FHA Renovate to Buy & Hold: How do Houston Property taxes work?

Question

Hi All,We are getting ready to pull the trigger on a property in Houston which we are going to renovate a single family home with the FHA 203k loan into a four-unit property. We've got the loan, checked that this strategy will work with our lender, and have found a property.Currently the tax rate is 2.686 and taxes on it are around $2700/year. If I estimate the ARV will be somewhere in the $650k range, it will be taxed around $16.7k/year if that's what Market Appraisal Value is from HCAD. When using the BiggerPockets rental calculator, what tax costs should I use? I will have the homestead exemption if I live there for 2 years which we're planning on doing but not after... How does this work?Does anyone who does renovations in Houston know how the taxes typically work after renovations? I'm thinking the loan for the property and tear-down and renovation will be $555,752.00 (including FHA's 15% buffer and Loan Consultant costs. IF property taxes are indeed going to be $16.7k/year, 6% vacancy, 5%maintenance, 5% capex then I'm not "cash-flowing" in the BP way with an expected monthly income of $5600 (if we aren't living there).Vacancy: $336CapEx: $280Insurance: $300P&I: $3,094.74Repairs: $280.00Electricity: $20.00Management: $560.00Property Taxes: $1389.42Per month (if we have taxes at $16.7k/yearIf the taxes are $5000/year instead, it cashflows considerably. Thoughts?

Tim Shin · Answer

Thanks Brandon! This is an up and coming area in Houston with lots of duplexes and ttriplexes but few have been renovated in forever! Those guys are clutching to them with a death grip or selling for non profiting prices. Would you buy a property if it didn't cash flow over saving for operating expenses for the first 3 years?

Brandon Turner · Answer

Hey @Tim Shin - this is a tough one. But I think you'd have to account for what the tax COULD be. I might look around for other very similar properties in the area, that are already nice, and look up their tax payment. Maybe that will give you a better idea?

Tim Shin · Answer

Hi @Michael Le Thank you for the response. I hadn't thought of the cost of lawn maintenance and garden area upkeep! Garbage collection is supposedly included as part of taxes in Houston I hear... but I could be wrong. Anyone know? How much do you think common area water costs are?It looks like massive taxes in this area may kill this deal. It may not cashflow in the traditional BP sense after saving those amounts for expenses if I get a 250% increase in taxes after renovation to $13,043/year. But, it does flow positive after PITI + management...Ugh. Any thoughts @Brandon Turner?

Michael Le · Answer

@Tim Shin, if it's a complete reno then I think your repair/capex is more reasonable. Are you sure you've captured all the expenses? Speaking of common areas, do you have costs in there for lawn maintenance and general garden upkeep? What about garbage collection fees? What about water? Even if the units are individually metered, there would still be common area costs I assume?As for the tax question, the tax cap is only for your residential homestead.http://www.hcad.org/Help/CappedValuesFAQ.asp"Does the capped value apply on property other than my homestead? No. The intent of the law is to address the needs of homeowners by making the taxable value of their homes more predictable. This statute only applies to residential homesteads. All other properties, like rental and business property, vacant land, or personal property, are generally appraised at their market value."

Tim Shin · Answer

@Michael Le Hey thanks for the response. For some reason, I didn't get a notification when you responded so sorry I am responding late.Do you know how to tell if there is any cap of max 10% when you move out? I spoke to another investor today and he seems to think that if you fight it every year, they can't max you more than 10% even if you are not owner occupying.As for the $20 a month, I was planning on having the tenants all pay electricity but I figured there would be some sort of common area light that might have to be paid for by the landlord, like an exterior light or something for safety. Is this true? This renovation will really be a tear-down to the foundation and build new, so the year of the build would be 2015/2016. That's why I chose such low cost numbers. Do you think that is unreasonable? No HOA fees and no deed restrictions.

Michael Le · Answer

The Appraisal District will review the Appraisal Value on a yearly basis. So you might get the lower value your first year (based on your purchase price or the previous value) but it will likely be raised after your rennovations. If you have homestead on there then you will be capped at a max of 10% increase but once you move out I don't think there is any cap.Also, you have electricity listed for $20/month. Where are you getting those numbers? Even if that is just for the single unit you're planning to live in, that seems extremely low. Is the house as it is now averaging $80/month for the entire year? Also, a lot of people don't think 5% for repairs and 5% for capex is conservative enough, nor 6% for vacancy. You might get hit with more than that depending on the age of the house and when things were last replaced. And are there HOA fees?