Property Tax Doubled at Purchase

20 Replies

Hi there, I am looking at a Duplex in San Francisco. The current owner pays about $500/mo on property tax. The property was sold in 1999 for less than half a million. The assessed value of the property doesn't seem to go up that much despite the rapid increase in fair market value. 

The house is now valued at 1.5 million. Based on the current tax rate of 1.18% in San Francisco, the new property tax would be $1475 / mo.

Is my calculation correct? Basically there will be a 1k jump in property tax at sale.

yes, this is correct.  You need to research prop 13 for California.  It holds down the assessment in value of property to 2% a year.  So if the value of the property goes up say 10%, the assessment used to determine property taxes can only go up 2% for that year.  Eventually on properties held by the same owner for decades, the real value and the assessment are very different.

For your property, the assessment is about 1/3 the real value, so the taxes will be about 3 times more when it is sold than it is now.

This is unique to property in CA.

@Tim Shi
If you can buy a $1.5m duplex you can find some good deals in others parts of the country.  What is the reasoning behind investing in SF? House hacking? I am going to go out on a limb and say that an extra $12,000 hit a year is going to kill your already negative CF.  Appreciation is important but you do not want to go into a deal with negative CF and if you do there should be some sort of plan to make positive CF besides waiting around for rental appreciation.  Even if you can cover the property with personal money you are gambling not investing.

@Tim Shi     Listen to what @Nick Robinson    said in his post. 

San Francisco has so many laws favoring tenants there that they make Oakland and Richmond seem like conservative Alabama by comparison.

I own rentals in the East Bay and Ohio, and the only way I would want to own a rental in The City is if I had Section 8 tenants in ALL units. 

If you are banking on appreciation AND you plan to buy and hold the duplex for 25 plus years that can certainly be in your favor. Unfortunately as a Realtor I saw so many people buy in The City in the early 2000's.....who in turn sold those same properties in 2007-2012 for a loss because they panicked. The disciplined investors kept the properties....and saw appreciation. 

There are other areas of California and other areas of the country where you can buy duplexes that may not appreciate much in value but you will realize some good solid cashflow.

Originally posted by @Lynnette E. :

yes, this is correct.  You need to research prop 13 for California.  It holds down the assessment in value of property to 2% a year.  So if the value of the property goes up say 10%, the assessment used to determine property taxes can only go up 2% for that year.  Eventually on properties held by the same owner for decades, the real value and the assessment are very different.

For your property, the assessment is about 1/3 the real value, so the taxes will be about 3 times more when it is sold than it is now.

This is unique to property in CA.

What a great "unique" feature that was in CA. Sacramento just comes after the population with other taxes to make up for the shortfall in subsidizing those long standing property owners, and the vast majority of the population who are not benefiting from 13 can't seem to wrap their heads around it and vote it out. 

 

Originally posted by @David A. :
Originally posted by @Lynnette E.:

yes, this is correct.  You need to research prop 13 for California.  It holds down the assessment in value of property to 2% a year.  So if the value of the property goes up say 10%, the assessment used to determine property taxes can only go up 2% for that year.  Eventually on properties held by the same owner for decades, the real value and the assessment are very different.

For your property, the assessment is about 1/3 the real value, so the taxes will be about 3 times more when it is sold than it is now.

This is unique to property in CA.

What a great "unique" feature that was in CA. Sacramento just comes after the population with other taxes to make up for the shortfall in subsidizing those long standing property owners, and the vast majority of the population who are not benefiting from 13 can't seem to wrap their heads around it and vote it out. 

 

You had to be around when prop 13 was voted into place to understand it.  MANY retired people were losing their homes of 40 years because the property taxes went up so much that the property taxes would be more than their social security checks.  Family farms were being lost because the property taxes went up so much that the families that farmed for over a hundred years could not afford the taxes anymore.  Properties were shooting up in value, but the people who just wanted to live where they had for decades with a paid off house could not afford to live there.

Yes, they could sell the property and make a lot of money, but then where would they live?  Everything else was also shooting up in cost.

The purpose of prop 13 was to not allow the counties to tax property so much that people could not stay in the houses they owned. It reduced the ability for the counties to escalate their spending when property value shot up, then increase the mill rate when the property value fell, so the county could afford all the stuff they thought they needed.  It let people have a little control over  new taxes the Counties wanted.

Counties should be able to manage a budget with a 2% increase in assessments.

 

Originally posted by @Lynnette E. :
Originally posted by @David A.:
Originally posted by @Lynnette E.:

yes, this is correct.  You need to research prop 13 for California.  It holds down the assessment in value of property to 2% a year.  So if the value of the property goes up say 10%, the assessment used to determine property taxes can only go up 2% for that year.  Eventually on properties held by the same owner for decades, the real value and the assessment are very different.

For your property, the assessment is about 1/3 the real value, so the taxes will be about 3 times more when it is sold than it is now.

This is unique to property in CA.

What a great "unique" feature that was in CA. Sacramento just comes after the population with other taxes to make up for the shortfall in subsidizing those long standing property owners, and the vast majority of the population who are not benefiting from 13 can't seem to wrap their heads around it and vote it out. 

 

You had to be around when prop 13 was voted into place to understand it.  MANY retired people were losing their homes of 40 years because the property taxes went up so much that the property taxes would be more than their social security checks.  Family farms were being lost because the property taxes went up so much that the families that farmed for over a hundred years could not afford the taxes anymore.  Properties were shooting up in value, but the people who just wanted to live where they had for decades with a paid off house could not afford to live there.

Yes, they could sell the property and make a lot of money, but then where would they live?  Everything else was also shooting up in cost.

The purpose of prop 13 was to not allow the counties to tax property so much that people could not stay in the houses they owned. It reduced the ability for the counties to escalate their spending when property value shot up, then increase the mill rate when the property value fell, so the county could afford all the stuff they thought they needed.  It let people have a little control over  new taxes the Counties wanted.

Counties should be able to manage a budget with a 2% increase in assessments.

 

Ya, but this isn't 1978, 1988, or even 1998. It's grown so warped and dysfunctional by now that it needs a revision, a revision that keeps eluding ballot measures. 

Warren Buffett has been vocal about this:

https://www.latimes.com/archiv...

I know someone with a property currently listed for 7.8M that he bought in 1990. He paid 13.9k in taxes on for 2019. Prop 13 has been a subsidy for him- not to mention the revenue shortfall coming from commercial and industrial properties who've "locked in" their low taxes decades ago.

 

@David A.

I’m sorry you guys keep reposting your comments and I am on my phone but are you trying to say they should eliminate the section of prop 13 for commercial and industrial buildings?

You realize if they eliminate that Buisness will go out of Buisness and our cost of living will go up. Just a basic example is the farmer will have to pay higher taxes so it will cost him more to produce the same amount of goods. Then it’s sent to a packing house who now has to pay more in taxes. Then the trucks that transport it to the store cost more because the office has to pay more in taxes. Then the produce gets to the grocery store and they have to pay more in taxes. If they all have to pay more in taxes they will raise the price of their goods and services. Unless you believe they are going to eat those extra costs. They will probably fire employees and raise the price of their goods and services.

Originally posted by @Nick Robinson :

@David A.

I’m sorry you guys keep reposting your comments and I am on my phone but are you trying to say they should eliminate the section of prop 13 for commercial and industrial buildings?

You realize if they eliminate that Buisness will go out of Buisness and our cost of living will go up. Just a basic example is the farmer will have to pay higher taxes so it will cost him more to produce the same amount of goods. Then it’s sent to a packing house who now has to pay more in taxes. Then the trucks that transport it to the store cost more because the office has to pay more in taxes. Then the produce gets to the grocery store and they have to pay more in taxes. If they all have to pay more in taxes they will raise the price of their goods and services. Unless you believe they are going to eat those extra costs. They will probably fire employees and raise the price of their goods and services.

 I didn't say there wouldn't be a reckoning. Me personally? I'm not held hostage by some Ayn Rand threat that businesses will leave if they don't get to keep their subsidies.  

But let's face it, prop 13 is hardly the only thing, or even close to the main thing, wrong with California. Properly dealing with Illegal immigration would probably kill a lot of your farmers as well. That doesn't change the fact that their economy is built on dysfunction, nor my opinion of right or wrong on the matter, or what should be done about it, regardless of the reckoning. 

Originally posted by @David A. :
Originally posted by @Lynnette E.:
Originally posted by @David A.:
Originally posted by @Lynnette E.:

yes, this is correct.  You need to research prop 13 for California.  It holds down the assessment in value of property to 2% a year.  So if the value of the property goes up say 10%, the assessment used to determine property taxes can only go up 2% for that year.  Eventually on properties held by the same owner for decades, the real value and the assessment are very different.

For your property, the assessment is about 1/3 the real value, so the taxes will be about 3 times more when it is sold than it is now.

This is unique to property in CA.

What a great "unique" feature that was in CA. Sacramento just comes after the population with other taxes to make up for the shortfall in subsidizing those long standing property owners, and the vast majority of the population who are not benefiting from 13 can't seem to wrap their heads around it and vote it out. 

 

You had to be around when prop 13 was voted into place to understand it.  MANY retired people were losing their homes of 40 years because the property taxes went up so much that the property taxes would be more than their social security checks.  Family farms were being lost because the property taxes went up so much that the families that farmed for over a hundred years could not afford the taxes anymore.  Properties were shooting up in value, but the people who just wanted to live where they had for decades with a paid off house could not afford to live there.

Yes, they could sell the property and make a lot of money, but then where would they live?  Everything else was also shooting up in cost.

The purpose of prop 13 was to not allow the counties to tax property so much that people could not stay in the houses they owned. It reduced the ability for the counties to escalate their spending when property value shot up, then increase the mill rate when the property value fell, so the county could afford all the stuff they thought they needed.  It let people have a little control over  new taxes the Counties wanted.

Counties should be able to manage a budget with a 2% increase in assessments.

 

Ya, but this isn't 1978, 1988, or even 1998. It's grown so warped and dysfunctional by now that it needs a revision, a revision that keeps eluding ballot measures. 

Warren Buffett has been vocal about this:

https://www.latimes.com/archiv...

I know someone with a property currently listed for 7.8M that he bought in 1990. He paid 13.9k in taxes on for 2019. Prop 13 has been a subsidy for him- not to mention the revenue shortfall coming from commercial and industrial properties who've "locked in" their low taxes decades

 

Well, if its not able to withstand the voters approving the change, then its not the change the majority of the population wants.  Find something that you think 'works' but also assures people that they will not have tax rates they can not afford, or in the case of commercial/industrial properties that the changes will not increase the cost of living to a level that is not acceptable. 

I moved out of CA, so no longer have prop 13.  In TN they have a law that helps some of the most vulnerable people have some relief from property taxes they can not afford.  TN law is: Property Tax Relief- Tennessee state law provides for property tax relief for low-income elderly and disabled homeowners, as well as disabled veteran homeowners or their surviving spouses. This is a state program funded by appropriations authorized by the General Assembly.  

Maybe the solution for CA is more of a compromise between prop 13 and what TN has, but based on income.  Something like for residential property prop 13 does not apply for any year if the household income is more than, say, $500k annually. (I made this number up, they would need to find a number that works.)  For commercial something like if the operation employs more than 1000 full time equivalents of non-family members it is fully taxed, otherwise it has steps to how much it can have increased tax, maybe 0-100 non family employees 2% a year, 101 - 250 increases of up to 4% a year, 251-...and so on.

The way to win on a ballot is to find a middle ground that works.



@Lawrence Leung

I agree that duplexes can be a great way to get into a real estate market and minimize your expenses especially in an expensive market. I assumed he was going to put down a good size down payment on the property. I feel like there are better ways and places to put your money than SF. Just a personal opinion. Especially with the unfavorable landlord laws, the high price of real estate, the negative cash flow, the type of lawlessness that they allow in the city and that people are moving out of big cities right now. I haven’t checked with any facts but I have seen multiple people in the past 2-3 months posting that they can not find tenants right now even after a dramatic price reduction in SF.

@Abhishek Banerjee San Francisco has a limited amount of housing stock. Therefore a duplex, if viable, will be worth more if you can subdivide and create two parcels.

@Nick Robinson San Francisco is not for the faint of heart. If investing was easy than I think we would all be retired living in the tropics sipping Mai Tais. Everything you said about San Francisco is true and that is the exact reason why an investor cannot apply the same strategy that you would in other less challenging vanilla locations. But to say there are better places and ways just means you haven't identified the right strategy for San Francisco. So instead of discouraging, I would rather applaud advise and encourage anyone that wants to invest in San Francisco because the opportunities are there and the sky is the limit.

@Lawrence Leung
I never claimed investing to be easy or even that there was not a way to invest successfully in SF. I said that there are better ways and places to put your money than into a negative CF asset. If you look back at my post that you responded to I said "buying a duplex, ideally a 4unit, is a great way to get into the market and help try to minimize some expenses especially in an expensive area." The next statement I made was "I think that there are better ways and places to put my money than SF and right after I said this is my personal opinion." I assume he is going to put down less than 20% and if he is like most younger people he has a higher income but less cash. If thats the case he can get a MF live in one unit to minimize his expenses and ideally save more money than renting. Then once the building has appreciated enough and he no longer lives in the property I would 1031 exchange it into a CF asset. Whether he wants it to be a market that still has some good appreciation such as a PHX, Miami, Austin, Dallas, etc. or he wants to go pure CF and go into KC, Huntsville, etc. is his choice. If he does have that 20-30% down he can get into a CF asset right now that appreciates and he is not locked in to a property so if he gets a job opportunity or wants to move he does not have to worry about a negative CF asset or it counting against him personally. This commercial MF that he is going to buy will also be in an LLC so it doesn't count against him personally and it will give him more tax advantages than buying a duplex and living in it. It will also have the positive CF, he will not have to come out of pocket monthly for expenses, and it will still appreciate.

@Nick Robinson A focus on immediate cash flow is short term thinking vs long term returns. When looking at overall returns, an investment in San Francisco has outperformed cash flow oriented locations by a wide margin, not only due to incredible appreciation, but also in long term cash flow returns.


@Amit M.
I do not think the focus should be on only CF or only appreciation.  You need to have positive CF coming in monthly to cover the investment and then be in a market that is appreciating.  The goal is the CF allows you to maintain the property throughout different cycles in the market and what for appreciation to work.  If you are losing money monthly on an investment you are hoping that the rents and property appreciate before you can not afford to cover the expenses anymore.  I do not know if you are aware of this but it is possible to have markets go down and for you to lose your job and not be able to cover those expenses.  More likely is you have unforeseen expenses, evictions, major issues, that come up.  I feel like you guys are pulling certain lines in my responses and responding to that instead of my post as a whole.  I said that since he would probably be putting down less than 20% I would buy a residential MF and live in it to minimize expenses.  Then in the following years when he is at a point of moving out he can decide to keep the property if it is seeing decent CF and has appreciation or move it to a market that he wants to invest in whether that is a more appreciation based market or a CF market.

@Amit M.   HAHA that's an oldie. I miss the old brokerages. I'm not such a big fan of the consolidation that Compass caused.

@Nick Robinson  I respectfully disagree with you. From an investment POV you make money in 4 key profit centers. I like CF as much as the next investor, but the real bang for your buck in SF is the appreciation (and hidden equity). I know you don't think the focus should be, but it really is an argument between cash flow or appreciation because your other two profit centers for amortization and depreciation are the same. So I agree with whole heartedly with Amit.

You can't ignore the math when add things up. We all know that the Cap rate in SF is abysmal at 2-3% and a good Cap rate in the areas you were eluding to earlier can be anywhere from 10-15%, but when you factor in the appreciation over 20 years CF can't catch up or compete with Appreciation.

Median home price in SF in 2000 was $500k, Median home price today it is $1.625M and increase of 225%
Median home price in the South/Midwest in 2000 was $160k today it is $290k an increase of 81%

@Abhishek Banerjee Either or, although the back cottages or separate structure on a lot is less appealing as you have to deal with egress and easements. But that is the hidden equity and xfactor from an investment strategy on the appreciation side.

@Lawrence Leung
First your ignoring the fact that I was talking about the negative CF and you will have to contribute money to the investment monthly. Second, I do not know where you are getting 10-15% CAP rates. If you look at PHX right now Commercial MF, 4+ units, a C class building has a CAP rate at 5.5% based on proforma and from what some brokers have told me trying to get me to sell mine sounds like that maybe closer to a 5.25%. In my last post I am defending the need to have both. +CF allows you to maintain the property. If you want that money coming out of your pocket thats fine I prefer to let my investment do it. I understand this is a crazy year with COVID and super low interest rates so the prices are skyrocketing right now. My investment from last year went up over 20%, based on what multiple brokers say it will sell for, and would be a 58.27% ROI just from appreciation. With the +CF and principle reduction thats a 68.9% total return this year on my money. Now just like with SF I do not get to touch any of that money besides the CF and this is a crazy year so I expect it to slow down with the appreciation. So we will see what happens. Right now PHX is the fastest growing metro area in the country and has an avg. age of 33.5 for its residents, SF is 38.2 so basically the same.

So again I do think you need appreciation and I am in NO WAY telling anyone to invest in Memphis which is a dying city and riddled with crime, city where you will find 10%+ CAP rates.  I would rather get in a market that the investment pays for itself WITH appreciation and be in a state that has landlord friendly laws. 

If you want to pay for the investment and wait for rents to give you a +CF and ride the appreciation yes appreciation does build wealth faster than CF.  There is no argument about that here.  You also have to count the monthly expenses against your total return. It is also a riskier investment.  If you do hold the property for a long period of time your net worth will most likely be higher than someone doing it in another market.  

For the sake of keeping the post short and seeing as you were mentioning SFR I will not go into the more units, commercial MF vs SFR discussion.

All strategies have their positives and negatives, main goal is to run your numbers and continue to grow.  Hope you guys had a successful 2020 and wish you luck in 2021 and beyond in your investments.