50% rule apply if real estate taxes high?

Question

In Northern NJ the real estate taxes are quite high so was wondering if the 50% rule makes sense in this case or should we separate out the real estate taxes separately when doing analysis? For example saw a 3 family home with 14k in taxes. If one were to separate taxes out of the 50% what would be a good rule of them to use for expense percentage (not including taxes). 30%, 40%?

Jeff S. · Answer

In some areas the taxes are high and the values and rents are low. Looks can be deceiving here because the price is low and the rents looks good in relation but a roof job on a 20k house not much cheaper than on my 200k house with much higher rents.

Joel Owens · Answer

Some areas just have high taxes even with lower rents.

I look at the last 10 years of property tax assessments and how much they have stayed flat, gone up, or gone down. Also any special assessments or large mill rate increases that have been put off can affect the bottom line as a borrower.

You have to understand WHY a seller is selling?? Is it they are just wanting to retire, special assessments coming for water and taxes etc., capital replacements they put off to show better cash flow and now they are trying to put off on an unsuspecting buyer, short sales or foreclosures of buyers buying on lower basis and market rents will take a 6 month to 1 year drop before recovering to previous levels??

Has the are started turning bad with crime or is there a bunch of new permits which will cause oversaturation and pressure on older buildings to keep tenants??

Many things come into play and you have to figure out as a buyer if the problem that exists is still acceptable or something you want to overcome or not??

Bill Gulley · Answer

I never made a buy decission on any ratio assumption, I put a sharp pencil to it.

But, if taxes are high in an area aren't taxes considered in setting rents, meaning the fair market rent would also be higher and if that's the case, why wouldn't the ratio approach remain valid? :)

50% rule apply if real estate taxes high?

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