Sell or hold- cashflow destroyed by property taxes

[Luke Hoffman]

We own two rentals in a small town in Indiana. Property values have gone up approximately 40% in the last two years. We bought a 3bed 1 bath for 125k with a rent of 1,100. We also own a 4bed 2 bath for 137k with a rent of 1300. Over the last two years our property taxes have doubled, if not more. This has put a cut on our cashflow and we have had some major expenses, like a new roof,  water heater, bathroom remodel, and kitchen remodel all done at the 3 bed house. With all that being said, the 3 bed house is worth approximately 180k due to the location and lot size. The 4 bed house is worth approximately the same. Would it be better to 1031 both of these or one of these into a different house in a different area. What is everyone’s thoughts?

[Jon K.]

You know what else has gone up significantly the last two years? Interest rates.

In order to provide good advice, we need good numbers. What is your actual average cash flow now? When considering capital expenses such as that new roof, water heater, etc, I suggest taking into account the life span of those things. Meaning if you expect the new water heater to last 8 years and it cost $1,200 to purchase and install then it cost you $12.50 per month on average and that's the number you should use when calculating monthly cash flow.

Being hit with a lot of capex early on when you own a rental can have an impact on your reserves for sure, but the nice thing is once they're done you should have X years before the same expense comes up again. Yes it affects your short term cash flow, but averaged out over the long run (decades) gets you a more realistic view of what your actual cash flow looks like.

And what would you expect to net after fees if you were to sell these properties?