This is a guest post from Sam at Financial Samurai, where he helps readers slice through money’s mysteries. He is also the founder of the Yakezie Network, a group of the best personal finance blogs on the web.
I got a postcard from a realtor the other day stating “JUST SOLD” at one of the resorts I own a vacation property. At first, I was like wow, that’s quite a decline in property prices given there are several foreclosures. Somewhat dismayed, I threw the postcard in the recycling bin and went up stairs to change into some comfy clothes. As I walked down stairs again it dawned on me, the postcard is going to save me a nice chunk of change!
You see, whether the property goes up or down in value matters little to me because I never plan to sell the place. It’s a lifestyle choice to purchase this vacation property for myself, friends, family, clients to enjoy now and during retirement. What I am concerned about is operating costs and cash flow. Before buying any property I run the numbers over and over again to make sure things work, even in the most dire scenarios. It’s all about increasing rental income and lowering mortgage and maintenance costs over time.
The property is in a rental program which covers all costs and then some for 8 months of the year based on a 60% occupancy rate. The other 4 months is cash flow negative, which is simply the cost to use the place for “free”. If I wanted to hustle more, I could privately advertise the place online to increase the occupancy rate and make more money. However, that takes time and not something I have much of nowadays.
One key expense is property taxes, which is 1.16% of the property’s assessed value in the state of California. Not bad, but still a recurring expense nonetheless.
EXAMPLE OF WHY YOU WANT PROPERTY VALUES TO TANK
Let’s say your $1,000,000 vacation property declines by 50% to $500,000. Oops! But, the bright side is that you go from paying roughly $11,600 a year in property taxes down to $5,800. A $483 a month savings is a meaningful amount, and one which is an unexpected positive upside surprise to a person who never plans to sell. In fact, it would be better if you could get the county to assess your property at just $100,000, thereby saving over $10,000 a year in property taxes!
Granted, obviously it is better to buy after the property declines by 50%, but if you are a rational buyer who has run all the numbers, you can clearly afford the property no matter what the paper value is, otherwise you wouldn’t have bought in the first place.
If you follow my 30/30/3 rule for home buying, I’m pretty sure you’ll be fine even if you lost your job for years and enter an economic crisis. If I couldn’t find work after a year, I’d go work at McDonald’s for 6 hours, teach tennis for 2 hours, and then go wait tables at night if I had to! Oh yeah, and of course there’s this online income gig as well.
ANOTHER EXAMPLE WHY YOU WANT PROPERTY PRICES TO TANK
My parents have a paid off home they live in for half the year. Given the property was purchased over 6 decades ago by my grandparents, the price has jumped probably 40 fold. Pretty sweet right? Not really because my parents never plan to sell as it is a house for all family members to use for generations to come. If I ever moved back home to be with them, I’d live rent free and just pay for all utilities, cable, and share the maintenance costs. I’d also have to split the property tax bill.
It would be a complete blessing if the assessor would come by and slash our property’s value by 90%. Too bad, prices in the governments eyes are sticky on the way down and easy on the way up. If you’re someone who plans to live in their house forever, start rejoicing at this housing downturn. Folks around you who are foreclosing are helping you save thousands of dollars a year. Take advantage of the situation and make sure you get the county to lower your assessed value! When property prices fall to zero, it’ll be such chaos and Armageddon that nobody will have to pay for anything ever again!
Please read: “How To Lower Your Property Taxes” for more insights.
Readers, any homeowners out there who are taking advantage of property price declines and lowering their property taxes? I strongly suggest you keep all those realtor postcards in the mail, and use them as comparables when you contact the county assessor’s office.
Anybody have any great stories where they were able to use really bombed out comparables to lower your property taxes more than the market value?
Am I the only one who wishes property prices go to zero in certain areas to help relieve the property tax burden?
Sam @ Financial Samurai – “Slicing Through Money’s Mysteries”