How are investors missing this?
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Rental Property Investor · Orange County, CA · Member since 2016 · 740 posts · 529 votes
2yif your PM is doing it right they are raising the rents each year to increase your income.
BUT...... you should not be investing for just for "cashflow". What I mean is that cashflow should be looked at as the cherry on top. It goes down, it goes up. One month you might have a vacancy, one month you might have a maintenance item. You can't rely on just cashflow. There is so so so much more to real estate than just cashflow and it takes patience.
------> This is the tortoise and the hare approach. You buy a property that has enough profits in it to cover unforeseen expenses, and then......you save! You put your profits into a HY savings account (email me if you want the one that I use for 4.5% return) then you are making a return on your return. Then if you need to pull $ out for expenses you pull from there. In the meantime it is making money and saving for the next property.
Now you wait.... let that baby do its thing. If you are leveraged (which is what you want) the tenant pays down your mortgage each month (giving you FREE equity) the property if in a good area is going UP in value ....... you are hedging inflation locked into a long loan.
Your PM is raising the rents each year and you hold hold hold.
That is how you grow wealth. Cashflow DOES NOT create wealth. Unless you own like 100 properties, or invest in STR's (yes that is high cashflow). True wealth is created through the asset growing up in value through equity pay down, appreciation and inflation going up.
Melissa
36 Replies
- Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes2y
Quote from @Chris Clothier:
Quote from @Joe S.:
So I hear people talking big game about owning Properties long term and the cash flow going up.
In some states that are high property tax state like Texas here is what I have seen.
1. The taxes and insurance are increasing faster than the rent.
Texas is such a different state though in how they treat property taxes and what they use them for. True, they are high and rents are not rising as fast as home values which is raising the taxes. But those taxes are directly used for public infrastructure being built and improved. I know that equity value is almost always inaccessible so it's not liquid unless we refinance or use a HELOC to realize it. The other option is selling, but that is not usually an option without a 1031 for a long-term hold investor.
In San Antonio, Houston and the DFW metro-plex, you have some of the highest and fastest growing areas of the country in jobs and migration. People are moving to these cities for the jobs, the climate, the schools, etc. I think we can continue to count on modest rent growth, nothing crazy but small yearly increases. Enough to notice the growth but not squeeze residents to move. And I also anticipate tax growth slowing down a bit as the dollars needed for growth slow down. I don't think rents will necessarily catch up meaning annual higher cash flow in those cities may not be possible, but value creation is real. And when an investor wants to review selling (usually 7-10 years in), the IRR on those properties (depending on area and how long ago they were bought) will be exceptional.
Thank you for acknowledging the taxes increase out paced
the rent increase in certain areas of Texas. There were serval posters that acted a bit doubtful concerning the tax situation. - 2yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
Quote from @Joe S.:
Thank you for acknowledging the taxes, out pacedQuote from @Chris Clothier:
Quote from @Joe S.:
So I hear people talking big game about owning Properties long term and the cash flow going up.
In some states that are high property tax state like Texas here is what I have seen.
1. The taxes and insurance are increasing faster than the rent.
Texas is such a different state though in how they treat property taxes and what they use them for. True, they are high and rents are not rising as fast as home values which is raising the taxes. But those taxes are directly used for public infrastructure being built and improved. I know that equity value is almost always inaccessible so it's not liquid unless we refinance or use a HELOC to realize it. The other option is selling, but that is not usually an option without a 1031 for a long-term hold investor.
In San Antonio, Houston and the DFW metro-plex, you have some of the highest and fastest growing areas of the country in jobs and migration. People are moving to these cities for the jobs, the climate, the schools, etc. I think we can continue to count on modest rent growth, nothing crazy but small yearly increases. Enough to notice the growth but not squeeze residents to move. And I also anticipate tax growth slowing down a bit as the dollars needed for growth slow down. I don't think rents will necessarily catch up meaning annual higher cash flow in those cities may not be possible, but value creation is real. And when an investor wants to review selling (usually 7-10 years in), the IRR on those properties (depending on area and how long ago they were bought) will be exceptional.
the rents in certain areas of Texas. A couple of people seem to imply I was making it up.Oh no, the values have jumped in Texas making a lot of investors a paper return in equity and rents are a lagging indicator. They go up slower and with a lot of rental properties to feed demand have not grown as fast. But they will grow and I do think appreciation growth will slow to a more normal pace which is already high, just not as high as it has been the last couple of years. That'll slow tax growth a bit too.
Best to you and good luck with your properties down there!
- 2ySam YinPro MemberLos Angeles, CA · Member since 2021 · 583 posts · 738 votes
@Allan Smith
I will agree that the total tax and insurance increase is a small percentage of the overall income. I think that this topic is more glaring because we have not seen these types of increases in the recent past. However, keeping in mind the overall picture, your increase in rent will surely cover the increase in tax and insurance, generally speaking.
Thanks for pointing that out. I hope more investors find some comfort in seeing those actual numbers on paper.
- 2yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Chris Clothier:
Quote from @Jay Hinrichs:
Quote from @Bob S.:
Quote from @Jay Hinrichs:
Quote from @Bob S.:
Quote from @Joe S.:
So I hear people talking big game about owning Properties long term and the cash flow going up.
In some states that are high property tax state like Texas here is what I have seen.
1. The taxes and insurance are increasing faster than the rent.
Go to another state. I live in FL ( FL is going to correct big time, its coming ) and do all my business in OH and now Jackson Mississippi, 10% net caps based on cash purchases, I get as many as I want. My avg rent is 1300 for a 3/2 with taxes of 1500, all in under 80k,
good luck in Jackson buying those kind of returns been there done that . very tough market in those price points.Well, my buddy has about 50, all occupied for years, with better the 10% nets caps. We are starting with 10 and working on a pack of 150. Not our 1st BBQ. No market is more difficult to navigate then Cleveland, Memphis, Indy, so this is a piece of cake for us, withOUT snow and freezing rain.
I have loaned on more than 750 props in Jackson and owned over 200.. you think its easier than the other cities you will soon find out its not. .. going for those high cap rates is going to be a wild ride for you and for many reasons you have no clue about right now. Good luck though !Jay,
We've researched and visited Jackson so many times over the years I've lost count. Good luck to Bob. If he's holding them, then he knows the risks going in and can decide for himself if he likes the results. However, if they are being sold to another investor that is an entirely different story.
We have held off moving into Jackson, MS because we have such a high responsibility to the investors who ultimately own these properties. We manage these homes and the economics make it nearly impossible to make money over the long-term unless you live there and are actively managing them. And I mean very active. I too have invested in these areas and price points semi-passively and it just carries so much risk. Those numbers reflect just how rough these areas are and how challenged they are for residents. 51% of the homes for sale in Jackson are priced under $100,000. On paper, it looks like a so-so bet, but if you are passive or semi-passive, it comes with the kind of risks that just tilt the scales massively against success. I would venture to say more than half of the properties we've viewed down there vacant and in need of major work were rentals being given up by the owners.
there are good areas of Jackson and suburbs Madison county Rankin county I owned a bunch of new builds there that i bought for go zone tax bene's and they were very easy to own and manage they never went up in value though so the ONLY play was the massive tax savings i made buying them in the first place. But what Bob is talking about is South Jackson and West Jackson. These homes are built in areas of yazoo clay were built extremely cheaply when they were constructed and the tenant base is very very tough .. I dont care what local you have there its a tough slog for sure and even those I know that live and work it while they may do OK but its a ton of work I simply wont loan money there anymore the risk is far to high .. Bob simply does not know what he does not know U know what they say about owning boats happiest is day is the day you buy it and the day you sell it same with City of Jackson rental props :) you have all the challenges of hood tenant base along with sub par construction and all the yazoo clay messing with your houses. If one moves to the nicer areas then its manageable but the returns are not going to be anywhere near what Bob is talking about.. real estate prices for Risk.
REI Nation identified that years ago and when you look at REI nation inventory that is what you will find quality which greatly limits the inherent risks of owning out of state rentals.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
@Jay Hinrichs
I agree - Jackson sucks. Not a place I would want to own rentals. I think I would take city of Baltimore over Jackson
7e investments53 Reviews - Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes2y
Can you share some #'s on this? Big difference if your talking tax was $400 and went too $2k or was $4k and went too $5k.
- 2yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Chris Seveney:
@Jay Hinrichs
I agree - Jackson sucks. Not a place I would want to own rentals. I think I would take city of Baltimore over Jackson
having done bizz in both no question Baltimore is far better than Jackson MS.. for many many reasons that one cant know until they start buying in south Jackson or west Jackson.. as I stated there are OK areas in Jackson north of Lakeland and East of I 55 going out towards the Reservoir. and there are pockets West of 55 and north of Lakeland but it becomes block to block.. you go South Jackson or West Jackson and that's were these 10 caps are and one will never get that in the long run I don't care who the partner is on the ground.. I started lending there in 2003. having done hundreds of loans and loaned on the same property 2 to 3 times over the years.. FAILED landlords each time. Just sayin.. Again there are safe areas but your returns are going to be risk rated. high returns high risk and very very tough to manage if not impossible for out of state
- Real Estate Broker · Austin, TX · Member since 2012 · 1k+ posts · 1k+ votes2y
Protest your property taxes. Its really easy to do. Folks act like they can't or shouldn't or whatever. Its super easy. The investors that I know in Austin do it. If you don't then that is on you. Shop around on your insurance too. You would be surprised what an insurance agent will do to keep your business.
- Investor · San Antonio, TX · Member since 2017 · 344 posts · 268 votes2y
Quote from @Joe S.:
So I hear people talking big game about owning Properties long term and the cash flow going up.
In some states that are high property tax state like Texas here is what I have seen.
1. The taxes and insurance are increasing faster than the rent.
As a fellow san antonion I feel ya lol. I always think it's interesting when folks want to invest here, if I didn't live here I wouldn't.
The interesting thing about it is that it varies greatly (both in tax rates and how aggressive they are on increasing). I've had properties where they have doubled in a single year.
Protesting your taxes annually is a must but it doesn't fix it, just slows the bleeding. - Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes2yYeah, it appears that some of the people that are not from here think I’m making it up and I have no intention of putting in the effort, showing property address, etc. etc. to show them I’m not making it up. Lol.
Quote from @Aaron Bihl:
Quote from @Joe S.:
So I hear people talking big game about owning Properties long term and the cash flow going up.
In some states that are high property tax state like Texas here is what I have seen.
1. The taxes and insurance are increasing faster than the rent.
As a fellow san antonion I feel ya lol. I always think it's interesting when folks want to invest here, if I didn't live here I wouldn't.
The interesting thing about it is that it varies greatly (both in tax rates and how aggressive they are on increasing). I've had properties where they have doubled in a single year.
Protesting your taxes annually is a must but it doesn't fix it, just slows the bleeding.
As we both know protesting taxes only help a little at best. - Investor · San Antonio, TX · Member since 2017 · 344 posts · 268 votes2y
Quote from @Joe S.:
Yeah, it appears that some of the people that are not from here think I’m making it up and I have no intention of putting in the effort, showing property address, etc. etc. to show them I’m not making it up. Lol.Quote from @Aaron Bihl:
Quote from @Joe S.:
So I hear people talking big game about owning Properties long term and the cash flow going up.
In some states that are high property tax state like Texas here is what I have seen.
1. The taxes and insurance are increasing faster than the rent.
As a fellow san antonion I feel ya lol. I always think it's interesting when folks want to invest here, if I didn't live here I wouldn't.
The interesting thing about it is that it varies greatly (both in tax rates and how aggressive they are on increasing). I've had properties where they have doubled in a single year.
Protesting your taxes annually is a must but it doesn't fix it, just slows the bleeding.
As we both know protesting taxes only help a little at best.Lol yeah. Here is one of mine in canyon lake where the land value 10x'd in a year lol. Thankfully they havent found out about our 1400sqft addition yet.
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