TAO of Flipping and Investing in Real Estate - Part 4.2 - Insurance and Taxes
Determining the cash flow of a purchase is important to the overall calculated risk you will be taking in relation to any real estate you will buy. Knowing the actualy cost of the property insurance and taxes on the property are 2 things you will be able to obtain. These two factors will be added into your overall purchase price based on a formula we will discuss in another section on this blogisode. Insurance and taxes will eat a portion of your proceeds when you purchase a house, so whether you are buying it to hold for long term (investing) or planning on flipping the house immediately after purchase, you will have to pay both.
The property insurance that you will need on a home, whether it is personal or for investment can be thought of as being the equivalent to car insurance. If you don’t have it, you bear the full responsibility of the actions taken with it. If you do not have property insurance, you essentially are fully responsible for any and all problems that may happen to the house. In Texas, insurance for a $100,000 home can range anywhere from 400-800 dollars a year. Imagine this cost doubled or tripled for a home in the half million dollar range; as you can see, it can get very expensive. The easiest way to find out the monthly fee for property insurance is to call a local or national insurance provider and tell them you want a good faith estimate on what the property insurance will be for the target property. They will be able to give you a figure that should be very close to the actual fee you will pay. When purchasing a home for flipping, you may be required to pay 3 to 6 months of the premium for insurance up front and if your holding for long term investment, you need to know what the monthly fee is for the insurance, so you can average that into your total montly mortgage payments along with the property taxes you will pay.
The bulk of your payment for a property, aside from the mortgage itself will come from the property taxes. This includes everything from couty, city, school taxes, and even medical facility maintenance and availability. In Texas, the average taxes on a 200,000 home is between 3500-4500 dolalrs a year. By calling your county tax appraisor or the court house, you should be able to speak with someone that can tell you the annual property taxes for the target property. This tax can be offset by claiming this property as a primary residence, also know as homestead or providing proof of disability which can offer a substantial discount to your taxes on the property. Your property taxes are important to pay, if you fail to pay them, you can be subject to forclosure by the city or state for failure to pay on time — death and taxes are the only 2 things we can be guaranteed in life.
When buying a home, it is normal to consider the mortgage, property insurance, and the property taxes as a package deal. Most people will pay all three of these to their mortgage company if they own a home. The insurance and taxes will go into an escrow account and be paid as they are due. Being a investor is no different than a home owner, so try and calculate these into your purchase price along with the mortgage. As an example, if you buy a house for $100,000 and find that the house will rent for $900.00 a month, then you will need to know what your mortgage payment is, your property taxes and insurance are and then calculate this into your purchase price.
House Purchase price: $100,000
Monthly Mortgage: $575.00
Monthly Property taxes: $225.00
Monthly Property Insurance: $35.00
———————————————-
Total Monthly Payment: $835.00
The total cash that it will cost (at a minimum) to own this property is $835.00 and this does not even account for rent loss, management fees, holding costs, maintenance and the lsot goes on. Being able to calculate the property taxes and insurance will help you in the final determination of what your willing to pay for a target property and ultimately allow you to know some of the variables without having to guess on them. Any time there is a mortgage on a property, there will most likely be property insurance that you will have to pay. The only way to get around this is by paying cash for a property. I would still highly advise having insurance on any property you own, it is in the best interest of your investment and the safety of the public. As far as your taxes go, this must be paid, and there is no way to get around this aside from getting a discount for disability or homestead.