50% rule and Annual Taxes

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50% rule and Annual Taxes

Juan Rosado
Real Estate Investor · Dallas Fort Worth, TX · Member since 2017 · 66 posts · 9 votes

Hello!!

I am trying to analyze multiple properties each day. My goal is to house hack next year (buying a multifamily, living in one unit while the tenant pay the mortgage). I use the 50% rule to analyze properties and the "BP Mortgage Payment Calculator" to calculate mortgage payment. My question is with the Annual Taxes part of this calculator. Should I include the annual taxes number in this analysis, or just focus in income and general expenses? (income*0.5). For example, I was analyzing this Duplex the other day. 

Asking price: $329,500

Downpayment [(Asking price)*(3.5)]: 11,532

Loan Amount (329,500-11,532): 317,967

Loan Period: 30

Interest Rate: 4.38%

Mortgage payment: 1,590

Income: 3,600 (having both units rented after I move out)

Cashflow [(Income)*0.5 - Mortgage payment]: 210

Annual Cashflow: 2,520

CoCROI [(Annual Cashflow)/(Downpayment)]: 22%    (Please, could someone double check this calculation?)

Now, I found this "rule of thumb" to calculate Annual Taxes. It goes like this:

Annual Taxes = (Asking price) * 3% = (329,500) * 3% = 9,885

If I include this number in the "BP mortgage payment" calculator, the monthly mortgage payment will be: 2,411. Moreover, my numbers will go this way:

Asking price: $329,500

Downpayment [(Asking price)*(3.5)]: 11,532

Loan Amount (329,500-11,532): 317,967

Loan Period: 30

Interest Rate: 4.38%

Mortgage payment: 2,411 (with Annual Taxes)

Income: 3,600 (having both units rented after I move out)

Cashflow : (611)   (negative cashflow)

Annual Cashflow: (7,332) (negative cashflow)

CoCROI [(Annual Cashflow)/(Downpayment)]: (-64%)

Should I include the "Annual Taxes" in my 50% rule analysis? Why, or why not?

Thank you in advance guys, and I wish you the best in your real estate journey.

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Jimmy Dudley
Real Estate Broker · Westminster, MD · Member since 2017 · 159 posts · 101 votes
8y

The rule allows you to quickly sort through a large number of properties quickly. Once you get the number down and begin your more in depth analysis you can take the time to look up the real values needed.  

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  • Brian Schmelzlen
    Accountant · La Mesa, CA · Member since 2017 · 477 posts · 476 votes
    8y

    Juan,

    You should not be counting property taxes twice (which it looks like you are doing).

    Also, the 50% rule is a rule of thumb, but personally I think using actual numbers is better if you can get them.   Although it increases the time you spend analyzing everything, I think you should run your analysis twice (once with the 50% rule, and once with best estimates) and use the more conservative analysis.

    1Reply
  • Juan Rosado
    OP
    Real Estate Investor · Dallas Fort Worth, TX · Member since 2017 · 66 posts · 9 votes
    8y

    ...

    0Reply
  • Juan Rosado
    OP
    Real Estate Investor · Dallas Fort Worth, TX · Member since 2017 · 66 posts · 9 votes
    8y
    Originally posted by @Brian Schmelzlen:

    Juan,

    You should not be counting property taxes twice (which it looks like you are doing).

    Also, the 50% rule is a rule of thumb, but personally I think using actual numbers is better if you can get them.   Although it increases the time you spend analyzing everything, I think you should run your analysis twice (once with the 50% rule, and once with best estimates) and use the more conservative analysis.

     Hey @Brian!!

    Thank you for replying. I lost you when you said that I should not "count property taxes twice". One of my biggest fears is that at the end of my first year owning the rental property the annual taxes will be so high that they will drain all the income I have made. In this example I made $2,520 in Annual Cashflow. If by the end of the year I pay $9,885 in Annual Taxes then this would be a bad investment right?

    0Reply
  • Henry J.
    Monterey Park, CA · Member since 2014 · 157 posts · 80 votes
    8y
    Juan Rosado Hi Juan, 50% rule already includes the property tax. 50% rule is only good for quick analysis. Unless you know for sure your expenses will fall under 50%, it’s best to work out all the details (property tax, insurance, repair, PM, etc) so you know what you are getting into in each category. From my DFW experience, I’ve been spending more than 50% on expenses. Good luck getting into your house hack! Henry
    1Reply
  • Juan Rosado
    OP
    Real Estate Investor · Dallas Fort Worth, TX · Member since 2017 · 66 posts · 9 votes
    8y
    Originally posted by @Henry J.:

    Juan Rosado
    Hi Juan,
    50% rule already includes the property tax. 50% rule is only good for quick analysis. Unless you know for sure your expenses will fall under 50%, it’s best to work out all the details (property tax, insurance, repair, PM, etc) so you know what you are getting into in each category.
    From my DFW experience, I’ve been spending more than 50% on expenses.
    Good luck getting into your house hack!
    Henry

     Thank you Henry!

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    8y

    @Juan Rosado, now that you've got your expenses question sorted (on paper), how about what the numbers look like as a "deal"?

    ie. Why would you be prepared to pay $329,500? Is it actually worth a lot more?

    ie. If you're paying market value, where's it's real investment value ("biggerpockets")?

    I reckon Henry makes a good point (especially if Taxes are geographically high there): he's "been spending more than 50% on expenses" (not including Principal and Interest)! All the best...

    1Reply
  • Ryan Edwards
    Real Estate Agent · Edmond, OK · Member since 2013 · 50 posts · 14 votes
    8y

    I live in Oklahoma and as a general rule here you should estimate 1.25% of the property value for annual taxes. I have no idea where TX stands on that but it should be easy to see on your county assessor site.

    But yes. Do take in to account ALL expenses when figuring that. Anything that will cost you money to own the property which does include taxes and any HOA dues (if any) plus mortgage (and PMI) and insurance. If I were house hacking I would be fine paying something every month (maybe a few hundred) as long as it will actually cash flow when you move out and rent the other side. Not sure what your needs are but sometimes you can find a duplex with a small side and a large side and rent the large side to completely cover your expenses. Just remember to keep in mind that when you buy a place you are buying your neighbors too, barking dogs and all.

    1Reply
  • Sung Park
    Rental Property Investor · Philadelphia, PA · Member since 2016 · 191 posts · 165 votes
    8y
    Juan Rosado you should have actual numbers for property taxes by checking county website, no need to estimate it. The only expenses you should be estimating as a percentage of total rent income is vacancy, repairs/maintenance, and cap ex. As others noted, the 50% rule is a rule of thumb to weed out numerous properties from further analysis when you start your search. Don’t base any purchase on the rule. Get actual numbers and figure out what your actual cashflow will be.
    1Reply
  • JJ GrittsPro Member
    Flipper/Rehabber · Oklahoma City, OK · Member since 2013 · 121 posts · 67 votes
    8y

    @Juan Rosado  Several things....first use real numbers when you have them not rules of thumb. 50% rule is typically "hey really quick does this make sense", and if it does using that formula then you go further and use the real numbers. Never buy a property using just the 50% rule. Look up tax rates on county assessor or similar site they typically post mill rates. Also you didn't take out insurance that I saw. Hope that helps a little.  

    1Reply
  • Jimmy Dudley
    Real Estate Broker · Westminster, MD · Member since 2017 · 159 posts · 101 votes
    8y

    The rule allows you to quickly sort through a large number of properties quickly. Once you get the number down and begin your more in depth analysis you can take the time to look up the real values needed.  

    2Reply
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