Sell or hold- cashflow destroyed by property taxes
Jasper, IN · Member since 2018 · 40 posts · 11 votes
We own two rentals in a small town in Indiana. Property values have gone up approximately 40% in the last two years. We bought a 3bed 1 bath for 125k with a rent of 1,100. We also own a 4bed 2 bath for 137k with a rent of 1300. Over the last two years our property taxes have doubled, if not more. This has put a cut on our cashflow and we have had some major expenses, like a new roof, water heater, bathroom remodel, and kitchen remodel all done at the 3 bed house. With all that being said, the 3 bed house is worth approximately 180k due to the location and lot size. The 4 bed house is worth approximately the same. Would it be better to 1031 both of these or one of these into a different house in a different area. What is everyone’s thoughts?
You know what else has gone up significantly the last two years? Interest rates.
In order to provide good advice, we need good numbers. What is your actual average cash flow now? When considering capital expenses such as that new roof, water heater, etc, I suggest taking into account the life span of those things. Meaning if you expect the new water heater to last 8 years and it cost $1,200 to purchase and install then it cost you $12.50 per month on average and that's the number you should use when calculating monthly cash flow.
Being hit with a lot of capex early on when you own a rental can have an impact on your reserves for sure, but the nice thing is once they're done you should have X years before the same expense comes up again. Yes it affects your short term cash flow, but averaged out over the long run (decades) gets you a more realistic view of what your actual cash flow looks like.
And what would you expect to net after fees if you were to sell these properties?
You know what else has gone up significantly the last two years? Interest rates.
In order to provide good advice, we need good numbers. What is your actual average cash flow now? When considering capital expenses such as that new roof, water heater, etc, I suggest taking into account the life span of those things. Meaning if you expect the new water heater to last 8 years and it cost $1,200 to purchase and install then it cost you $12.50 per month on average and that's the number you should use when calculating monthly cash flow.
Being hit with a lot of capex early on when you own a rental can have an impact on your reserves for sure, but the nice thing is once they're done you should have X years before the same expense comes up again. Yes it affects your short term cash flow, but averaged out over the long run (decades) gets you a more realistic view of what your actual cash flow looks like.
And what would you expect to net after fees if you were to sell these properties?
I bought one house at a 7.25 interest rate and the one with all the upgrades is at 3.865. My mortgage payment is 800 and 1000 so when you figure in and account for the expense they basically break even. I’ve never sold a rental so I don’t know what the costs would be expect for the realtor fees. What else should I be thinking about?
How much are the property taxes? Have you tried appealing the tax increase? Doubling seems excessive unless they went from $500 to $1000. If they went from $3000 to $6000, I'd be on the phone with the city finding out why. I've had houses double in price, but the taxes haven't gone up at the same rate.
Renos can cost a lot, but if in the long term, you can rent the house for more and have less turnover, you will recoup some of that money. Talk to realtors in your area to find out what they charge. It can vary. Used to be 7% on the first 100K and then 3-3.5% on the rest. You also have closing costs as well as capital gains.
How much are the property taxes? Have you tried appealing the tax increase? Doubling seems excessive unless they went from $500 to $1000. If they went from $3000 to $6000, I'd be on the phone with the city finding out why. I've had houses double in price, but the taxes haven't gone up at the same rate.
Renos can cost a lot, but if in the long term, you can rent the house for more and have less turnover, you will recoup some of that money. Talk to realtors in your area to find out what they charge. It can vary. Used to be 7% on the first 100K and then 3-3.5% on the rest. You also have closing costs as well as capital gains.
I bought one house at a 7.25 interest rate and the one with all the upgrades is at 3.865. My mortgage payment is 800 and 1000 so when you figure in and account for the expense they basically break even. I’ve never sold a rental so I don’t know what the costs would be expect for the realtor fees. What else should I be thinking about?
Fees will vary by realtor. Last I checked Redfin was charging 4% commission total to be split between buyer and seller agents before other fees. Maybe ballpark the cost to sell at 8% of total sale price. You'll also have to pay some depreciation recapture unless you do a 1031 exchange.
So take that number and subtract what you owe on each of your mortgages and you'll be left with a net figure. Then ask yourself what you could invest that net figure into and what returns you're likely to get. Also factor in whatever tax benefits there may be in the new investment vs what you have now.
As another poster suggested, are your tenants currently paying market rents? If not, raise them when you're able to.
How much are the property taxes? Have you tried appealing the tax increase? Doubling seems excessive unless they went from $500 to $1000. If they went from $3000 to $6000, I'd be on the phone with the city finding out why. I've had houses double in price, but the taxes haven't gone up at the same rate.
Renos can cost a lot, but if in the long term, you can rent the house for more and have less turnover, you will recoup some of that money. Talk to realtors in your area to find out what they charge. It can vary. Used to be 7% on the first 100K and then 3-3.5% on the rest. You also have closing costs as well as capital gains.
I wonder what they are doing with all of the extra income?
I bought one house at a 7.25 interest rate and the one with all the upgrades is at 3.865. My mortgage payment is 800 and 1000 so when you figure in and account for the expense they basically break even. I’ve never sold a rental so I don’t know what the costs would be expect for the realtor fees. What else should I be thinking about?
Fees will vary by realtor. Last I checked Redfin was charging 4% commission total to be split between buyer and seller agents before other fees. Maybe ballpark the cost to sell at 8% of total sale price. You'll also have to pay some depreciation recapture unless you do a 1031 exchange.
So take that number and subtract what you owe on each of your mortgages and you'll be left with a net figure. Then ask yourself what you could invest that net figure into and what returns you're likely to get. Also factor in whatever tax benefits there may be in the new investment vs what you have now.
As another poster suggested, are your tenants currently paying market rents? If not, raise them when you're able to.
Unfortunately I could raise them by about 50 bucks a month but that would be it. I think we could do that but still that doesn’t add a lot of cushion.
You have $100k in appreciation in two years, which dwarfs the increase in property taxes.
Whether to hold or sell is based on future estimated IRR of what you own vs estimated IRR of other opportunities.
$50 a month may not be much of a cushion, but over time it does add up. Plus with current interest rates, people with a high mortgage (eg 80% of the home's value) won't have much cash flow.
Have both of the homes been rentals the entire time you owned them or was one of the homes your primary residence at some point?
I have a SFH rental in an Indianapolis suburb and my property taxes went 17% and 13% in 2023 and 2022 (as rentals). I used to live in that house before I moved back to California. My property taxes doubled all at once because I lost the homestead (homeowner) exemption and the other exemptions since it became a rental property. My property tax rate is 2.72%. If it was still my primary I'd be closer to 1% range. If one of your homes wasn't a primary that became a rental that sounds strange that your property tax went up that much.
I don't know very much about the Jasper area. If you think that the appreciation will be more than your tax increases or your reduced cash flow, maybe lean towards keeping the properties especially the one with the 3.865% rate.
As far as 1031, Indianapolis has a lot of development with businesses moving there so that could be a consideration, not sure how far you are from Indy. The suburbs do well with appreciation and being in high demand because of good schools.
You have $100k in appreciation in two years, which dwarfs the increase in property taxes.
Whether to hold or sell is based on future estimated IRR of what you own vs estimated IRR of other opportunities
Have both of the homes been rentals the entire time you owned them or was one of the homes your primary residence at some point?
I have a SFH rental in an Indianapolis suburb and my property taxes went 17% and 13% in 2023 and 2022 (as rentals). I used to live in that house before I moved back to California. My property taxes doubled all at once because I lost the homestead (homeowner) exemption and the other exemptions since it became a rental property. My property tax rate is 2.72%. If it was still my primary I'd be closer to 1% range. If one of your homes wasn't a primary that became a rental that sounds strange that your property tax went up that much.
I don't know very much about the Jasper area. If you think that the appreciation will be more than your tax increases or your reduced cash flow, maybe lean towards keeping the properties especially the one with the 3.865% rate.
As far as 1031, Indianapolis has a lot of development with businesses moving there so that could be a consideration, not sure how far you are from Indy. The suburbs do well with appreciation and being in high demand because of good schools.
Property taxes have doubled with me holding them as rentals the entire time without a homestead exemption.
Any thoughts on specific parts of Indy?
If I was in this situation, knowing only what I know from these posts, I'd rather have the properties in Jasper/Dubois County than Indy/Marion County even though the Indy market has more jobs (i think) and can support higher rent (in some areas). In my past, 100% of the time I decided to increase rent as a result of a Property Tax increase, I sent a copy of the spring and fall installment invoices and showed my tenants that I was not going to get any of the money. Since Indiana property taxes are collected in arrears, you already owe for a full year's increase BEFORE you see the increase and can inform your tenants.
If my cash flow position was strong enough to suffer a tenant possibly leaving, I'd pass on the full increase ASAP. After all, the tenants live there and they get the services those taxes provide, not me. So, they should pay the increase or vote for someone else who would cut property taxes. If my cash flow was not strong enough to weather them moving, I'd eat the tax increase while considering a 1031 or an outright taxable sale, both of which I've done. Possibly i'd subsidize the tenants and make the increase when they move because the market will eventually increase rent to catch up with the higher property taxes.
After making all those improvements, I would lean towards the long term and try to get as close as possible to break even now while at least slowly increasing rent enough for the tenants to cover the property tax increase. My concern with switching properties would be that I'd go through another sent of renovation costs.
Have both of the homes been rentals the entire time you owned them or was one of the homes your primary residence at some point?
I have a SFH rental in an Indianapolis suburb and my property taxes went 17% and 13% in 2023 and 2022 (as rentals). I used to live in that house before I moved back to California. My property taxes doubled all at once because I lost the homestead (homeowner) exemption and the other exemptions since it became a rental property. My property tax rate is 2.72%. If it was still my primary I'd be closer to 1% range. If one of your homes wasn't a primary that became a rental that sounds strange that your property tax went up that much.
I don't know very much about the Jasper area. If you think that the appreciation will be more than your tax increases or your reduced cash flow, maybe lean towards keeping the properties especially the one with the 3.865% rate.
As far as 1031, Indianapolis has a lot of development with businesses moving there so that could be a consideration, not sure how far you are from Indy. The suburbs do well with appreciation and being in high demand because of good schools.
Property taxes have doubled with me holding them as rentals the entire time without a homestead exemption.
Any thoughts on specific parts of Indy?
Wow. And you can't appeal the tax increase?
I tend to favor the Northside especially Hamilton County (Carmel, Westfield, Noblesville, Fishers) - it's had the highest increase in property values of all the Indy area counties. My house is in that county. I only raised the rent slightly this time $30 since I have a great tenant (going on 4 years) and want to avoid turnover. The westside suburbs: Avon, Plainfield, Brownsburg and Southside suburb, Greenwood are also good.
I like Broad Ripple and Butler Tarkington. I think the townships, Pike and Washington are alright. I would be careful of certain areas in Indy. It's block by block. I have 2 homes on the Eastside - AC unit was stolen before tenant moved in (thieves climbed a 7 foot fence), attempted break in with the other house (alarm scared intruder away).