All Forum Posts by: Thomas Higgins

Net 0 home! @ finehomebuilding.com

Quote from @Gurjot Grewal:

Hello BP,

I am trying to understand how property taxes work in Columbus to better analyze property. From the government website, " Ohio law requires counties to revalue all real property every six years with an update at the three-year midpoint as ordered by the Tax Commissioner of the State of Ohio." Some general numbers I found online are 2.18% on 1-3 units and 2.78% on 4+ units (although I assume this varies on the neighborhood). Also that the tax will be on the appraised value. 

A few concerns I have: 

- This user describes having to pay the taxes of the past 2 years on his new purchase even though he didn't own the property those years. Is this common? https://www.biggerpockets.com/...

-  Pull permits in Columbus and do a major renovation you can lock in the current taxes for 15 years

- read posts where users' tax rates skyrocket after a reassessment 

Questions: 

What can I do to analyze property information more accurately taking into account the possible tax hike? 

Is there any way for me to figure out how much the tax might be raised? 

Will doing a major reno allow me to lock in tax rates for 15 years? 

Would I have to pay property taxes on the years prior to me owning the property? 

Thanks Everyone 

In my opinion, understanding taxes is the most important part of the opX section of underwriting. People often underwrite based on the current in-place tax rate and get burned with a reassessment. I always recommend that our analysts call the local tax assessors office as they are typically the best resource. Especially in smaller municipalities. 

Another thing you should look into is dropdowns all so known as drop-and-swaps. This process can be very tax efficient.

We have acquired a few multifamily properties in Columbus this month. I will be happy to connect you with our resources.

To answer your questions:

What can I do to analyze property information more accurately taking into account the possible tax hike?

Plan for multiple scenarios hard for you to know the new common level ratio if the city doesn't even know it.

Is there any way for me to figure out how much the tax might be raised?

This is a loaded question. There is historical data and ways to project future expense growth but best to stress test your model (base case, upside case, downside) To be clear your base case should be a reassessment linked to sale price unless you are using a drop down.

Will doing a major reno allow me to lock in tax rates for 15 years?

First I am hearing of this. I doubt it. If so please send me some literature on it.

Would I have to pay property taxes on the years prior to me owning the property?

Only if the previous owner didn’t pay it. Should be able to figure this out in DD and credit your closing costs.

Feel free to dm me and I can send you the formula we use to estimate taxes in Columbus. Currently out of pocket.

I just sent you an email. I look forward to learning more. 

Quote from @Osazee Edebiri:

Quote from @Thomas Higgins:

Loved this question as you can take it anywhere! Market, asset type, politics, Macro, Micro etc. Here is my take as I see it as a great opportunity to show the value of multifamily cash yield-focused investing. I will use two examples to illustrate the power of multifamily cash flow investing in markets with good cap rates:

In California, I buy a 3-million-dollar house (after accounting for buying costs and a reasonable LTV 1M/.33) seems about right. I find a great broker and am able to purchase based on local comps with a 4% cap rate (or cash on cash yield). I get a loan from an awesome broker at a 5% interest rate. I own it for 15 years and the market appreciates by 3% per year.

In Ohio, I buy a 20-unit property ($1M/.25 / 200k a door) for $3M and own and operate it for 15 years. Let's assume I buy this 20-unit building at a 6.75% cap rate and get a loan at a 6% interest rate with a 75% LTV.

I modeled both scenarios back of an envelope to illustrate the differences in each strategy. I should note that my sense for the California SFH space is that a 4% cap rate on a $3M home may not be attainable, and some people may argue 3% appreciation is too low or high. I am using it as a benchmark to show both ways of looking at real estate and not comment on the appreciation potential of an entire state.

I hope you find this helpful!

 Yes, I like this breakdown. California average appreciation is 6.77 over the last 39 years tough. 

 Here is an updated break down with 6.7% appreciation:

I would caution against investing based on historic YoY appreciation; it can lead to bad investment decisions.

Quote from @Bob Willis:

A few months ago I heard David Greene on the BP podcast start discussing this very point. I have listened to many many BP podcasts, but this was the first time I remember someone specifically taking potential appreciation into account when making real estate investing decisions. I happen to own properties in areas that have both great potential appreciation and have very little potential for appreciation. The funny thing is, the properties with little potential for appreciation cash-flow very well.

I guess the point I am trying to make defining what your investment goals are? Is it long-term appreciation vs short-term cash flow? I guess in the example given in the original post it would have been a more accurate comparison if you discussed the income that would have been thrown off over 40 years vs appreciation over 40 years... That's a more interesting analysis/conversation in my opinion.

I would be curious to know if your properties in the markets with great potential appreciation (purchased or recapped at today's fair market value) would have a high enough yield for debt to be accretive y1? Or would an operator need forced appreciation or value add (or buying below market) for deals to underwrite? 

I respectfully disagree. First rule of real estate investing is cash flow. Lower basis than market can often help achieve high enough yields for debt to accretive in todays market. 

Off market, and under market can help if your underwriting is sound. 

Loved this question as you can take it anywhere! Market, asset type, politics, Macro, Micro etc. Here is my take as I see it as a great opportunity to show the value of multifamily cash yield-focused investing. I will use two examples to illustrate the power of multifamily cash flow investing in markets with good cap rates:

In California, I buy a 3-million-dollar house (after accounting for buying costs and a reasonable LTV 1M/.33) seems about right. I find a great broker and am able to purchase based on local comps with a 4% cap rate (or cash on cash yield). I get a loan from an awesome broker at a 5% interest rate. I own it for 15 years and the market appreciates by 3% per year.

In Ohio, I buy a 20-unit property ($1M/.25 / 200k a door) for $3M and own and operate it for 15 years. Let's assume I buy this 20-unit building at a 6.75% cap rate and get a loan at a 6% interest rate with a 75% LTV.

I modeled both scenarios back of an envelope to illustrate the differences in each strategy. I should note that my sense for the California SFH space is that a 4% cap rate on a $3M home may not be attainable, and some people may argue 3% appreciation is too low or high. I am using it as a benchmark to show both ways of looking at real estate and not comment on the appreciation potential of an entire state.

I hope you find this helpful!

First rule of real estate investing is not location, location, location. It is: invest based on cash flow and don't bet on appreciation. There are a lot of amazing markets in the US. I would look for greener pastures! Happy hunting.

"how do I come up with the estimates for gas, electric, water, etc?" I agree with @Nathan Gesner it is always best to call the utility company or do desk research to determine how exactly gas, water, sewer and electric is billing and calculated in your market. 

Things to look out for: 

1. Meter minimums

2. Size of service and usage cost - x units of measurement cost Y dollars. 

3. Average use in your market per unit type or per person 

Terra Capital is also actively deploying our captive fund in Indianapolis. We closed two properties in Indy this month so far! We focus on Value add 2-15 unit properties in Indianapolis, Columbus, and Pittsburgh. Please do not hesitate to reach out.