How To Lower Your Property Taxes – Adventures In Assessor Land

FACT: The goal of local governments is to get every single penny in tax revenue from you! When I got my property tax bill in 2009, I was astonished to see that the City is taxing my primary residence based off an assessed value 7% HIGHER than in Armageddon 2008!  In the biggest economic downturn ever, the San Francisco assessors office believes my property actually increased?!  What a sham!

Like clock work, assessed values increase 2-3% higher every year, regardless of the economic environment.  It’s as if the City is punishing me for succeeding to lower my assessed value last year by 3%.  Too bad for the city, because they are messing with the WRONG person.  The tax collectors office counts on citizens to roll over and listen to their every whim, but not me, and certainly not you!

I want to share some tips on how you too can fight against the machine.

5 STEPS TO REDUCE YOUR PROPERTY TAX

 

The 30/30/3 Principle – Three Home Buying Rules To Follow

A reader writes in: “Hello Samurai! I like your 1/10th rule for buying automobiles and was wondering if you use some similar sort of calculation when deciding how much one should be spending when buying a home?  Thnx, Brian”

Response: Hi Brian, thanks for your question. For those who are not aware, the 1/10th rule simply states one should spend no more than 1/10th your annual gross income on the purchase price of a car.  Home buying is a tougher one, especially since people get so emotionally crazy and irrational when it comes to property.  There are several key hurdles you need to meet before buying a home.  The rules can be encapsulated in the 30/30/3 principle.

1) Cash flow. Traditionally the industry says to spend no more than 30% of your gross income on your monthly mortgage payment, but I think you can stretch it to 50% if you think you’ll be making more money in the future.  Don’t bank on it though, as this downturn has shown many people, including myself.

50% of your gross income on $50,000/month is much different from 50% on $2,000/month mind you.  You must be able to take care of your basic needs with the money remaining.  Hence, I suggest spending LESS as a percentage of your gross income the more income challenged you are.  I wouldn’t spend more than 30% of gross, if income is $10,000/month or less.

2) Down Payment. You should have at least 30% of the value of the home saved in cash.  20% is for the downpayment to avoid PMI insurance, and the other 8-10% is for a healthy cash buffer.  There are some high-risk people out there who want their home so bad that they put down only 10%, and take another 10% in the form of a maxed out HELOC loan just to get in the home.  If you don’t have at least 30% of the value of the home saved up, then it’s best to start eating only ramen to bolster savings!

3) Value of the home. Cash flow affordability is a function of the price you pay.  If you are able to meet the first two hurdles of cash flow and down payment, then you can tie it all together with a proper multiple of your yearly gross income to see what you can afford.  The MAX multiple I recommend is 5X if you meet the first two conditions, but 3X is better.  In this case, the more you make, riskier it is to go to an upper limit multiple because of  leverage.  5X $500,000 is much more daunting than 5X of a $50,000 salary for example.  You can always refinance your home, but you can never change your initial purchase price!

Good Example: $100,000/yr income, $120,000 in cash saved, $400,000 home no problem!  $320,000 mortgage after putting 20% down, and you still have a $40,000 buffer.  Your monthly payment is $1,918/month PMI at 6%, and is a suitable 23% of your monthly gross income of $8,333.  In case of layoff, you have 21 months of mortgage coverage with your $50,000 buffer.

Donkey Example: $120,000/yr income, $100,000 in cash saved, salivating for a $750,000 home.  10% down leaves $25,000 in cash, and a $675,000 mortgage since you’re doing another $75,000 HELOC to avoid PMI insurance.  Monthly payment $4,000, or 40% of your gross income.  6 month mortgage coverage ratio before you run out of cash is not enough.  Don’t do it!

I highly recommend making sure you pass the 30/30/3 principle before making the biggest purchase of your life.  It’ll be good for you in the long run, and it’ll be great for neighbors and the entire financial system as there will be less of a chance you’ll foreclose.  Best of luck in your house hunt!

Recommendations:

Manage Your Finances In One Place: The best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing and how my net worth is progressing. The best is their Portfolio Fee Analyzer which is saving me $1,700 a year in fees I had no idea I was paying!

For Tenants: Take a moment to check your free credit score through GoFreeCredit.com, a company I trust. If you are in a hot rental market, or really want a particular rental, you should have your credit score as part of your application for your landlord. I am a multi-property landlord and highly value a credit score and report. Those who come to me with their credit score stand out above others who don’t. If you do not want to pay for the credit monitoring, simply cancel within the grace period.

For Homeowners. LendingTree Mortgage Refinance offers some of the lowest refinance rates because they have a huge network of lenders to provide mortgage loans, home equity loans, and home equity lines of credit. If you’re looking to buy a new home, consider using LendingTree to get multiple offer comparisons in a matter of minutes. When banks compete, you win.

Updated: 2Q2014

Zillow Says I’m $400,000 Wealthier! Why Net Worth Is Rubbish

Primary Residence Zestimate

Primary Residence Zestimate

To prove our point regarding “Your Net Worth Is An Illusion” I took a look at Zillow’s latest zestimates of my primary residence and rental property.  Apparently, in a span of 3 months, my primary residence gained a whopping $300,000! I’m popping open a bottle of  Crystal, buying a rose gold Patek Philippe Calatrava at Tiffany’s, and ordering the Audi R8 on as we speak.  Just kidding, especially since September is frugality month. Besides, Zillow isn’t writing me a check for $300,000!

The dollar sign shows the purchase price after a 4 month escrow that began in late 2004.  In other words, the purchase price was $250,000 below what the zestimate measured as fair value in the middle of winter.  You’d think that after 4+ years of existence, Zillow’s price algorithms would be more refined.  Perhaps the data is legit, but I’m not buying it. Since net worth calculations don’t include one’s primary residence, let’s strike this example and look at a rental property.

Family Gets Award For Paying Off Debt & Jumps Right Back In!

If you go $106,000 into personal debt, and pay it off in 5 years, you apparently get the Professional Achievement and Counseling Excellence (PACE)  2009 Graduate Client of the Year Award. I was hoping for a longer award name, but what a great nugget to put on their resume!

The kicker?  The Hildebrandt’s decided to dive back into debt with one year left on their pay back plan by buying a house! Furthermore, they took advantage of the $8,000 first-time home buyer tax credit. The article ends with sage advice from the Hildebrandt’s saying, “Get out of debt, it’s a choke-hold.”

One of the greatest things about America is free speech.  Good or bad, we are a society that coddles fragile self-esteem and rewards people for situations they shouldn’t be in from the onset.  Although The Hildebrandt’s aren’t practicing what they preach, they’ve got their award and are living the American dream.  Congrats guys!  We can’t wait for your next award.

Meet The Hildebrandt’s and read about their great achievement.

Related Posts:

“Should The First Time Homebuyer Tax Credit Be Expanded And Extended?” from Xin Lu of Wise Bread and The Baglady.

Keigu,

Financial Samurai

“Slicing Through Money’s Mysteries”

The Mortgage Dance of Money: Should I Pay Off My Mortgage Or Not?

“Should I pay off my mortgage as soon as possible or not?” is a common question which warrants more attention now that mortgage rates are back down to record lows as of June 29, 2010.

The answer is pretty simple actually.  You should pay off your mortgage sooner if you have the money. By the way, the sky is blue.  Thanks for nothing, you’re thinking.   However, if you really think about it, that’s the right answer!

It’s all about balancing your debt/cash ratio.  Build up too much home equity (prepaying) based off of your own principal payments, and you run the risk of blowing yourself up when there’s a cash crunch due to unforeseen circumstances.

Your conservativeness of paying down your mortgage ironically INCREASES your chance of financial doom.   Not paying down your debt sooner, on the other hand, inhibits you from maximizing your returns.  Dance with your mortgage without stepping on its toes!


THREE VARIABLES TO CONSIDER BEFORE PAYING DOWN YOUR MORTGAGE: