Flip Thy House

The Joys of Texas Property Taxes

Things are rolling right along with the purchase of House #3. We had to bump closing back a dew days to December 22nd, but everything else is basically done and ready to sign off on, as the title company has already prepared the settlement statement and our bank has given me the go-ahead as far as using the line of credit for the purchase and repairs.

As part of getting approval from the bank to proceed with the purchase, I put together a basic packet of info, included estimated repair costs, time lines, proposed rent when renovated, estimated cash flow, all that good stuff.

One thing that was really hammered home was the impact that property taxes can have on monthly cash flow, especially here in Texas where we’re blessed with some whopping property tax bills. While property taxes are to some extent an unavoidable part of doing business in the world of real estate, they can (and should) definitely steer your search when looking for new properties, especially if you’re looking at rentals (or flips to sell to wanna-be landlords as opposed to owner-occupants).

When House #3 is renovated it’ll be a 2-1 650 sq. ft. home that should appraise for about $40,000. As I’ve mentioned previously, it’s currently appraised by the county at $5,830, and the property tax bill for 2008 is $154.99. While the county will eventually get around to realizing it has been renovated and increase the appraised value, that could realistically take them 4-5 years, and could even be longer than that.

The only other similar comp I can find is for a 2-1 600 sq. ft. home that sold back in June for somewhere around $35,000-$40,000 (it was listed at $45,000 when it sold but I doubt it went for that), which is appraised by the county at $36,500 and has a 2008 property tax bill of $1,080.

Both houses would cost roughly the same to acquire and both would rent for about $450/month. But due to the much lower appraised value and property taxes, House #3 will cash flow an additional $75/month when compared to the other house, solely based on the difference between property taxes, with all other factors being roughly equal.

That’s not quit-your-day-job money as far as the difference, but it’s a pretty decent chunk. And yeah, the above is all very obvious and straightforward, but it is definitely making me look at prospects in a new light moving forward, as far as what I want to tackle in 2009.

I think there’s definitely an opportunity to go after more beaters like House #3, especially if I’m looking to acquire rental properties. And the real opportunity there is that they’re not hard to find, as opposed to waiting around and sifting through the MLS trying to find something where the numbers can somehow work.

Really, though, at the heart of the issue is that I need to get more active about finding properties outside of the traditional MLS/listing agent universe. I keep dragging my feet on that as the one side of the real estate business I don’t enjoy at all is the whole, you know, talking to people thing. Love searching for houses, planning renovations, and even doing the actual work; hate having to somehow sell someone on why they should buy or rent the house or loan me money.

But I’ve got to find a way out of that mindset, in the current economic climate, and especially if I’m going to focus on really beat up, likely abandoned properties. Owners could most definitely use a little money in their pocket from unloading them, but they almost never try to sell them via an agent on the MLS, especially if you’re talking about an old abandoned house and small lot that might sell for $5,000-$10,000.