Today’s question comes from Rose and she says, hi Marco. I have been a subscriber for over a year and love your podcast. Thank you. I was hoping you can answer my escrow related question. I am a relatively new investor for one and a half years. I bought a three-unit property in Massachusetts in April 2019 four months ago. The loan servicer sent me an annual escrow analysis with the projected shortage that I paid. Today, I’ve received another letter demanding another check. Basically every time I managed to accumulate some cash, I have to give it interest-free to the mortgage company. Question, is it even worth it to try to handle the property tax payments on my own? If that path is not worth exploring, what can I do on my end to better manage the escrow? Thank you in advance and please stay safe.
Sincerely Rose.
Rose, thank you for the question. Okay. You’ve got a simple question and I’ll give you a simple answer, the best way to manage your property taxes, in my opinion, and probably in the opinion of many other real estate investors is simply this. Most, if not all lenders offer and actually encourage you to use their escrow services. So they collect the property taxes and the property insurance for the property that they have a loan on a lien on it’s in their best interest and it’s for their protection to make sure that the property is insured and that it doesn’t get foreclosed on because you have neglected to pay your property taxes for multiple years. So it’s not only in your best interest, but it’s especially in their best interest because let’s face it. They’re taking on most of the risk. If they’re giving you a loan for 80% of the property, and you’re only putting 20% down, they’re shouldering or carrying 80% of the risk and burden on that property.
And on top of that, they’re not even getting any of the benefits from the property such as cashflow equity gains or tax benefits. So they really want to make sure the property is protected. That’s why they provide this service of escrowing, the property insurance, as well as the property taxes. Now, if they’re doing that for you and they’re doing it at no cost, then why not take advantage of it. And this is just what I like to do. It just takes away that hassle and the management of it completely, because what they will do is every single month, they will tack on the portion of the property taxes and insurance, one 12th of it onto your principal and interest payments. So what they call PITI – Principal Interest Tax Insurance, the PITI payment is your principal interest tax on a one 12th of a year basis.
So every time you make a mortgage payment, you’re paying one 12th of everything for that year. And that just makes it very brainless. They just hold it, they collect it, they hold it, and then they pay it for you. They will pay it directly to your insurance company. Well, I was going to say their escrow, but it’s essentially your escrow. They’re holding it and they’ll pay the property taxes directly to the County each and every year. So to me, that’s a great time saver. And if nothing else it’s worth it just to eliminate the hassle and have them manage it and account for it and report it on each and every monthly statement. So the question is why not the fact that you can flip that question around and say, well, why would you want to manage it on your own? And the only thing I can think of that you’re thinking of in order to do it on your own is that if you have the cash in hand, you could put it to better use, or you could invest it somewhere or put it into a savings account or something where you get interest on it until it’s actually due and payable once each and every year.
Well, the reality is, is I’m not sure how much you’re going to be able to do with that over the course of one year from an investment perspective. And maybe you have access to some great investments that provide very healthy returns. And if that’s the case great, as long as there’s liquid in each and every year, you can turn it around to pay your property tax bill, then no problem all the more power to you. But if you’re just going to keep it parked into a savings account, or just have it in some sort of cash equivalent, you’re probably not even making more than 1% as a rate of return in interest on holding that cash. And the reality is, is you’re actually losing money because inflation is going to be more than the 1% or the half a percent or a quarter percent that you’re getting from a savings account.
So I look at it this way. My time is worth far more than what I could potentially get in terms of interest on a 1000 or $1,500 or $2,000 per year property tax bill. So that’s my perspective on this and my suggestion, again, my personal choice and preference, but my opinion too is really just let your mortgage companies manage the insurance and property tax escrows. And think about this too. This is your first property. What happens when you have 5 or 10 or maybe 20, 30 properties? Now you’re managing escrows and having to cut checks and track the property taxes and insurance on all your properties. Well, at the same time, you could have just have your mortgage companies doing it for you at no cost. So anyway, that’s what I think Rose. So I hope that helps. I appreciate the question.
And for all of you, if you have a question about real estate or investing or finance, that you’d like me to answer on the show, as best as I can just simply go to passiverealestateinvesting.com and click the Ask Marco button. A shortcut is also just to go to AskMarco.com in your browser, and it’ll take you straight there. If you haven’t already. I say this all the time, and I know you’re tired of hearing it, but remember to subscribe, just takes five seconds. Click on that subscribe button, help us share the show with your friends and family. I’m sure they’re like-minded or at least hopefully they are otherwise. I can imagine what Thanksgiving dinner might be like at your place. Anyway, thank you for listening. I will see you on our next episode.
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