Wednesday, August 25, 2010
You Can Never Really "Own" Real Estate
While you can get a mortgage and buy a house or piece of land, the bottom line is, the purchase price really only allows you the privilege of paying taxes on it.
Many folks are under the mistaken impression that owning Real Estate is the end-all of humanity. Buying a house is touted as the greatest personal accomplishment a person can make. Every home show touts this idea and every politician gets all teary-eyed when they talk about the "American Dream of Home Ownership".
Of course, owning a house was never the real "American Dream". The American Dream, as I understood it, was to start with nothing and make your way in the world, becoming successful based on your own abilities and hard work. Today, it is all about owning granite counter tops. No wonder our country is in trouble.
The problem with this ersatz "American Dream" as many are discovering, is that it ends up being a form of slavery, not freedom. More and more Americans are stressing themselves financially in order to own "a piece of America" in the form of an upscale home. Many folks spend 30% or more of their incomes on mortgage payments, which the financial industry considers to be a level of "financial stress".
Compounding this problem is the issue of property taxes. In the past, property taxes were not really a big issue for most Americans. You paid them as part of your mortgage, and as a percentage of the mortgage payment, they were fairly trivial. But today, property taxes can be a big chunk of your overall monthly cash flow.
For example, I own a home in Central New York, and I am fortunate that it is paid for. But each month, I have to set aside about $600 to cover the property taxes - or in other words, what someone would pay in rent for a two-bedroom apartment nearby. It may not sound like a lot of money, but consider that if the home was mortgaged, the mortgage payment would be about $2500 a month. Taxes account for nearly 1/4 of the monthly cash flow.
Which gets to the point of this posting. You can never really "own" outright a piece of Real Estate. Buying a property, as opposed to renting it, only eliminates one landlord in the chain of people you have to pay. The Government is the ultimate landlord, holding the lease on all the Real Estate in the country.
Don't believe me? Try not paying your "rent" (Property Taxes) for a few years and see what happens. Yup, the Government will foreclose on you and boot you off the property. And some other fool will pony up money for the privilege of paying taxes on it.
And thanks to eminent domain, the government can boot you off your property - just like a landlord can - if they think your property has better uses. If they want to build a freeway - or even a shopping mall - they can boot you out (paying you, of course) and use the property themselves - or sell it to a developer. And even if you are allowed to stay, your government "landlord" can tell you what you can and cannot do with the property, via zoning laws, wetlands laws, and the like. You really don't "own" real estate - you just rent it from the government.
And in today's economy, many local Governments are finding it hard to meet budget goals, as they have more and more "unfunded liabilities" foisted upon them, and special interest groups defending other liabilities. The County government cannot cut welfare spending, as it is mandated by the State. They can't even control the spending or try to make it more efficient. And cutting school costs is a political third-rail. The teacher's union will throw its considerable weight to your political opponents, should you be so foolish as to make such a move.
The only really "discretionary" spending the County government can cut are items once thought to be non-discretionary - police and fire protection, water and sewer service, road repairs. How odd, when you think about it. Paying people not to work is the untouchable budget item, but the basic necessities of daily living are expendable.
So taxes in many parts of the country are doubling or tripling. And for many Seniors facing retirement, the prospect of "staying in the home" is becoming more and more difficult. Taxes on even a modest family home can be $5000 to $10000 in some parts of the country - an amount equal to a substantial chunk of the typical Senior's Social Security check.
Many Seniors are turning to ill-advised financial schemes such as reverse mortgages, which I have written about before. Such band-aids are only a temporary solution to a long term problem, however.
So how can you get around the problem of high property taxes? Well, for starters you can own less property. Downsizing to a smaller, less expensive home in an area with lower property taxes is one way to get out of this trap - but perhaps not for long.
Florida had, in the past, been an attractive retirement destination for many Seniors. With no income tax and relatively low property taxes, it was a place you could retire to, and not worry about the cost of retirement. Since the State had so many Senior citizens, school taxes were low, as was the cost of welfare.
However, in the last 20 years, many people have been attracted to Florida by the prospect of jobs. Many stayed on and had families, creating a boom of school building. Florida is increasingly less a retirement state and more of a working State, and hence the demographics have shifted dramatically. And Florida has also attracted a legion of derelicts, con artists, serial lawsuit filers, and welfare recipients.
Today, some areas of Florida have the highest property taxes in the nation. A simple dwelling can have a tax bill topping $12,000 - a thousand bucks a month, just to pay the gub-ment. As a practical retirement destination, those sections of Florida are no longer an option.
And that's the problem with property taxes - you can move somewhere where the taxes are low, only to be priced out of the area by tax increases. Granted, some States have "homestead exemptions" - but these only limit the amount of tax increases per year. Over time, taxes can still rise, quite dramatically and at a rate higher than inflation. Other States have programs designed to help Seniors reduce their taxes and are based more on need, such as Virginia.
But the long and short of it is, you can never really get rid of that last landlord in the chain. Buying a home - even if you pay cash for it - is not the end of the story. You will still have to pay taxes - and insurance, and utilities, and repair, and upkeep. And often it is these "other" expenses that can end up dwarfing the actual monthly P and I portion of the mortgage payment.
So before you decide you "need" five bedrooms, four baths, a three-car garage, along with a designer kitchen and media room, think carefully about how this will affect your tax bill. Owning more house than you need may be a nice boost to your ego - a chance to show off apparent wealth - but it will cost you actual wealth every year. Those excess property tax dollars, put into savings, could equal hundreds of thousands of dollars in retirement savings down the road.