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Friday, February 02, 2007

OK Property Taxes Will Be Higher Than Expected

I did some more research today on property taxes for the Tulsa property I am buying. My original estimate for taxes was $371 per year, which is what the current owner is paying. Turns out, that figure is because the owner was able to buy the house so cheap. From what I can see on the Tulsa County Assessor's website, property taxes are calculated based on the purchase price (for new home owners) and the school district the property is located in. This property is located in the T-1A school district. Based on their Tax Estimate Calculator, my taxes will be about $1,000 per year. That's almost three times the current tax bill!

Using this new figure, it looks like my cashflow will be around $140 per month instead of $200 and my ROI will drop to the 16% range. This is assuming a standard loan amortized over 30 years. If I use an interest only loan, I can increase the cash flow by about $60 a month, which gets me back to my original numbers. However, I am very leery of interest only loans, so I'm not sure I will go this route.

12 comments:

Doug O said...

I know it crosses into a grey area, but any chance you could get the seller to reduce the recorded purchase price, and simply create a note between the two of you and have it secured by the property?

Shaun said...

Given that the seller just got her real estate license, I'm guessing no :-)

Anonymous said...

Shaun,
Hate to say it but this is an alligator waiting to eat you. 1. your out of state so not unless the prop manager is your sister, Id be careful. 2. Gross rents for the year are 9k. Real World expenses(managementfees,taxes,insurance,vacancies,maintenance,advertising etc) run %40-%50 nationwide. Using the low end of %40x9,000=3600 for operating expenses, leaving you with $5400 to service the debt. 5400 divided by 12=$450 a month to make towards a mtg note. If this is to work, your note better be around $325 a month.. At that purchase price, i dont think it will work.. Its an alligator at that price, Id politely RUN away from this "deal" & hunt for others using REAL WORLD operating expense numbers, not the guru numbers..

Shaun said...

Let's talk about the "real world" for a minute. You are using a generic, nationwide formula of 40%-50% for operating expenses. I am using the *actual* numbers for this *specific* property, not a generic formula or "guru" numbers. Sorry to say it, but I trust my hard numbers more than your estimate. Thank you for running away from this deal so that I could buy it.

Shaun said...

Oh, and by the way.. This is not my first rental property. I do have real world experience - just none with out of state properties. And I have no qualms about the property manager.

Anonymous said...

Calm down, I didnt know you were so attached to this deal & the property manager. Since you have real world experience what percentage does expenses run in Arizona? For a self managed property you could cut the percentage down.. You posted the numbers for feedback correct? I gave you feedback & you took offense. Sorry

Shaun said...

As I said in the comments on the previous post, everyone has their own assumptions they make when evaluating a deal, so I have no problem with your opinion of this deal. What bothers me is that you claim your method uses "REAL WORLD" (your emphasis) figures, yet it really uses a generalization based on a nationwide average. My method uses actual numbers for this specific property. I think anyone would agree that property-specific numbers are more "real world" than a general rule-of-thumb formula.

Anonymous said...

Well management,taxes & insurance will already cost you around 2300 for the yr. Add in a cpl more items such as vacancy & maintenance & youll be near %40percent of gross for the year.. But hey, if you can sleep good at night & Rich dad says it cool, then i guess it is
Best wishes

Shaun said...

Except "vacancy" and "maintenance" are two categories that you could budget whatever you want for. Your estimates are no more valid than mine because those values are based on guesses you, the investor, make. There is no "real world" number you can pick before buying because those expenses are reserves that you define. I could budget $200 per month for each and come up with a negative cashflow. As I said, each person has their own assumptions they use to figure potential cashflow. You use yours, I'll use mine, and I'll just agree to disagree. You wouldn't buy this deal. I would. Only time will tell whose assumptions end up being closest to reality. I welcome you to come back in 10 months and let's have this discussion again.

Starsky said...

Hey Shaun, I was checking out this yesterday & noticed you deleted what a anon had posted.

I looked at your numbers & what was posted by he/she & noted that you did not factor vacancies nor maintenance. Also nothing for Evictions etc. How come? Do you not feel that that stuff will happen during your ownership? Is it built in to the management fee? $140 is fools gold without giving regards to vacancies-maintenance-evictions-clean up.

Shaun said...

Starsky - or should I call you Anon? I've discussed the reasons for my decisions here and in comments on the previous post. We disagree and will continue to disagree. End of discussion.

Doug O said...

I agree that using nationwide averages is an assumption that will cause people to walk away from deals with good potential.
Having the real numbers for any particular property is always more powerful, as the average is calculated inclusive of the maintenance free and the distressed properties (ergo, why it is called an 'average') ...
Vacancy also is an average. I have a property in NJ where vacancy is non-existent. Even when a tenant leaves, I always have a tenant waiting to move in the very next day. Only enough time to clean the place.
So, am I naive for not factoring in vacancy when I ran the numbers? No, I knew the history of property and the area. 3 years later, and it has lived up to exactly what I expected going in...
Anon - those who are truly successful in real estate investing are those who know how to analyze each property individually, not those who use averages. If there is value in a particular deal, and you have all the information to put together an estimate that uncovers that value, should you simply walk because those numbers are not matching the national average? No - that's a dumb way to think. Ignorance is bliss....

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