Hey all, I'm a new investor in New Hampshire with 1 SF. I am looking to purchase my first multi-family and was curious what others think about the accuracy of the 50% rule in a state with high property taxes. I have seen a few properties that look like extremely good deals based on that rule but am cautious. I like the idea of the rule as a tool to quickly assess whether I should spend any time evaluating a property. What have others experienced?
Everyone has their own opinion. While we don't operate in a state with high property taxes, we do operate in areas that have "tight" margins since we buy "class A properties". Our key has been to put together a business plan that meets our goals. As long as the properties were on our "pathway" to reach our goal, we bought them! This has worked much better for us since the 1%, 2% or 50% rule isn't possible in any of the area we work in.
Another large factor is heat and snow (snow isn't usually a big deal expense-wise, but it is this year)
If you pay the heat and hot water, that's another huge variable, not a small one. Assume they will use far more heat than you would.
I have property where the 50% rule is more than enough, and another where it is not. I don't use the rule, I evaluate each property on it's own merits. For example, I just bought two properties where all utilities were already separated, including water/sewer. Most investors passed it up, but the numbers worked for me. I was also able to get additional bedrooms approved.
I agree with Ann on all points she made. I just bought a 5-family last July, and thought it was a good deal. Heating and Plowing are taking a huge chunk out of my profits. Not sure I'll buy another property where I pay the heat. Think about the years when Heating costs went wayyyyy up. The Landlord is stuck with that huge variable. The snow, I realize has probably been a "worst case" this year.
Thanks for your advise everyone. I will make the full expense analysis of the properties I am looking into, and determine if they are worth pursuing further.
Heat is a huge factor up in this area. One approach is to install Rinnai Direct Vent heaters hooked up to stand alone propane tanks and make the tenants pay the heat. Should be around $2500 net to get a new one installed and running per unit. It makes the unit a little less attractive but it keeps the tenants from doing stuff like opening windows because they get to hot, or leaving the thermostat at 76 ALL DAY. We have been going through 700 gallons of propane a month. Somethings flowing in the winter in New England, and its certainly not CASHflow
As others have said everyone has their own tolerances. I live in VT so I KNOW what you mean by high property taxes. I base my evaluations on cash flow more so than the 50% rule just make sure you take into account all the variables. Two common ones people forget are vacancy and maintenance.
Have you considered filing a tax abatement with your local municipality? I'm working on a 4-unit deal in Maine with an assessed value of $265k and have it under contract at $180k. Basically, the city is taxing the building based on a pre-recession value.
One of the first things I'm going to do after closing is to appeal the assessment with the city. I'd be curious to know if anyone has successfully reduced their tax bill through an appeal process and what strategy (appraisal, comps, etc.) they employed to pull it off.
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