Insurance & Tax increases have KILLED CASH FLOW

Investor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votes

3y

Yes the Title is a little Click baitey.. but i feel we are not seeing enough attention being given to this important realization in many markets. Honestly, this applies to primary mortgages and investment properties, whether financed or not. I included the cash flow portion, because we are an investment minded community.

As a new investor, or homeowner, knowing how your county or city (if in the city limits) responds to the PP of your investment in regards to triggering a new FMV "assessment" (which is a joke honestly) is imperative when evaluating cash flow and/or affordability. I do not see many investment or affordability calculators (like bankrate, zillow, or BP) including this in their formulas. Our lender never once brought up the possibility of this happening the very next year! (they just want a note that pencils out pretty in order to sell...but thats another issue for another day) Even the HUD disclosure paperwork lenders required to send 2 new potential buyers do not mention this potential increase.

for example: 5 % down on new home., 2021. Our property taxes doubled, causing our monthly mortgage to increase by X% in 2022. Next, 2023 our Home Owners insurance rates XXXincrease!, which caused another unforseen X% increase in our monthly mortgage.(no claims) We live in North Middle Ga. I can not imagine what coastal rates are like. I know the difference in PITI , im trying to keep this post simple, because as a newbie i had no idea this could happen. I always heard "mortgages stay the same for 30 years". As a new home owner, i absolutely did not understand this could price me out of my monthly payments within a year of buying my home in 2021. Is this the new ARM??

I bought my 1st primary in 1994, we started investing in 2018. I have purchased and financed 8 primary homes over 30 years, and 11 investmenet properties since 2018. I do not recall a lender ever "warning" me the PITI will / can increase next year and to be prepared. My adult children, who are now buying homes, are also not being informed of this possibility, i am the informed parent making them aware of this.

Is this not predatory lending in disguise?

one of our residential investments, SFR, that was once cash flowing really great...now barely meets the mark because of the increase in the PITI, in Georgia. i know how to respond to these changes, am ready to pivot markets etc. but many new investors will have no idea. Can we add this to the calculators on BP somehow, perhaps it is triggered when the zip code is inputted. Awareness needs to be brought to the forefront for new investors, unless we just dont want them to know.

yes my spelling sux, im not here for a grammer check. (im a nurse x 30 yrs, so i write with abbeviations)

@Constance Chambers

I feel like some of your concerns are just not understanding the way real estate works. It can be a cruel first lesson. Virtually all property is reassessed at the time of a sale. usually once a year, but the year following your purchase. In some places it is once every 2-3 years. This is just the way it works. The issue is exasperated by how long it was since the property was last sold. We went from an appraised value of $100,000 to nearly $250,000 on a recent property.
Likewise as home values increase, it drives higher insurance rates, etc.

Your loan terms are fixed… (the principal and interest). But the other two parts.. insurance and taxes are not a part of your loan…. They are just escrows your lender is collecting on your behalf. So no one is doing anything illegal… it’s pretty much the only way it can work.

In response, you should adjust your rents to reflect those increased costs. In return, your tenants will complain. Simply show them the actual increase in cost, and there’s little that they can say about it. They have a choice where they live, just like you have a choice as to what you rent your units for. Inflation is a real thing that you as a landlord need to be compensating for it.

You can actually plan for this in advance knowing that it is going to happen. Your millage rate is a multiplier to your “just value”. Most property appraisers set your just value about 20% below market value. So if you are paying retail you should anticipate a taxable “just value” about 20% less than that and you can pre-determine your approximate new tax rate before you even buy it and start escrowing for it in advance. The issue is only multiplied when your lender not only has to collect was is owed for the following year, but also what you were short the previous year!

Not a fun thing to experience, but know that every property owner (be it personal or for investment) experiences the same thing.

All the best!

Randy

1 Reply

Mike Dymski

Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes

3y

Most of us agree that personal finance, including stuff like insurance and property taxes, should be taught in schools.

The good news here - you purchased many homes and the increase in taxes and insurance is likely a fraction of the increase in the property values.

5 Reply

Constance Chambers

OP

Rental Property Investor · Athens, GA · Member since 2016 · 47 posts · 13 votes

3y

Quote from @Mike Dymski:

Most of us agree that personal finance, including stuff like insurance and property taxes, should be taught in schools.

The good news here - you purchased many homes and the increase in taxes and insurance is likely a fraction of the increase in the property values.

thanks Mike, i posted this as more of a general statement, versus a question.

I have been a homeowner since 1994. But an intentional RE investor since 2018. I understand PITI, but i certainly did not initially at age 24. I have never seen taxes and insurance rates increase so dramatically.

Although i understand some states do regulate these tax increases, Ga does not. I want to help educate the new buyers, investors, by making them aware that the monthly morgage amount being paid (which i know includes escrow, but most consumers just refer to it as "my mortgage" ) will go up and to anticiapate this after year 1. I would love to have this included in our calulators here to start with. i have spent a great deal explaining this to my adult kids, but i had to find out the hard way early on. I had set up autopay through the local banking system, and after a few months i got a collection notice in the mail and had no idea my monthly payment no longer covered my debt service. Why? i had set it up for auto pay, threw away the mail that looked like it was a credit offer or refi offer etc. never realizing my escrow balance was short at the end of the year.

I just feel like we could do more.

thanks for responding

1 Reply

Nathan GesnerBusiness Member

Moderator

Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes

3y

Quote from @Constance Chambers:

Predatory lending? Not really. Your insurance and taxes have nothing to do with the mortgage lender.

Property values increase, therefore taxes increase. Why are you caught by surprise that taxes increase? You bought your first home in 1994, so surely you've seen taxes increase over the years?

Property values increase, therefore insurance increases. The insurance company is now offering to cover you for a $400,000 home instead of a $200,000 home, so the cost clearly needs to increase.

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2 Reply

Cameron MoorePro Member

Insurance Agent · DFW, TX · Member since 2021 · 348 posts · 245 votes

3y

As far as insurance goes, you should be working with a broker to keep your insurance rates as low as possible year over year. To be honest, there are causes for the rate increases coming from every direction. (profitability issues within carriers, we are not drilling for oil as much and oil goes into EVERYTHING in a house so the costs are higher, and for some reason people across the US are filing more petty claims most likely due to the economic issues and majority of people do not have cash on hand for medium sized claims etc.)

[email protected]682-593-4016

1 Reply

Constance Chambers

OP

Rental Property Investor · Athens, GA · Member since 2016 · 47 posts · 13 votes

3y

Quote from @Nathan Gesner:

Quote from @Constance Chambers:

Predatory lending? Not really. Your insurance and taxes have nothing to do with the mortgage lender.

Property values increase, therefore taxes increase. Why are you caught by surprise that taxes increase? You bought your first home in 1994, so surely you've seen taxes increase over the years?

Property values increase, therefore insurance increases. The insurance company is now offering to cover you for a $400,000 home instead of a $200,000 home, so the cost clearly needs to increase.

Nathan thank you for your response. Actually no i was not surprised at all, regarding property taxes. It always increases, but i was not as aware because i had always paid more down before i learned about leverage. (Although it was more than i anticipated, because of city taxes as well increasing). What i am trying to get others to notice and respond to is the fact we do not have a way to calculate these possible increases in our mortg. calculators/ tools any where and consumers are not being made aware. this is not a post about myself so much as just trying to bring awareness to the situation. New investors are definetly in the dark and something that penciled out nicely suddenly becomes not so positive in just a few short years, even if shopping insurance and increase of rents. Im not going to increase rents 24% annually just to make the same cash flow, i have been a tenant many times myself and do not believe in this kind of rate increase.

0 Reply

Constance Chambers

OP

Rental Property Investor · Athens, GA · Member since 2016 · 47 posts · 13 votes

3y

Quote from @Cameron Moore:

As far as insurance goes, you should be working with a broker to keep your insurance rates as low as possible year over year. To be honest, there are causes for the rate increases coming from every direction. (profitability issues within carriers, we are not drilling for oil as much and oil goes into EVERYTHING in a house so the costs are higher, and for some reason people across the US are filing more petty claims most likely due to the economic issues and majority of people do not have cash on hand for medium sized claims etc.)

Thanks Cameron, as a broker have you seen rate increases such as these within your career? The last broker i used only had access to a handful of companies, and once i had my soninlaw review my coverage after a few years with them, he pointed out several unneccessary costly add ons i was not aware of so i left them and have a distrust for brokers /agents now. *my son in law worked in the insurance industry for @ 4 years and recently left because of witnessing unethical practices at the brokerage he worked for. But i will consider this as an option to reduce insurance costs.

0 Reply

Cameron MoorePro Member

Insurance Agent · DFW, TX · Member since 2021 · 348 posts · 245 votes

3y

@Constance Chambers , Everything we are seeing is unprecedented. Yes, unfortunately there are many cases of dishonesty among agencies.

[email protected]682-593-4016

0 Reply

Jonathan R McLaughlin

Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes

3y

As you have acknowleged in the thread...home prices up=FMV up=tax increases. Next up by the way are insurance increases as the values go up and replacement costs grow higher.

The simplest way to protect yourself is to calculate in your cost estimates the tax rate of the town times the purchase price you are paying, not the current value.

Ironically, zillow, while its close to useless for estimating purposes does a good job of doing this in its cost modeling.

Its kind of willful blindness to think the taxes won't follow the prices, but real estate investors are definitely an optimistic bunch.

0 Reply

Constance Chambers

OP

Rental Property Investor · Athens, GA · Member since 2016 · 47 posts · 13 votes

3y

Quote from @Jonathan R McLaughlin:

As you have acknowleged in the thread...home prices up=FMV up=tax increases. Next up by the way are insurance increases as the values go up and replacement costs grow higher.

The simplest way to protect yourself is to calculate in your cost estimates the tax rate of the town times the purchase price you are paying, not the current value.

Ironically, zillow, while its close to useless for estimating purposes does a good job of doing this in its cost modeling.

Its kind of willful blindness to think the taxes won't follow the prices, but real estate investors are definitely an optimistic bunch.

0 Reply

Constance Chambers

OP

Rental Property Investor · Athens, GA · Member since 2016 · 47 posts · 13 votes

3y

@Jonathan R McLaughlin thanks for the tip about Zillow, i have noticed several new options with zillow since their most recent updates, including an monthly affordability calculator. I will say i like their FSBO filter for lead generation.

0 Reply

Hannah Joy

Rental Property Investor · Eureka CA · Member since 2020 · 91 posts · 27 votes

2y

@Constance Chambers thank you for this post! I was prepared for the new property tax amount as a percentage of the sale price but I wasn't prepared for the supplemental tax invoice which is separate from escrow and I still don't fully understand how it is calculated.

0 Reply

Insurance & Tax increases have KILLED CASH FLOW

Insurance & Tax increases have KILLED CASH FLOW

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