Home Real Estate Mortgage Write-Offs, Buying with an LLC, & Boozy Airbnb Gifts

Mortgage Write-Offs, Buying with an LLC, & Boozy Airbnb Gifts

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Your new Airbnb is set up and ready to go. You’re just finishing up the welcome gift and slipping in a bottle of wine as a pleasant surprise for your guest. Oops…you might have just put yourself in a BAD position. On this week’s Rookie Reply, Ashley and Tony are getting into the moral muddiness of including boozy gifts in your welcome package, how to account for your mortgage interest expense, and when you should (and shouldn’t) buy a property in an LLC.

You’ve got the real estate questions; Ashley and Tony have the answers. But we’re not just debating whether your guests should crack a couple cold ones on your dime. We’ll also get into how to find past purchase prices for ANY home, a property tax breakdown with some tips to save you money, and the difference between appraised and assessed value.

Ashley:
This is Real Estate Rookie episode 322.

Tony:
So we only do welcome gifts at a few of our properties right now and ours are pretty plain. It’s a little note card that we have. It’s a little package of popcorn and it’s like some candies. I personally probably wouldn’t standard include wine as a welcome gift for a lot of the reasons that you mentioned. We have sent gifts like that in the past, but only if we know if we get something from that guest before they check in. So someone’s like, “Hey, my wife and I are celebrating our 10th anniversary.” Anyone who’s celebrating an anniversary 10 years is probably over 21 years old, right?

Ashley:
My name is Ashley Kehr and I’m here with my co-host Tony J. Robinson.

Tony:
And welcome to the Real Estate Rookie podcast where every week, twice a week, we’re bringing the inspiration, motivation, and stories you need to hear to kickstart your investment journey. Today we’ve got a really good rookie reply for you guys. Ashley kind of goes off the rails at one point and she just goes rogue and comes up with her own question. But we get a few good guest questions as well, or rookie questions I should say. So we talk a little bit about mortgage interest and is it a business expense or is it not? We talk about the pros and cons of buying your properties in LLCs or just doing it in your personal name.

Ashley:
I love it how Tony said Ashley has a question and then we have really good questions from the rookies.

Tony:
She’s reading into that guys.

Ashley:
So yeah, some of the things we talk about today are about mortgage payments and how they should be broken out on your tax return and in your own bookkeeping for your profit and loss statement to show your income and expenses. You have your principal that is included in your mortgage payment, and then you also have interest, and then you may also have escrow, which would be your insurance and property taxes too. So we’re going to touch on that and why a bookkeeper can play a really big important key role in helping you decipher that.

Tony:
All right guys, so I want to give a quick shout out to someone by the username of Alyssa A. And Alyssa says, “Favorite podcast. Been listening to The Real Estate Rookie for the last year. One of my favorite podcasts for being a newbie and real estate, always have the best guests, inspiring stories and advice.” So Alyssa, I appreciate the five star review and if you’re one of our rookies and you haven’t taken just a few minutes to leave us an honest rating and review, please do. The more reviews we get, the more folks you’re able to reach and the more folks we can reach, the bigger impact we can have, which is what we want to do here at The Rookie Podcast. So take two minutes, leave that review, and we just might shout you out on the show.

Ashley:
So for this week’s Instagram, shout out, I want to give a shout-out to Dell Collective. So this is an Instagram account that hosts unforgettable stays and so they share their journey about the three different short-term rental properties that they have, and I want to stay at one of them because they’re so beautiful. So if you are looking for design and experience ideas, I’m pretty sure they have a camel I think on the property even that you get to hang out with while you stay there. So definitely check out Dell Collective. They have a really unique Airbnb experience along with some of the different, I guess, amenities that are provided along with your stay and the really cool animals that you get to meet while you stay there. So go ahead and check out Dell Collective on Instagram.

Ashley:
Okay, today’s first question is from Heidi Keywood. “Why is mortgage interest not considered a loss in income or an expense? Is it just the cost of doing business? A $100,000 mortgage costs 50,000 in interest over 30 years, that’s $50,000 you’ve lost, even if the tenant is paying it. I know it’s a tax deduction and leveraging your money allows you to buy more properties and everyone has different goals, immediate cashflow pay down and larger cashflow for retirement, et cetera. But I don’t see interest expenses in the equation in any discussion and that affects how to use your cash. Thanks.”

Ashley:
So first of all, interest expense or interest on your mortgage is an expense and it should definitely 100% be included on your profit and loss statement. So if you’re using the BiggerPockets calculator and you put it in there that you’re going to be using a mortgage, the interest will show up as an expense when it is showing your profit or loss on the property. Your mortgage principal payment, that is only calculated since it is money borrowed against your cash flow. That is not calculated as a loss or as a loss in income or an expense as Heidi had put it.

Ashley:
So 100% it definitely should be accounted for. So Heidi had said that she has seen it places where it’s not included and I’m not sure where those are. Maybe people are posting examples, but it definitely should be included when you are running the numbers as to how you’re going to fund the deal. If she saw maybe properties that were being paid for in cash where there was no interest, that could have been the scenario, but it definitely should be included on your tax return and it also should be included as an expense on the profit and loss statement. And what having a bookkeeper can do is every month when you make your mortgage payment, they will take that say $585 and they will take say the principal that you’re paying is actually only $115 of that, and they will take it and they will allocate that $115 to the mortgage principal to show, okay, your mortgage balance is now this, and then they will also take the interest expense and put it as an expense for you to bring down your bottom line.

Tony:
Yeah, well said Ash. I think the only thing that might be kind of causing some of Heidi’s confusion, and maybe this is something that’s affecting some of our other rookies as well, is that a lot of times you’ll just hear people refer to what they pay monthly for their home as their mortgage payment. So they just use that as a catchall phrase, Hey, my mortgage is X, Y, Z, when in reality that mortgage payment is a combination of your principal interest taxes and insurance. So your PITI. So if you hear someone say, Hey, my mortgage is 2,500 bucks, a lot of times you’re including that interest payment as part of that 2,500. But yeah, it’s Ashley’s point, you should definitely be including your interest as an expense on your P&L. And if you are not or your bookkeeper is not, I would probably go find a new bookkeeper.

Ashley:
Okay, the next question is from Mark Urban. “What are the pros and cons of purchasing in your personal name versus in LLC? And if you go the LLC route, do you put all your properties in one or a separate LLC for each property? I’m relatively new, so pardon, if this question has been asked before.” Mark, we welcome every question here and we are so excited to have you part of the real estate rookie group and that you’re going to be starting your real estate investing journey. This question has been asked before and it gets brought up a lot. Definitely is something that people are unsure about because there is not one defined answer. Is this 100% what you should be doing? We’ll go through the pros and cons. Putting it in your personal name leaves you up for liability that someone can sue you personally if something goes wrong with the investment property, but you can also get better financing by having it in your personal name.

Ashley:
So the bank will give you a better rate and terms because it’ll be on the residential side and not in an LLC. If you put the property in an LLC, it does provide you more liability protection against you personally and your personal assets as long as you are following the rules of having a business that is an LLC such as properly maintaining your books. Downside of an LLC is that the bank loans are not as term and interest rate friendly. So for example, if it’s in your personal name, you can probably get a fixed rate over 30 years. With an LLC, you’re probably only going to get a fixed rate over five years and only amortized over 15 or 20 years. So those are some of the differences. If you go the LLC route, do you put all your properties in one or separate LLC for each property?

Ashley:
So the main reason for most people to put a property into an LLC is for that liability protection. So I would not look at how many properties, I would look at what your total equity is. So if somebody were to sue you, how much equity do you have available where the judge would say, okay, you have half a million dollars in equity, you sell all your properties. If you have them leveraged and maybe you only have $50,000 in equity, then there’s not that much to lose.

Ashley:
So I would look at it more of an equity position. I have LLCs based on my partnerships, but one partnership, the equity got too high for our comfort, so we started a second one, a second LLC, now that properties are going into that. So it really depends on your comfort level as far as how much equity is in that you’re doing the properties. And then there’s also a lot of people that just put one LLC in each property, or I’m sorry, put one property in each LLC, but Tony knows it is very expensive in California to have 20 different LLCs to maintain. You’re paying the, what’s it in California? $800.

Tony:
$800. Yeah.

Ashley:
And is that per year?

Tony:
Per year.

Ashley:
Per year. And then you also have your bookkeeping for each LLC, it’s to file a tax return for each LLC. So that can completely diminish your cashflow if you only have one property in that LLC. So that’s definitely something else to take into consideration. One more thing I will add is if you do go into your personal name, definitely get an umbrella policy from your insurance broker that all encompasses and gives you some kind of protection. So if somebody does sue you personally, they will pay up to a million, 2 million or whatever that umbrella policy is in legal fees or most likely they’ll settle for that amount of money and you won’t lose anything.

Tony:
Yeah. Just to add on to that last piece you said, Ashley, is that a lot of new investors, I think they get understandably, but they get kind of freaked out about the liability that comes along with being a landlord. And for a lot of people their minds go worst case scenario. And the truth is that there’s tons of ways to protect yourself and actually kind of alluded to this, but I think the bigger question you need to ask yourself is how much do I really have to lose If you don’t have much net worth and if someone came after you and there’s maybe a car, there’s not a whole lot for you to risk there. And for a lot of people, especially when you’re just getting started out, a lot of times the protection you can get through your home insurance policy and through your umbrella policy can give you pretty decent coverage, as you said, up to millions of dollars, which hopefully would cover a lot of incidents that happen at your property.

Tony:
To Ashley’s point, we don’t have one LLC per property. We have a couple of LLCs that kind of manage a lot of our holdings and we do that because we feel that’s the right structure for us. But I think the best thing for you to do Mark, is to go talk to an attorney in your estate, someone specifically that and maybe not even in your state, but really more so someone that understands real estate investing and all the different kind of nuances that come along with that and kind of lay out like, hey, here’s what my picture looks like, here’s what I’m worth, here’s the assets that I have, and let them kind of understand, hey, what’s the right way for you to do this? Because I don’t know, some people that spend $50,000 in legal fees for asset protection, but it’s because they’re protecting tens of millions of dollars. I myself today probably wouldn’t pay a lawyer $50,000 to set up asset protection for me because in comparison to my assets, it doesn’t make sense for me to do that, right? But someone that’s got thousands of units probably.

Tony:
So I think you want to weigh the cost against the benefit and see what structure makes the most sense for you, but I think getting some good legal advice is a good first step as well.

Ashley:
So the next question is actually I’m going rogue on this. This is a question that I have for you, Tony, that I wanted to submit today to Real Estate Rookie. So I never ever go on Facebook, but I actually once in a while go on Facebook marketplace and look for properties for sale and I actually found one, so I’ve been logging into check if the guy has messaged me back on it and he did today, but I also just scrolled through my feed and it was just, I’m not in this group, it’s like an Airbnb, VRBO, booking.com host group and it must have came up as a recommendation.

Tony:
Suggestion group.

Ashley:
So it’s a picture of a fridge and it has six different beers and a little wooden crate thing and then a bottle of wine and it says, here’s a choice, beer or wine, have a drink, it’s vacation time. And then the person wrote, “This is a little something that I do for each guest and the refrigerator. I have a nice bottle of wine and a variety six-pack of beer along with a 12 pack of waters.” And then of course, this cute little sign. “I would like to see what other hosts do for their guests as a special little welcome.” So in my brain, the first thing I think of is, Okay, what if they’re underage kids in there and they drink alcohol? I always think worst case scenario.

Ashley:
So I go into the comments and there was actually a mix of them, some just being like, you know what? It’s the person’s choice. This is a very nice gesture. Other people talking about recovering alcoholics, how this may be a trigger for them and that it’s not a good idea to put it in the home. Also, other people talking about liability or saying that it’s actually illegal for you as a business owner to provide the alcohol on the property because you don’t have a liquor license depending on what their state was. So I was just wondering if you have any take on this as to what are your thoughts on it?

Tony:
That’s a great question. I’ll answer with a little anecdote first. There was this podcast I was listening to, and it was a podcast about the court system and this lady was going to the courthouse every day following these different court cases that were happening. But one thing that she called out in the podcast was that as she was in the courtroom, there were TVs in the waiting areas, but the TVs were always only set to the food network. And she asked someone there, she’s like, there’s so many other options, why the food network? And they kind of started rattling off the different possibilities. They’re like, “Oh, well we could put the news but it’s too polarizing. Or we could put sports, but not everyone likes sports. Or we could put a kid show, but not everyone’s in here with kids.” And they just rattled off all these different reasons why all these other options were potentially bad ones and they landed on the food network because they’re like, “Who doesn’t seeing good food getting cooked?”

Tony:
So when I think about from a host perspective, it’s almost that same approach. We’re like, okay, what’s the food network of a welcome gift? So we only do welcome gifts at a few of our properties right now and ours are pretty plain. It’s a little note card that we have. It’s a little package of popcorn and it’s like some candies and we do that at I think two or three of our properties right now and that’s it. And for most people, there’s not a super high allergic reaction to popcorn. We thought about maybe home baked goods but don’t like what if people are allergic to nuts or peanut butter or whatever’s inside of them. So we said, what’s something simple, something generic, something that most people can be happy with. So I personally probably wouldn’t standard include wine as a welcome gift for a lot of the reasons that you mentioned.

Tony:
We have sent gifts like that in the past, but only if we know if we get something from that guest before they check in. So someone’s like, Hey, my wife and I are celebrating our 10th anniversary. Anyone who’s celebrating an anniversary 10 years is probably over 21 years old. So in some of those situations we’ll send a bottle of wine or if a guest maybe has an issue getting into the property because they’re checking coat working, we’ll send a bottle of wine or something like that. But as a standard catch all, give for everyone, I probably wouldn’t do it.

Ashley:
Yeah, we’ve done it twice in our A-frame property and the one was for the first ever guest, and you could tell by the picture they were definitely over 21. And then the second one was for a couple getting engaged where he had just asked us a couple different questions about how he was planning his proposal and things like that and asked, where’s a good place to go get drinks? We’re doing this hot air balloon ride or whatever. And so our manager had given recommendations, and so this was all done ahead of time, so we left them a bottle of champagne, but we actually hid it and then we told him where it was so that after he proposed and stuff and they came back [inaudible 00:18:09].

Tony:
That’s super cool. I do think welcome gifts in general are a good idea because as supply continues to increase on the platform, competition continues to increase, the hosts that really separate themselves through the experiences, the ones that I think will do relatively well. So we’re always kind of reevaluating what can we do to improve that experience for our guests.

Ashley:
Yeah, one thing that I’ve never seen feedback on is that we bought $150 Marriott plush bathrobes and our cleaner takes them home every time and does them as we have, I don’t know, four of them, whatever, but we leave two at a time and does them as part of her sheets wash cycle, and we have never had anybody say that they like them or even use them or what. We found someone in the hamper and everything that cleaner says, but nobody has cared about that. Then we also get at weddings, people sometimes provide flip-flops or whatever, or even slippers for your guests or you’re doing a bachelorette party or bridal shower, whatever, and so you can buy in bulk slippers. And so we actually tried that out too, and people use them, but nobody has ever left in their review or private review like, “Oh, we love this little touch.”

Tony:
We love the slippers.

Ashley:
Yeah.

Tony:
It’s an interesting concept and it’s something that I struggle with as well. I read this book about Disneyland and how they create the magic at Disneyland, and it started to give these little examples of things that Disney does that go above and beyond what a typical amusement park will do, and it’s all with the goal of creating this magical experience. If you walk through a construction zone at Disneyland, you never see the construction because they decorate even the gates that they put up over the construction. If you walk through a different amusement park, you’ll hear the tractors going off in the background, you can see everything that’s going on. Disneyland has people that are going through scraping up gum all day, just all these little things that they do, and no one’s probably ever commented at Disneyland. I love going to Disneyland because there’s no gum on the ground, but they can feel the difference.

Tony:
All these things kind of just combined, it creates a significantly better experience for people when they’re there. So I struggle with that. It’s like, do we invest in these little things that may not themselves create that positive review, but it’s the combination of all those small things together.

Ashley:
What’s your biggest complaint, would you say, as to far something that’s very little, that’s not like you wouldn’t think somebody would even put their time and effort into actually sending you a private note when they read a review.

Tony:
I feel like it’s either something related to cleanliness, maybe a cleaner missed something. That’s probably the biggest beef that most guests have these days. But outside of that, I wouldn’t say there’s anything that’s consistent. It’s usually some one-off thing where it’s like, for example, our AC was leaking at one of our properties and the mini split is right above the bed. So that guest complaint about that, but I don’t, there’s nothing that’s like all the time we get this same complaint. So it’s kind of hard to say.

Ashley:
Yeah, I was trying to think too, and none of our stuff is really about cleanliness or things that need to be fixed or anything like that. It’s more of like, oh, could you add this in? Or we actually got one the other day, they still gave us five stars, but there was like, there’s nothing to do here. And I don’t know if they meant in the house outside or the location of the property, but I was like, Hey, there’s board games. There’s a TV, I’m not sure exactly. There’s a fire pit, there’s a basketball net.

Tony:
We’ve kind of gotten dinged on some of our properties for location as well. And when that happens, there’s the location description on Airbnb. We can talk about the location. We’ve tried to go back and update that so people really get a good sense of where they are. One of our properties, it’s literally as far north-west, it’s in the far edge of Joshua Tree. Literally. If you go the next parcel doesn’t even belong to anyone. It’s all government land. So that’s how far out it is. And initially we were getting reviews from people that were saying like, ah, it’s a little bit far. There’s a two-mile dirt road to get there. So we put that information out into the listing. We say, Hey, you’re going to love being so remote. If you’re really looking for a solitary desert escape, enjoy the two-mile bumpy dirt road on your way to get there to really experience the desert. So we try to hype it up inside the listing so people understand that, but when we do get comments like that, we try and go back and optimize the listing to make it more apparent upfront.

Ashley:
Yeah, it’s so funny. The things we thought were going to be issues haven’t been issues at all. The driveways actually really steep, and if it rains, it can get really muddy and we put in there, we highly recommend bringing four wheel drive and stuff like that. And nobody has complained about that at all, which has been super surprising. But yeah, I was just looking at the review that we got today that kind of made me want to ask you that is the only thing that they complained about was the difficulty of finding light switches. And I mean, this is the tiniest little property ever, and they could have, and I still have the messages hooked to my phone, so I’ll still get like… Sometimes they’ll pop up for me. And so I read it and they had asked our manager who we can’t find it, she responded right away, told them the exact one they were looking for, where it was located or whatever.

Tony:
We do label our light switches, as silly as that sounds, but it’s like we’ll have one sink light, kitchen light, patio light. That way people, because we were getting those questions a lot too, like, “Hey, which switch does this thing?” and, “I can’t turn thing on?” So yeah, you got to dumb it [inaudible 00:24:21].

Ashley:
Yeah, I think the only one we have labeled is the exterior camera, and we give them the option of shutting it off.

Tony:
Really?

Ashley:
Yeah, exterior.

Tony:
Interesting. We literally just argue with the guest maybe two weeks ago, two or three weeks ago, because we said, say in our listings like, Hey, there’s an exterior security camera for your safety and for us to make sure that nothing goes wrong with the property. At this particular property, we had two, one at the front and one on the side that pointed towards the backyard. And for most of our properties that have big backyards, we do that. One on the front and anywhere there’s a point of entry. And she was making this big fuss because the listing only said security camera and not security cameras. And she literally reached out to Airbnb and she was like, their listing is incorrect and they’re watching me. And anyway, we’re pretty staunch about keeping our security cameras on at all times because in case something happens, we want to be able to check.

Tony:
For example, someone literally broke into one of our properties last week. There was one night that was unbooked and our cleaners had cleaned the property on Monday. No one checked in Monday night. The next guest was checking in on Tuesday and the cleaners cleaned the property Monday. We saw them come in, we saw them leave. They finished their checklist. The guest gets there Tuesday and he’s like, “Hey, the property looks a little dirty, and someone left some white residue on the countertop and there’s some weird things happening.” So we went back like, yeah, okay, cool. The cleaners were there. We go through our cameras, and turns out someone broke into the lockbox and stayed the night at the property, and we saw them at two o’clock in the morning. They were literally trying to creep past the camera so we couldn’t see them. So anyway, we never turn our cameras off because you never know what could happen.

Ashley:
So I should start leaving them on. Make them-

Tony:
You should always leave them on.

Ashley:
Well, they have to turn it back on when they leave, which everybody has been super good at that. But yeah, so basically it’s when they’re there, some people don’t. Yeah.

Tony:
Because we had one guest that reached out to us saying that she slipped and fell out by the hot tub. And again, we have a camera that points to the backyard, and we were able to go through all the camera footage, and the only time she slipped and fell was because they were drinking sitting at the outdoor patio table, and she tried to sit down and she missed her chair, but she tried to message us and say that she slipped because it was so wet by the hot tub. So even just for reasons like that, we never turned the cameras off.

Ashley:
So let’s go back to some of our other questions here. The next one is from Julie Glazer. “Is there a way to find out what a property sold for other than asking a real estate agent? Zillow and the assessor’s site does not seem to be accurate. For example, I purchased a property in September, and it’s not updated on Zillow for the price I paid, thank goodness, the assessor’s site had it appraised at 74,000, which is way over what it was actually worth given its condition. I called our recorder of deeds, and they do have an online record search, but it’s $20 a day or $250 a month.”

Tony:
So Julie, first, just to kind of clarify the different data sources here. So typically there are a couple ways you can get data on properties that have sold. You can get it from the MLS, like the multiple listing services, or you can get it from the actual county records. Typically, the most accurate information comes from the county records because those are based off of the paperwork that gets filed when the property is closed. In California, our title and escrow companies collect all the paperwork from the buyers and the sellers, and then they submit all of those final documents to the county. So those are typically your most accurate data sets are from the county.

Tony:
Zillow, if I’m not mistaken, and someone shoot me an angry message on Instagram if I’m wrong here, but I’m pretty sure Zillow is pulling their information from the multiple listing services. So if an agent fat fingers a number or whatever, as they’re kind of finishing things out, you could see inaccurate data on Zillow as well. So just understand that there’s two kind of different ways to pull that information first.

Ashley:
So Tony, where do you think they get it? If it’s an off-market deal and it’s not on the MLS then?

Tony:
Yeah, so there’s a couple places I like to go for data. So first you can go to the county. So Julie looks like you’ve already reached out to them. 250 bucks a month seems pretty steep, but luckily there are other ways to get that information. So there are data aggregators, basically websites, software companies that pull data from all these local counties and they put it all in one place. So Invelo is one option. BiggerPockets has a good relationship with Invelo. PropStream is another option, but both of those data software providers allow you to search pretty much every city county across the entire country and see the same data you would see as if you were paying that two 50 per month. So I think my first recommendation, Julie, would be to go to a website like Invelo or PropStream and set up an account with them. I think it’s like 99 bucks a month or something like that. So you’re only paying one subscription, but then you get access to nationwide data as opposed to just that one little county or city.

Ashley:
And I think some of them have free, I think Invelo, if you’re a BiggerPockets Pro member you get like $50 free to spend on stuff and then PropStream, I think you get seven days free too. So lots of options to just try it out, especially if you just need one thing. For myself, I’ve looked at the county records and you can still pull information a lot of times without having to pay to get the searches or if you actually go to the assessor’s office, especially if it’s a smaller town. Today, my business partner is actually going to the assessor’s office. They’re only open on Tuesdays from one to 4:00 PM And this question actually made me remember, and I just messaged him real quick on my computer and I said, “Did you go to the assessor’s office?” And he’s like, “No, I’ll go right now.”

Ashley:
Thank you. So also thank you Julie for your question so that this reminded us to make this happen or else we’d have to wait until next week. But you go to the assessor in person and you may have to pay a fee still depending on how big the assessor’s office is, but you can get the information from there too. And then also we have a newspaper, I think it’s called Business First or something, it’s in Buffalo, and it’ll actually publish all of the real estate transactions that have happened and what they were recorded at. So you can actually pay a membership to that newspaper, which is probably going to be way cheaper than the $250 a month. And you can go and search and they think they do it every week. Here’s the transactions that happened this week.

Ashley:
And usually it takes a little while. So if the newspaper comes out in January, it may have been transactions from the end of November or December or something like that, but if it was a while ago, you can go through the newspaper too and search or go to your local library and go through the big computers where you click through the pages of whole newspapers.

Tony:
I think the last thing to highlight too for Julie is the assessor’s appraised value. So the assessor’s appraised value, at least in the properties that I’ve purchased, that I’ve researched, that I’ve analyzed, I’ve never seen the assessor’s value match the actual appraised value of the home. Typically, I see that it’s lower. The assessor’s kind of trying to understand, Hey, what kind of property tax bill should you have? And luckily, it’s always lower than what the actual appraised value is. So I would never use the assessor’s website to gauge the value of a property. It’s only more so for your property tax perspective.

Ashley:
Let’s break that down real quick. I think that does get really confusing because when you get your property tax bill, okay, you have the market value and then you have the assessed value, and the assessed value is determined by the assessor along with the market value and the assessed value is usually lower than what the market value is, and that’s what they’ll take that amount and they’ll multiply it by the percentage of the property tax rate, whatever that may be for your town or county. So that is determined by the assessor themselves. This is 100% completely different than an appraisal. So for an appraisal, it is an appraiser who is going out a third party and they’re going and looking at the value of the property, which would be more comparable to the market value of the property, but still there can be a huge difference of what’s listed as the market value.

Ashley:
And also you have to look at when the property was actually assessed by the assessor too. So when was the last time the assessor went around and said, okay, you know what, I’m changing. Your property is now worth this instead of that, and they usually do a whole town reassessment for the property, and you’ll get a letter letting them know that they’re going to be doing this and that. So you want to go outside, make your house look like a dump for the days that they’re going around town, assessing property, your property tax [inaudible 00:33:35] lowered. But just so you know that there is a big difference in that, the appraised value and the assessed value of your property, because I have seen people say like, oh, they’re listing this house for sale for this, but the assessed value only says it’s worth this. There usually is a huge, huge, huge difference, and you want your assessed value to stay low, to be low.

Ashley:
So another thing, yeah, to keep in mind is that when you purchase a property, so at least in New York State, you can’t get reassessed right away. So it’s whenever there is a county or town reassessment that this will occur. And usually it’s the town that does the assessment, and so they will be like, there was maybe when you bought it, there was just an assessment done that year, so you bought it after the assessment was done. So you’re clear for a little while until they do that reassessment, and when they do that reassessment, they would look at what you had purchased the property for and what the condition of the house looks like at that time. So that’s also something to be very cautious of. If you are paying a lot more money for this property, be cautious that when there is a reassessment that your property taxes could increase.

Tony:
It’s cool that New York kind of only reassesses on a fixed cadence for one of the counties I purchased and even where my primary residence is, the reassessment happens at the time of transaction. So what happens, for example, and Joshua Tree will, we own quite a few properties whenever we purchase a property, they immediately reassess the tax value. So our property taxes go up as soon as we purchase that property, but then we also get hit with what’s called a supplemental tax bill. So I don’t know how, I don’t know the math that goes into this, but basically the county is saying, I don’t know if we’re like, hey, this is what we should have been getting on this property for the last timeframe. And it’s not a small amount. It’s like $4000 or $5,000 that’s due that first year of ownership when you buy that property.

Tony:
So I think it really is important for new investors to kind of understand those nuances because imagine you bought that short term… And we got surprised the first time that we did it. We bought that first short-term rental and we’re cashflowing like crazy. Then we get a bill for 4,000 bucks. We’re like, “Hey, we’ve already been paying our property taxes.” And they’re like, yeah, we know. You owe us this too. So then we had to start kind of budgeting for that in our new properties. So just important for rookies to kind of understand what that process looks like.

Ashley:
Yeah, there was a parcel of land that I helped an investor with. He owned the land already for a long time. So it was taxed at… The assessed value is based on it being vacant land. And then he went and did a new development on it and his property taxes for three years after that were still based off of the vacant land because they hadn’t gone and done the reassessment. So here’s a three and a half million dollars property getting taxed on a $20,000-

Tony:
Like empty plot of land.

Ashley:
… [inaudible 00:36:28] value. So there are ways that it could definitely benefit you, but then that year that it was reassessed like woo, a big shoot up. So just so you know to expect those coming. Well, thank you guys so much for submitting your questions for this week’s rookie reply. Remember, you can always leave a question, and The Real Estate Rookie Facebook group, you can send a DM to Tony or I or you can go to biggerpockets.com/reply. Thank you so much for listening. I’m Ashley @wealthfromrentals and he’s Tony @tonyjrobinson on Instagram and we’ll be back on Wednesday with the guest. We’ll see you guys then.

Ashley:
(Singing).

 

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