex, for example, has been assessed for more than the average value of similar rental properties, you might have a valid reason to contest the higher tax evaluation levied against your property.

In this case, gather as much information about the assessed values for all income property within the general area of your property and then isolate properties most similar in size (lot size and property square footage) to your rental property and contest them to the tax assessor.

You may not win your case, but it is worth your effort. Just bear in mind, most tax assessment departments have a deadline for tax disputes, so if you consider the property tax levied against your property exceeds that charged for similar rental properties, act immediately.

by Attorney William Bronchick

Editor’s note: Rental reserves (or replacement reserves) is an important function real estate investors must practice. ProAPOD real estate investment software addresses this issue by including a replacement reserves category in all three of its real estate investing software solutions for this very reason.

“Cash is King”, so they say, and investor would be wise to keep an adequate cash reserve for things that can go wrong in real estate, particularly rentals. It is easy to buy real estate with no money down, but it’s difficult to survive when you have no cash set aside for a rainy day.There’s no magic formula you can use to determine how much you should keep in reserve in the real estate business. When I have rental properties, the four key factors I consider are strength of the local rental market, eviction time line and cost, the age of the property, and the type of neighborhood.

Strength of the Local Rental Market The lower the vacancy rates in your area, the fewer reserves you’ll need for vacancies. Your local newspaper or your city’s housing department may have articles or statistics on vacancy rates. You should, at a minimum, have enough cash reserves to pay for one month of vacancy per unit, which is only an 8-percent vacancy rate. Even in a good market, you’ll deal with problem tenants who may stop paying rent and require an eviction. Good tenant screening will help solve this problem. If you plan to rent properties, you should always, without exception, do a rigorous background check on tenants. This includes reviewing credit reports, employment verification, references, and calling current and previous landlords.

Eviction Time Line and Cost The length of time it takes to evict a tenant is relative to your cash reserves. In pro-tenant states like New York and Massachusetts, it could take months and thousands of dollars in legal fees to evict a tenant–all while you’re paying the mortgage. In addition, in our experience, collecting back rents or damages from tenants who’ve been evicted can be futile.

Age of the Property With newer and recently renovated properties, you won’t need to anticipate many repairs in the first few years. As noted earlier, we recommend that you always hire a professional property inspector before you buy. Inspectors will go through the property with a fine-tooth comb, which helps ensure you’ll have no surprises later on. Another thing to keep in mind is that many utility companies offer a fixed monthly payment option so you don’t experience payment swings each season if you’re paying for heating, water, or other utilities as the landlord.

Type of Neighborhood If you’re renting properties in low-income neighborhoods, you can expect the turnover to be much higher than in high-income areas. In addition, multiunit buildings with small units and one-bedroom condos will attract more single people who tend to move more often than families.

Cash flow management is the bedrock of survival in any business, with real estate being no exception. Investors must be careful not to run out of cash or they will be soon out of business.

Click Here for more info for Rental Reserves

About the Author

Written exclusively for Legalwiz.com by Attorney William Bronchick, Certified Registered Nationally-known attorney, Author, Entrepreneur and Speaker.

Real estate investing risk cannot be eliminated; there is risk associated with any type of real estate investment that every real estate investor must deal with.

Risk, however, can be reduced with knowledge. A key to success in real estate investing, for example, is to know as much as possible about the growth trends of an area, the local problems, upcoming new investments, and changes in zoning or other regulations or rules that affect real estate both directly and indirectly.

This means real estate investors should develop a keen sense of awareness about their community by gathering as much information as possible from sources like the local newspaper, local meetings, or visits to the planner’s office or zoning board.

It seems appropriate, therefore, to acquaint you with several key terms you undoubtedly will hear that could affect your real estate investment.

Feasibility Study

A feasibility study examines the anticipated results from any specific development or proposal. They are usually conducted to show the success potential of a project with the goal to enhance the developer’s chances to obtain financing, but can also be made for presentations before various public forums.

Highest and Best Use

The highest and best use of real estate signifies the best economic use of a property with respect to what is legally and physically possible at any given time. A change in zoning or other regulations may dramatically change the highest and best use. When an investor can find and acquire a property that can easily and economically be converted to the highest and best use, the property value can be increased dramatically.

Land Use Regulation

Land use regulation deals with how the land is used. Because most areas of the country have detailed land use rules that are frequently changed and have the effect of reducing land values, real estate investors would be wise to watch for public notification of these regulatory changes in the newspaper and attend the public forum.

Unincorporated Area

Real estate in an unincorporated area means that it outside legal city boundaries. These areas are governed solely by county government. Though property in the unincorporated area often have greater flexibility of use because county building and zoning rules are often more lax, they may not have all the public services available to other parts of the county.

Variance

A variance is an approval granted by the city or county commission to enable a property to be used contrary to one of the building codes or sometimes contrary to a zoning regulation. A variance may be easier to obtain than a complete change of zoning, but each circumstance will vary.

Zoning Board

A zoning board is usually compiled of appointed (non-elected) community leaders whose duties are to hear and vote on zoning issues within the community. They can give an investor advance information about the acquisition of an investment property that could go up in value due to a proposed project and offer a good real estate investing opportunity.