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Taxes

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The Rising Costs of Real Estate Taxes By Suzanne Andresen I attended the launch of the Atlanta Chapter of the National Rental Home Council a few months ago and heard a lot about the SFR arena and the current concerns facing the industry. There were a few discussion points that I felt were more pressing than others. Certainly, the concerns about trespass were front and center, as Atlanta seems to have become one of the industry’s hot beds for that activity. Other areas of focus were the escalating insurance fees affecting certain markets, following the many catastrophic weather events we have seen across the country. If you would like to learn more about that topic, consider attending the AmeriCatalyst event in Washington, DC April 18th and 19th — Going to Extremes. The Rise in Real Estate Taxes The topic that I was most interested in was centered around real estate taxes. It seems that every year these fees continue to rise. In theory, that should not be the case. I am an elected official in Maine, and we recently completed the 10-year state required revaluation process for real estate and personal property. We were a few years behind due to COVID and needed all of the 18 months allocated to this task. We followed the state valuation process, hired an appraisal firm, and visited each and every real estate asset in the town. The state mandates that the town can assess a maximum of 5% overlay for items not currently projected as budgetary items. We have specific guidelines in this process where the town is prohibited from overcharging taxes to the residents and remaining within the limitation of the 5% rate as our overlap buffer. Once we receive the completed analysis with updated determination of current asset valuations, the elected officials then review what the town expects to spend annually to meet the town demand of services provided. As I am sure that all town budgets allocate the highest percentage to the school budget, the remainder of the monies in our town budget are reserved for the other municipal elements necessary to keep the town running like road repairs, first responders, public library, etc. In theory, as the values rise, the mill rate used to determine the tax bill falls. In the end, your real estate tax bills should remain relatively fixed unless you have altered your property for improvement. The new valuation the town received projected our tax rate to a significantly higher value from the previous assessments, — nearly 60%. Some of the increased value was the 15-year timeframe from the last revaluation. Additional increased value stemmed from an anomaly yet to have been experienced in the past following the frenzied acquisition appetite and fall out of COVID relocation — work from home scenarios. As a licensed real estate designated broker, I was surprised that this atmosphere trickled into Maine and was sustainable for more than two years. We are not mainstream America by any means. COVID Relocation Practices In watching real estate transactions, I learned that local residential mortgage requirements actually added in new COVID relocation practices, requesting remote employees purchasing homes in a new location to receive written approval from their employer, confirming that the employee’s job was indeed an approved offsite employment contract. We have seen companies require employees to return to the brick-and-mortar office buildings for onsite duties. Some have adopted a varied schedule or went completely to a 5-day work week in the office. The fear for the mortgage holder was that once the employer realized the employee had moved, perhaps their job would be in jeopardy for this new relocation destination when the return to the office policy would be reinstated, creating an uptick in foreclosed properties. Let’s look at the effects relocation has had on rental real estate. My brother recently moved from New York to South Carolina. He is recently divorced and decided to put his assets in a trust for his children. When he purchased his house, the taxes were estimated at $8,300 annually. After the closing documents and deed were recorded, the county billed the taxes for the new year at $25,830 under the assumption this was now a rental property due to the trust name on the deed. What factors from the county contribute to over a 300%+ markup on real estate taxes? It is not like rental properties have added families with nine school aged children and feel it is justified in this tax allocation. If we review the 5% overlay state limitation in tax allocations in Maine, this would not be an allowable assessment. There is an ever-increasing need for housing and rental properties, which will make it nearly impossible to forecast the demand. Municipalities should not be able to have fluctuating tax rates as part of the real estate property town revenues. We would not be able to meet the overlay stipulation with this assessment practice. As a landlord, rental fees include the monthly real estate tax as a pass through to the tenant, in all markets. Ultimately, the state’s assessment practices are the cause for rental properties becoming out of reach for certain tenants. The investors are constantly held accountable for gobbling up the available assets across the country, in front of first-time home buyers. There is a significant, purposeful rental engagement with many younger tenants. They are attracted to the flexibility of living wherever and whenever they want. Additionally, the population transitioning to the retirement aged scenarios have also decided they prefer renting vs owning. They have moved closer to their grandchildren and want the flexibility to pursue different locations and lifestyles, on a more flexible basis. We need to stop the perpetual demonization of real estate investors. They are providing valuable housing services to towns and communities across the country.

Perspective

Securing your Assets from the Ground Up

Criminal Trespass, Marketing Scams and Other Fraudulent Activities By Suzanne Andresen In last month’s issue of REI INK magazine, we had two terrific articles about technology and what strategies are currently available to protect your assets. The cover story from Swidget focused on the use of their smart home devices that can help ensure that both landlord and tenant experiences can be positively influenced with the use of technology. Also in that issue, Alex Fahsel, the co-founder of Property Shield, discussed asset protection strategies through the implementation of their service which protects real estate companies and professionals from scams, brand impersonations, and illegal occupancy issues. Property Shield sees themselves as a preventative measure to these fraudulent leases as described in this article. We have heard all sorts of statistics about “trespassing” and the amount of money that is lost due to the lack of legal strategies that protect the landlord. There seem to be two types of trespass: civil and criminal. Let’s explore criminal trespass, defined as the intent of an individual to knowingly commit trespass, ignoring signs, and/or creating forceable entry. Criminal Trespass Most states do not prosecute criminal trespass, and some will not even process claims for first offenses. Currently, squatters are protected in all states from forceful removal and many law enforcement agencies will not even respond to this current issue. In discussing the elements of trespass with an industry investor, he shared that they had an average trespass occupancy of 272 days. That is a significant loss of rental income — not to mention the monetary losses due to the interior damage done to the premises during a fraudulent tenancy. At present, Florida and Texas have the most progressive legislation in progress to address trespass, but no state has a bill ready to be passed into law. The question remains: How can landlords protect their assets from fraudulent tenancy? We have been told by many legal authorities that property owners are prohibited from turning off water or electric services to their owned assets while there is a tenant onsite — whether that tenant is there legally or not. I have a hard time processing that perspective or law. If you are the one responsible for payment, it should be your determination and right to control the utilities if the individual in residence has no legal right to be there. Tenants who violate the terms of their legally binding leases by remaining in the property after the end of the term are a separate and distinct issue and have long been protected from loss of utilities, correctly or not, by virtue of their previous legal leasing status. You may not agree with this, but that is the law protecting the tenant. That is very different from the unauthorized and illegal squatting activities landlords are reporting today. A Real-Life Scenario Let us consider the timeframe immediately at the end of a lease when the tenant willingly departs in a timely fashion. You may have a property inspection protocol to ensure that the tenant did not go beyond the basic wear and tear of the asset. You schedule your walk-through, probably before the move out, noting the repairs and touchups required to make the asset presentable for the next occupant. A short vacancy period is the critical element of opportunity for the fraudulent occupancy. As you prepare your assets for public viewing and create self-guided tours complete with keycode access, think about how you could secure the vacant property. Let’s look at Swidget’s portable kit as part of their modular technology offering. At a recent installation in Atlanta, eight kits from Swidget were installed and activated over a 3-day timeframe. These kits consisted of two cameras, a cellular LTE device, and a door with locking mechanisms. At their first install, in about 2 ½ hours following the completion, key code access to the unit through legally intended means quickly turned into a well-choreographed illegal tenancy scam — almost. The fake renters dismantled the electronic lock by removing the batteries, so the door was no longer secure. They then proceeded to preview the property, commenting that “this would be their first bedroom with a closet,” and began discussing what fake name to put on the lease. The entire conversation and visual activities were captured on the two video cameras recording to the cloud from the cellular transmitter. This scheme was thwarted by the end of the afternoon when the owners were notified that the locking mechanism was offline and needed prompt attention. While this trespass in the making was averted early, what other preventative steps could have been be taken? Let’s say we incorporate utility deactivation as part of our tenant-turn protocol. Shutting off the water and electric services makes the property uninhabitable immediately. Furthermore, it is likely legal since there was not a tenant occupying the property, although you should check with legal counsel to be sure this is true in your specific case. You may be thinking that criminals are smart enough to know how to turn the water back on at the street. I am proposing an installation of a smart home water shut off, specifically out of reach and out of sight. Now, let’s add a subpanel to the electric that only powers our cellular transmitter, a few lights and, in the northeast, heat during the winter months. The stove, refrigerator and other necessary appliances will not be operational until the landlord turns them all on again. Since this REI INK issue is focused on Build to Rent, let’s build in a faux beam in the garage or basement that the trespassers would not recognize as the real “brain” of the house — ruining the tenant experience for the trespassers. This goes back to the initial question you asked your departing tenant, “What time do you expect to leave the premises?”  Explain to the departing tenant that this is extremely important to protect their departure and the tenant-turn process. Adding the “brain” can certainly be

On the Horizon

Imagine This on the Horizon…

Thinking Outside the Box to Solve the Housing Shortage By Suzanne Andresen We have recently seen some concerning legislative attempts to continue the demonizing of real estate investors who are allegedly gobbling up all the assets in front of homeowners. Let’s look a little deeper into this and really contemplate the “evil landlords.” We can start with a quote from David Howard, CEO of the National Rental Home Council. Howard is regularly in DC lobbying for the rental real estate industry. He recently shared the bill “End Hedge Fund Control of American Homes Act” proposed by Senator Jeff Merkley (D-OR) and Representative Adam Smith (D-WA). This is a bill targeting the legitimate development, investment, and ownership activities of America’s leading providers and builders of professionally managed single-family rental homes and communities. Those evil landlords. What we fail to take into consideration is the intent of the rental tenant’s perspective. My niece who is 26, has no intention of purchasing a home and just entered into her fourth lease, after several moves back home for extended time frames. It had nothing to do with the cost of rent, as my brother was paying her rent for a one-bedroom apartment in midtown Manhattan. She simply moved out mid-lease and back home to live with her mom. My brother continued to pay the rent, and actually could have sublet the unit for years. I negotiated the lease for him the October following the COVID outbreak. As I watched the vacancy rate rise as it showed the units available on their floor plan website, I kept calling back and asking when they wanted to accept my offer? They eventually did, and we had a smoking good deal with sublet rights. At today’s market rate and with the rental control components to NYC housing, he would have cleared $1,000+ per month. That said, there is clearly a housing shortage, and we need to collaboratively try to figure out how to fix some of the most important issues. There is some truth in prominent cities having an increased focus for some of the REITs investment strategies. But there is also a similar, less interesting element to the less popular cities. There are actual zombie housing markets, but some of this goes a bit deeper than just the image of the house or location. We all know the challenges home buyers face as they diligently put money aside in savings for their down payment and closing costs. Now let’s look at the REO and zombie assets these first-time homebuyers feel they can afford. The most likely financing will be a 203K loan product or something similar. This is a significant challenge for a first-time home buyer to attempt. We have seen a shortage of materials all over the country, with costs increasing every month. Now imagine the miscalculations of the new homebuyers as they run out of money and are only 92% complete, with no additional funding available. They face default and the loss of their American Dream along with the years of diligent savings. Heartbreaking, and not the cause of any real estate investor. There are additional shortcomings along the way. Let’s take a step back and look at the now-vacant house. If it is not located in an up-and-coming market, it may go into foreclosure or even a tax sale. Foreclosures are great opportunities for the next buyer if there is one. When there is not — the town gets it back. They have the right to have a tax sale but may keep the asset on their books for years. My town has several. Some are land only and one is actually 27 acres on the water. As an elected official, I think there is opportunity on the horizon. At the same time, the allocated taxes for the properties have not been paid for years, essentially diminishing the services the town can offer. I have a solution. Ever hear of a 529? It is a tax-advantaged savings plan to encourage savings for future education costs, paid to qualified tuition plans. This is authorized through Section 529 of the Internal Revenue Code. It is sponsored by a state, state agencies or educational institutions and administered through an approved financial institution. Let’s call this a 529-C, for college education. Now let’s create a 529-R for rental conversions to homeownership. Each month a tenant can contribute up to 4% or whatever the tax law allows, which can be matched by the landlord — all tax free. Similar to the 529-C, the account follows the tenant from state to state, and years of contributions are accrued. Let’s go back to a tenant, not yet ready to buy a home. Like my niece, she could have been depositing and receiving matched funds into her 529-R account for years. What a terrific solution, fostering home ownership, when the buyer is ready. The person who opens the 529-R plan account is called the account holder or the saver. The person the account is opened for is called the beneficiary or the tenant. The account holder and the beneficiary can be the same person. Next issue— solved. What happens if the tenant never buys a home? As of 2024, the following rules apply to 529 plan rollovers to Roth IRAs: The 529 plan must be under the beneficiary’s name for a minimum of 15 years. Yearly conversions cannot exceed annual Roth IRA contribution limits. The lifetime 529 to Roth IRA rollover limit is $35,000. We could replicate this to the 529-R. Now we have created a conversion strategy for a lifelong tenant, who can either purchase a house or contribute to their IRA — or both, if they have saved enough through the years. Now the tenant and landlord are partners in homeownership. What a terrific solution. Are the landlords and real estate investors still demons? I think not.

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