Escrowed Taxes as Expenses on Rental properties

General Landlording & Rental Properties
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Escrowed Taxes as Expenses on Rental properties

Spencer Herrick
Pittsburgh, PA · Member since 2019 · 40 posts · 16 votes

I'm curious to know and understand whether or not you should still consider Total property tax and Mortgage payment as separate expenses on the "4 square method".... in the case that you are having those taxes escrowed from your mortgage payment. Obviously this has a huge effect on the total number of expenses to a rental property and impact the amount of cashflow calculated on a rental property. 

Thanks!

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  • Michael Craig
    Rental Property Investor · Saratoga Springs, NY · Member since 2017 · 238 posts · 200 votes
    6y

    @Spencer Herrick

    Hi Spencer, either way you categorize it the property taxes are going to end up in the expense "square". The taxes have to get paid, whether you pay them direct or through escrow is up to you and makes no difference to your expense square.

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  • James Mc Ree
    Rental Property Investor · Malvern, PA · Member since 2016 · 1k+ posts · 934 votes
    6y

    I don't understand the purpose of your question.  Mortgage principle and interest are 2 line items.  Taxes are often 1-3 line items depending on how many governments are taxing a property.  Insurance is another line item.  You have to account for them in escrow or have your own self-escrow plan.

    Lumping them all together as one line item possibly hides some opportunities.  You can refi a mortgage which may help your payments.  You can shop for insurance.  You can't do much about taxes.  Clearly seeing these expenses can help remind you of what you can control or influence.  There aren't an overwhelming number of line items for a real estate investment such that you need to collapse them.

    Personally, I enjoy the breakout!  I love to see how much of my mortgage principle my tenants are paying off each month!!!

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  • Spencer Herrick
    OP
    Pittsburgh, PA · Member since 2019 · 40 posts · 16 votes
    6y

    @Michael Craig, but considering a location with higher taxes, this “expense” totals number goes up; hence making your cash flow value go down. My point is, is if it’s already included as part of your mortgage, aren’t you duplicating that’s liabilities value under that quadrant?

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  • Spencer Herrick
    OP
    Pittsburgh, PA · Member since 2019 · 40 posts · 16 votes
    6y

    @James Mc Ree the purpose of my question is to learn. I understand your response from the Accounting perspective, but I question whether or not listing the property taxes in addition to the mortgage payment is a redundancy if the property taxes are already escrowed and included in the mortgage payment itself. The "4 Square method" by biggerpockets on Facebook is not a financial document, but rather a tool. The answer to my question, whatever it may be has a huge impact on the value of the cashflow quadrant of this formula. In the case that I'm analyzing, it is a good investment without the property tax in addition to the mortgage, and a bad one with. I just question whether or not the taxes should be on there if they're already escrowed through mortgage. This seems like a redundancy to me. I appreciate the response!

    SPENCER

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  • Michael Craig
    Rental Property Investor · Saratoga Springs, NY · Member since 2017 · 238 posts · 200 votes
    6y

    @Spencer Herrick

    That is correct, you would be accounting for the taxes twice if you include it in the escrow and on its own - which is wrong. When tallying up your expenses be sure to only add taxes once. 

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  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    6y

    @Spencer Herrick

    I think I see your problem spencer. 
    your mortgage payment isn’t an expense. Only the portions that go to interest, taxes and insurance are, the left over goes towards Debt pay down. 

    If you collect $2000/mo in rent and pay $2000/mo mortgage payment, if you have no other expenses you have profit, (the loan pay down amount which in this example could easily be $12000/year). You just don’t have cash flow. They ain’t the same. 

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  • Spencer Herrick
    OP
    Pittsburgh, PA · Member since 2019 · 40 posts · 16 votes
    6y

    So my next question would be, is there a particular software you use to assess whether a deal is good deal? Spreadsheet? 

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    6y

    @Spencer Herrick

    If your mortgage payment includes property taxes and home owners insurance, you are not required to pay for these items separately.

    Your mortgage payment therefore includes 4 items, principal paydown, mortgage interest, escrow for home owners insurance, and escrow for real estate taxes.

    A deduction for home owners insurance and real estate taxes aren't allowed until the escrow account remits payments to the insurance company/county.

    Regarding a software to determine a deal is good or not - I am not sure if one will exist since everyone will have their own criteria for a good/bad deal.

    You can use excel to create a formula to allow you to tell you a deal is good or not.

    You would want to input as much information as possible to provide the best output.

    1.  Required Rate of Return
    2. Purchase Price
    3. Interest rate
    4. Rental Income & Expenses
    5. Downpayment amount
    6. Etc

    Good Luck in your search!

        [email protected]917-280-8544
        Basit Siddiqi CPA4.979 Reviews
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      1. Spencer Herrick
        OP
        Pittsburgh, PA · Member since 2019 · 40 posts · 16 votes
        6y

        Thank you for the reply Basit. My question then is: Do I need to consider the property taxes in analyses if it is already included in the mortgage escrow? In other words, if property tax is escrowed, does it need to be analyzed beyond the mortgage payment to determine ROI?

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      2. Basit SiddiqiBusiness Member
        Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
        6y

        @Spencer Herrick

        When you pay into your escrow payment which includes property taxes and home owners insurance, the bank is breaking down the large payment into smaller monthly payments. It is also holding onto the payment until the payment is due.
        property taxes are normally due once or twice a year.

        Since these are actual expenses, you may want to consider it when factoring in ROI.

        [email protected]917-280-8544
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