Any way to compare real estate from different states?

Question

A recent thread made my mind wander a bit. Is CA better than Oh?  MI better than OK? I don't know and I dont think "one size fits all" is the answer. 
   Someone mentioned the high taxes in TX as a concern. It is. How about the high insurance rates in Miss or other hurricane prone areas? How about the category 10 fire areas for insurance in certain areas? What about the areas that are high crime or red-lined for loans? See the problem here? Also, new to old properties?
     Here is an assumption. All homes are 5-7 years old. All are in comparable areas, expense wise. All are outside the ghetto or war zone. All are sitting with no deferred maint, etc,etc,etc.
   I find a home in State "A" that is rented for $1000 per month. I find the same $1000 rental in State "B". Here is my process:

State "A" To buy rental here, the price is   $100,000 on open market-current appraised value.( only using appraised value as a comparison tool). It is in a state where taxes are 2.5%.
Taxes are $2500 per year, or $$208 per month.

State "B"To obtain $1000 , the  rental is purchased for _________ on same market etc, It is in a state where taxes are 1% .

Mortgage rates on both new loans is 7%.With 30% down and 25 yr loan on each, the P&I payment on first example is $495 .The T in the PITI is $208 per month, so PIT in first example is $703. The rate per $1000 on 7% loan is $7.07.

Now the second example with 1% in taxes, the monthly is unknown. Lets' try a price of $125,000. At this price, the taxes would be $104 mo.To end up with the same PIT, I can spend $600 on the P&I. That is $105 more than needed on the first house.After putting 30% down on this example, I can have a mortgage for $87,000.( $105 divided by $7.07 is 14.85 and that is added to the $70,000 in first example.) If 87,000 represents 70% of the price, then price was $125,258.
    What does all this mean? IMO, I can spend up to about $125,000 in a low tax state and have same return after PIT. If I can do this, the states are equal. If I can't , then , from a cash flow point of view the first example is better, imo.This doesn't take   into account, any of the nebulous things. Which area will inflate faster, vacancy factor, area that is growing(sunny states as opposed to MI) or many other factors. 
     The only reason I came up with this process of comparison is for those investors that said"property taxes are too high". Maybe so, but it is only one of the factors or costs affecting return. I listed many of the other cost factors above that cause the variance. 
     I like to see the bottom line. I don't care if taxes are low or high, as long as the bottom line is better. Any thoughts? Rich, now in FL.

Vikram C. · Answer

Rich, I wasn't saying one should not buy in TX because taxes are too high.  I was saying that a significant difference in taxes seems to have a huge impact on NOI and one should take that into account instead of assuming everything will always even out.

Regarding your example, I think I have a better way of doing it.  I will start with the property values because that is the starting point in real life:

State A = $100,000
State B = $125,000

Tax A = $2,500
Tax B = $1,000

Other expense A = $4,000
Other expense B = $4,000

Rent A = $12,000
Rent B = $12,000

We are assuming everything else is the same in both places - appreciation potential, financing terms, etc.

So the easiest way to figure this out is to ask ourselves how much we are paying per dollar in income.

State A Cash Yield = $5,500 (12K - 2.5K - 4K)
State B Cash Yield = $7,000 (12K - 1K - 4K)

Cash return %:

State A = 5.5% (5500 on investment of 100K)
State B = 5.6% (7000 on investment of 125K)

We need not calculate anything else to figure out that per dollar of investment, state B is slightly better than state A, but not by much.

Obviously, these are all based on assumed numbers.  In reality, we will compare with real numbers.

Mike McKinzie · Answer

To get $1,000 rent on a piece of property that is less than 10 years old, here is what I have actually done.

In Fort Worth, Texas, I paid $103,000 for a house and get $1,050 rent.  My property taxes for 2008 were 3,318 and insurance was 471.00.

In Southern California, I have a house that I am receiving $1,100 a month for and August Comps are $350,000 to $375,000.  Taxes would be 3,500 to 3,700 and my insurance is 800 a year.

Here in SW Colorado, the Durango area, to get $1,000 rent, I would need to buy a 1,000 to 1,200 square foot home for 250,000 to 300,000.

I have an investor friend who is buying Riverside, California homes for 50,000 to 60,000 and renting for $1,200 a month.  The catch is he has to carry a side arm to collect rents and make repairs.  Plus, they are all repo's that he is putting 20,000 to 40,000 in rehab.  They are usually missing all drywall, all plumbing and plumbing fixtures, all wiring, light fixtures, etc...  He is basically buying a house that is in the framing area process of construction.  He even had his car stolen once while making repairs on one of them.  BUT, he is getting 1,200 for a house he paid 50,000 for, LOL.  Oh yea, to top it off, he can't get insurance on them (cash investor).  No thank you.

I think Rich has the right idea, you have to consider so many things when investing.  I like Texas and maybe Arizona.

Rich Weese · Answer

The other question is , where do you find a $1000 producing SFR with these characteristics in other states? It is just a fun comparison. Rich

Rich Weese · Answer

Thanks Mike. I agree with your excellent post with the comparisons. If you think I had the right idea, I ask for your vote on the thread. Others are invited to also. Thanks. Rich

Eddie Ziv · Answer

I bought it about a year ago. I have another one in Pflugerville that I bought for $117,000 about the same time and it is rented for $1,050. Prices did not move much since then if at all. It actually went slightly higher since the economy is quite good over there.

Vikram C. · Answer

Rich, it was your topic, not mine! :)

I think you should vote for my simpler way of analyzing the deal :)

I agree all this is academic.  If you know of a good cash flowing property that you don't want to buy because you might be on a cruise ship, please do let me know.  If the deal is good enough, I will pay for your next cruise.  (I think your wife is going to like my offer.)

Vikram C. · Answer

Eddie, when did you buy the Round Rock property?  What would its value be today?

Rich Weese · Answer

Vikram- My next cruise is already booked. 28 days, beginning in Hong Kong on Nov . 7 and ending in Sydney. It is 28 days to celebrate our 28th cruise. Rich. I'll vote for your method, .

Rich Weese · Answer

Eddie- That is why I used comps of same age, etc. We can all compare apples with watermelons and make one or the other look better. Rich

Eddie Ziv · Answer

Here is an example of two different properties that I own. The first one is in Round Rock , TX. The rent is $995 a month and I barley breaks even. In a matter of fact, if you apply all the conventions, it is a loosing property. It cost $105,000 and the annual taxes are about $2,400. The second property is located in Birmingham, AL. Total cost including rehab (New roof, New AC unit, paint, closet, tub treatment, etc) was $24,000. Monthly rent is $650 ( I have another one in Birmingham that cost about $10K more due to rehab that currently rents for $685). Taxes are around $750 anually. If you compare the two properties (the one in Texas with the one in Alabama), the cost to rent ratio is huge, At first glace you can tell that from a cash flow perspective, the Birmingham property is a sure bet, however there are many other factors that would show that in the long run, the Texas property may turn to be a better long term investment ( Age, neighbourhood, type of renters, potential appreciation, saleability, etc).
Many times where you have two different properties in two different states that rent for a similar amount, you are still comparing apples to oranges for the reasons mentioned above

Any way to compare real estate from different states?

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