Do taxes and insurance kill your cash flow?

Question

Hi, I am comparing single family home rentals in a few cities (Houston, Kansas City, maybe Memphis) for my first rental house.  Researching revenue and costs for pro-forma sheets....finding property tax and insurance are much higher in Houston than other cities--is my information good? Is this normal, and if so, how do you keep it from killing your cash flow, as compared to other cities? Thanks!

Rocky V. · Answer

Coming from a biased TEXAN - it's just the cost of doing business.  If a deal does not work when factoring in those numbers then it is not a deal.  I only have rentals in Tx and they ALL perform well.

Penny Clark · Answer

@Andrew R., yes taxes and insurance costs can kill your cash flow if those costs are not estimated properly BEFORE you buy. However, like you pointed out, some areas are higher than others. In Cali, property taxes are a set fee - unless you petition the tax assessor for a re-assessment of value. Insurance costs can be a little more flexible if you raise your deductible, bundle your properties under one carrier to qualify for multi-discount and outfit your units with preventative measures to cut risk. For example, install a locked gate around a pool; add a security system, rent only to non smoking applicants, etc.

But @Rocky V. hit the nail on the head - you make your money on the purchase, not by saving nickels and dimes on expenses.

Good luck!

Steve Endress · Answer

@Andrew R. I have properties in Houston and Memphis.  Costs are higher across the board in Houston and so are the rents.  Would be glad to talk about my experiences in those two places.

Robert Seltzer · Answer

I don't think the issue is one expense category.   For me the right approach is to build a model based upon TUMMI -- Taxes, Utilities, Mortgage, Maintenance and Insurance -- the numbers need to work based upon the specific property.  Hope this helps.

James Wachob · Answer

@Steve Endress would you like a few more in Houston? we have 10 available now

or in Memphis? we have 80 in the Mid-South

Andrew Syrios · Answer

Taxes and insurance suck, but our cash flow here in Kansas City is just fine.

Chris Dawson · Answer

@Andrew R. this is just one more reason why markets similar to Kansas City are such good, cash flowing areas.  Taxes are low (on the Missouri side) and insurance rates are low compared to other markets.

Fred Heller · Answer

@Andrew R.  You are correct. Property taxes in Texas are higher than other states, And insurance in Houston is also pretty high. Not sure about other cities regarding insurance. That may just be a Houston issue.

It can get particularly ugly if you're buying in a MUD because that can add $1300 or so to your tax bill. I had a listing for a home in the Bear Creek area last year that was in a MUD. The total taxes were something like $4800, which is $2000 more than my taxes in the city, and my home is worth double that one.

Charles Fletcher · Answer

Yes, taxes and insurance kill a lot of potential deals, but as Rocky said, that just means it wasn't a deal. Being in Coastal Zone 2 or an area where you need flood insurance increases insurance premiums here. It's hard to find deals on the MLS for that exact reason.

Do taxes and insurance kill your cash flow?

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