Property taxes eventually eating into profits?

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Property taxes eventually eating into profits?

Jake Recz
Manville, NJ · Member since 2015 · 141 posts · 87 votes
Hello guys just wanna throw this out there to see what you think. Let's say I buy a two family house that generates about $800 profit every month. That's after all expenses are paid. The taxes keep going up yearly. Aren't those taxes going to go up enough in let's say 20 years that the property is gonna stop generating cash flow? What happens then? This seems absurd. Am I missing something here?
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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
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Yep, taxes are going to go up.  As is insurance, maintenance, utilities, legal costs, etc., etc., etc.  Over time, the rents will, too.  Hopefully, over time it all averages out and your cash flow continues.  If you buy into the 50% rule, which says that 50% of gross rents go to all expenses (including taxes, but not the principal and interest part of your payment) then your cash flow will increase over time.

Of course nothing locks all these factors together.  So, no guarantee that rising expenses translate into rising rents.

I assume when you say $800 a month you're paying cash.  It would be a pretty exceptional property that could generate that much true cash flow with a mortgage.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    11y

    Yep, taxes are going to go up.  As is insurance, maintenance, utilities, legal costs, etc., etc., etc.  Over time, the rents will, too.  Hopefully, over time it all averages out and your cash flow continues.  If you buy into the 50% rule, which says that 50% of gross rents go to all expenses (including taxes, but not the principal and interest part of your payment) then your cash flow will increase over time.

    Of course nothing locks all these factors together.  So, no guarantee that rising expenses translate into rising rents.

    I assume when you say $800 a month you're paying cash.  It would be a pretty exceptional property that could generate that much true cash flow with a mortgage.

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  • Linda WeygantPro Member
    Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
    11y
    Originally posted by @Jake Recz:

    Hello guys just wanna throw this out there to see what you think. Let's say I buy a two family house that generates about $800 profit every month. That's after all expenses are paid. The taxes keep going up yearly. Aren't those taxes going to go up enough in let's say 20 years that the property is gonna stop generating cash flow? What happens then? This seems absurd. Am I missing something here?

     Yep.  You're missing that rents also go up.

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  • David Stefanovic
    Investor · Inverness, IL · Member since 2015 · 124 posts · 35 votes
    11y

    Something you may want to consider is hiring an attorney to reduce your property taxes.

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  • Joel OwensBusiness Member
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    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    11y

    If you are going to challenge taxes make sure you use a specialist attorney and not one who DABBLES in various areas of law.

    Property Tax Attorneys

    A good attorney should tell you if it makes sense to dispute your property tax bill or not after a pre-lim consultation . Sometimes you can get re-assessed higher in rate by appealing ( not good ).

    I work with commercial clients but they still worry about expenses. Any owner paid utility for tenants is a big one. As part of due diligence I look at a history of property tax assessments and mill rates for the last 10 years and I do the same for the water bills if landlord is responsible. I want to research if any upcoming large assessments or rate increases are happening. All of these things will impact the bottom line. For instance rents go up at 3% a year but slow to 2% a year yet water rises by 3%. Now you are negative 1% on return even with the rent growth from last year in comparison.

    My clients buying multi-million dollar properties that are retail it is triple net so the tenants pay the property taxes. This is especially beneficial in states like Texas that have no income tax. They offset that with property taxes at around 3% instead of other states where property taxes average 1%. So if you have a house rental in Texas you really get pounded with high taxes.

    Where I am in Georgia we pay about 1% in taxes so if you have a 200k house the taxes are about 2,000 a year.

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