One way to cashflow rentals - not paying property taxes

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Here is a case study on investing out of state for us California investors and being a landlord of section 8 housing in lower end markets. Anyone attending the tax sales in August? Million dollar tax bill owed in St. Louis Co. by California investor impacts hundreds of properties NORTH ST. LOUIS COUNTY (KMOV.com) - A California investor has spent years purchasing homes in St. Louis County. According to St. Louis County property records, Raineth Housing owns at least 614 properties in north St. Louis County, although the company’s CEO concedes the number is higher. Tax records indicate Raineth Housing is delinquent on at least 558 houses, with nearly 350 homes owing back taxes for three years. News 4 Investigates traveled to Los Angeles to ask Raineth’s CEO why his unpaid tax bill totals more than $1.1 million in St. Louis County. Ed Renwick says “We’re behind on our taxes because we are behind in our profitability.” The delinquent tax bill has a direct impact on local school districts. Jennings Superintendent Art McCoy says, “The amount of funds you discussed would make a tremendous impact because it would be equivalent to two or three teachers, maybe more in funding.” Raineth Housing owes more than $268,000 in unpaid taxes on houses in the Jennings district. According to St. Louis County’s Director of Revenue Greg Quinn, more than 50 percent of real estate taxes go to local school districts. Quinn said, “When people don’t pay their taxes those districts have less revenue for which to supply services.” Unpaid Raineth Housing tax debts are piling up in several North County school districts. Ferguson/Florissant $249,904 Riverview Gardens $267,051 Normandy $257,925 Ed Renwick says he’s raising capital and intends to pay his tax bill. He adds, “We were surprised at the challenges of operating the business.” Some Raineth Housing tenants receive federal tax dollars to pay their rent on Raineth owned homes. In St. Louis, the city's housing authority director provided these totals paid to Raineth Housing over the last two years: In St. Louis County the vouchers, known commonly as Section 8, totaled approximately $555,000 in 2017. Susan Rollins, the Executive Director of the St. Louis County Housing Authority, expressed concerns over the delinquent tax bill, and said, “That adds insult to injury I believe. You should take more interest in paying your taxes if you receive a subsidy from the federal government for your business.” Renwick tells News 4 he has not made any money as the CEO of Raineth Housing, and says rehabbing, repairs and maintenance account for much of his budget. In his Brentwood, California living room Renwick said, “We had a choice, stop investing in our tenants or fall behind in taxes, and we chose to fall behind in taxes.” According to some online real estate sites, Renwick’s home is valued at more than $3 million. Unlike the tax bills on many of his St. Louis County properties, the tax bill on Renwick’s California home is paid in full according to Los Angeles County records. News 4 pressed Renwick about when his St. Louis County tax bill will get paid. Renwick expects the bill to be paid prior to August, that’s when St. Louis County will auction nearly 350 of his homes for tax debt dating back three years. He is adamant about holding on to his properties and does not intend for any of them to be sold this summer. Renwick also says he will pay the debt back with interest and penalties, and that means local school districts will receive more money than the original tax debt owed. In Jennings, the district operates on a tight margin. Dr. Art McCoy says the average home sells for between $35,000 and $40,000, which means real estate taxes collected are lower than many other St. Louis County school districts. McCoy says, “We would rather have the money on time then money two or three years delayed because two or three years delayed delays the services.” Renwick tells News 4 he would like to purchase more homes in the St. Louis area and says he’s invested millions of dollars in North County. Raineth Housing also owns hundreds of homes in Kansas City and Cincinnati. Copyright 2018 KMOV (Meredith Corporation). All rights reserved. http://www.kmov.com/story/37406975/million-dollar-tax-bill-owed-in-st-louis-co-by-california-investor-impacts-hundreds-of-properties
That's really sad. I hope that guy does the right thing otherwise a LOT of people are going to be displaced. Wow.

This is one of those stories that produces emotional responses. It’s the classic story of the rich taking advantage of the poor. But think about rationally. Did the social unrest in Florence have an impact? Did property values and rents decline as a direct result? Did vacancy increase? Insurance rates? If the owner doesn’t pay, there are mechanisms in place. Bankruptcy, foreclosure, etc. One way or another the tax will be paid. Are the property tax valuations fair and accurate? I just looked this company up in Cincinnati. A quick search shows about 325 properties. On the second one I checked, they paid $4000 for a SFR that is valued at $58,930 for property taxes. Is that fair?

Consider Maslow’s hierarchy of needs. A landlord provides one of the most basic and essential needs. So does a doctor. When people can’t pay bills and are forced into bankruptcy by medical costs, are the doctor’s fees scrutinized? Is the doctor’s income or the value of the doctor’s home questioned? And what personal financial risk does the doctor take when he provides his services? I suspect the landlord in this article is facing a significant financial loss. A doctor does not face a similar risk. So being a landlord can be a thankless job, even for the most ethical and generous. We can’t tell from the article if this landlord is treating tenants well or not. He says he’s prioritizing tenants over property taxes.

There are two sides to this story but the vast majority of the public will be angry with the owner after reading the article. I’m not looking for more drama. That’s why I limit my news intake.

@Jeff Ronningen he is a business owner not paying his taxes... it happens to be that his company owns so much property that his taxes are hurting the local schools/economy. Is part of your "argument" the fact that he bought a house for $4000 but the taxes are based on $58,930? You think the taxes are unfair? The company can fight the taxes if they feel they are unfair (at least in my area you can), however I'm guessing the company purchased the house significantly under value, and the tax base is probably more in line with value then the purchase price.

An honest question. What happens to all of this tenants when the houses are sold at tax sale??? 

Taxation is theft, so I don't really blame the guy for not paying until the last minute, but that said the optics are certainly terrible for him and KMOV loves doing these class warfare hit pieces. I think maybe we should question why we fund our schools with property taxes such that they can be left waiting to get paid. Maybe we should get the government out of the education business? Just a thought...

I do wonder if this may be an indication of underlying weakness in some of these midwest markets that have gotten hot recently. This out of town investor claims to be underwater, or at least losing money, on hundreds of homes. I would guess that he isn't the only one. I have seen some worries about "shadow inventory" where people bought up these dirt cheap houses after the crash and have been holding on hoping for the prices to creep up enough to unload them. With so few houses on the market, prices have gone up steadily the past few years, but I wonder if there could be a large correction when these guys decide to unload and it floods the market with relatively cheap inventory. Something to watch if you're in the SFR game.

@ Brian Pulaski I’m not attempting to defend the landlord and I’m certainly not defending the idea of not paying taxes. I’m simply pointing out that the article is written to elicit an angry response toward the landlord, which may or may not be deserved.

You assume he bought the properties below value, I don’t know if that’s true. I don’t know if the valuations for property taxes are in line with the market. I don’t know what the process is to dispute valuations in that county. I don’t know what improvements if any have been made to the properties. I don’t know how many if any were vacant or abandoned when he purchased them. My point in bringing this up is that I don’t know enough to draw conclusions. I can’t conclude if his ownership of these properties has been a net positive or a detriment to the community and the schools.

Let’s say he loses it all and it all goes up for auction. What if it sold for 50% on average of today’s property tax valuation? If the property taxes are then adjusted to sale price, the schools would need to adjust to the new tax revenue streams. At that point their revenue impact may far exceed his unpaid taxes. Is that the landlord’s fault? He took a risk and got burned. He doesn’t control property values.

There’s certainly a human factor in this story. No one wants to see families displaced. I just resent that the landlord is so easily and readily painted as the bad guy. But I have no sympathy for the bad actors in our business whose actions perpetuate that perception.

Just goes to show you that just because you've got money, you've got a "business" or anything like that, it doesn't make you SMART.

How could you possibly be that behind on your taxes? Well, its simple, you didn't have the right numbers going in, or you didn't know the reassessment process, or you're a criminal, or maybe some combination of the three.

What a joke. This is the classic speculation without rationalization. 600 properties! SIX HUNDRED! Guy should be a millionaire, yet he's probably going to jail for tax evasion.

This is a great example as to why I think it’s best to leave much of this business up to professionals. This guy needs a great PM, and probably a new accountant.

Why is anyone surprised? Businesses get behind on taxes all the time. Some do it strategically, some simply don't have the money, and some are just to disorganized to get them paid. I have been guilty of all three at one point or another. 

I am not saying we should have sympathy for him. I certainly don't, but I understand how it can happen.

That is why there are stiff penalties for not paying taxes on time.  It is also why I have no guilt when I take a property from a landlord for a tax lien foreclosure. 

As far as the city is concerned they ought to have a  more expedient process to deal with this. 

Ned I think you nailed it.  It's a cheap capital source in the opinion of the investor.  Buy as many properties as possible, spend the tax money on rehabs, build up tons of cash, and negotiate a favorable settlement.  It's another exercise in understanding opportunity cost.

Some drivers in large cities view parking tickets as the cost of living in the city.  They let the fines, interest, and penalties accrue and pay off everything at the end of the year.  Cheaper than a garage.

One thing that fascinates me is that some tenants view late fees as a blessing.  For $XXX my landlord will loan me my rent money.

I don’t have to pay back my lender or taxes!! I guess I’m late to the game on this one. Idiot me playing by the rules.

@Jeff Ronningen

$4k tax on a $56k house would make it pretty tough to do business in that market, even with sec8 paying close to $1k/month.

Not defending this investor but heavy property tax in many ways is perhaps a self-limiting factor in many of these mid-west towns. It stunts grow and appreciation. It then becomes a downward spiral of low property values attracting low quality buyer / tenants and owners which leads to lower quality tax payers.

Through the lens of a #Califoria investor, It is often alluring seeing these price/unit vs rent/invome. But this one case study sheds some light. There have been many times I had to remind myself of the #grassisgreener syndrome.

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