All Forum Posts by: Stan Hill

@Carrianne Mucho

Excellent Carrianne! I was born and raised in California and had forgotten about Prop 13. In fact, I never knew the growth maximum specifically set at 2% per year. Here it's 10% per year only on your primary residence- for investment properties, there is no 10% increase limit. That certainly makes it a distinctly different game in the two states. Know your local market indeed!

 Mark, I think there's certainly no coincidence property assessments are announced so far ahead of when the tax is actually due. I can say this with certainty- they'll never make any taxes due on election days. I'm sure you get my meaning.  ;)

With regards to "where to go", that's a good question. We have made one small step as a hedge to that end. We're purchasing a nice one-acre residential lot in West Sherman. One of two things will happen. It will appreciate in value and I'll sell it later for a profit. Second, when we do get that big rise in values here in McKinney, I figure we can always sell the McKinney house, build a smaller house that reflects our kids moving out (I've almost got both out the door- hopefully this year they'll be producing on their own) and the overall desire I think many of us get to simply and downsize as we get older. 

I noticed that when I looked at places I would build NOW, the lot prices were already very pricey and the motivation to move was greatly diminished. That said, time is clearly on our side in north Dallas. At any rate, I came to the conclusion that if I buy a nice lot now, by the time I need it, I'll have a nice chunk of the cost of a new home paid for, and hopefully at a lower factor than if I wait for when I do need it. If prices in McKinney go where I think they're going, Sherman isn't going to be much cheaper. In fact, it can be pretty pricey to get into a nice, newer neighborhood up there already. I am hoping that by the time we're ready to sell, I will have learned enough that I can either hire all the trades myself or perhaps do something like a ubuildit.com route to keep my building cost lower. That's all down the road, so I don't worry about that much. A solution usually presents itself.

With regards to MFRs, that's the big wild card for us. We've bought two duplexes this year. One was classified as SFR- house with "guest quarters" or "mother-in-law" suite in back. We lucked out, the two buildings were separately metered for gas and electric. I haven't seen the assessment for 2016. It had an assessment number for 2016- until the county got wind of it being sold. Now it shows ZERO for the 2016 assessment. My guess is they haven't gotten around to figuring out how bad they're going to nail me.

In looking at additional MFRs, I see assessment values well below market prices. I don't see that holding. When analyzing properties, I plan on assessment value equal to the purchase price. I figure once the county sees it's not a homestead, they're going to put the pedal to the metal and hit me as hard as they can. We stick to lower end properties, so I'm typically seeing current assessed values, say $50,000 with a projected acquisition price of $80,000 - $100,000. I think the thing is not so much being MFR, but the property not being a homestead. We just looked at an SFR that was a great deal at $100,000 and was assessed at $50,000. But again, I feel I need to assume assessed values are going to creep up.

You mentioned auctions. I've heard stories similar to what you saw. I have a keyword alert for "McKinney". Often, the person mentioning McKinney is from out-of-state. One guy was from Australia! So 60% of auction purchases being foreign isn't surprising. 

Clearly having so much investment capital coming in WILL reduce CAP rates. How could that not happen? Hopefully it also leads to some decent appreciation that enables an escape with some good gains in exchange for the diminishing monthly income returns. Anyway, that is my HOPE.

The good news is we're in one of if not the best markets to be in real estate. The best we can do is try to find deals and pay attention when it comes time to sell.

Excellent thoughts, Leland. I hadn't thought of property taxes keeping property prices at a reasonable level. How could it not be a factor?

You also raise an excellent point regarding our lack of state income tax. We should be grateful for that. I suspect that we're better off than a state like California where you have property tax and income tax.

I live in McKinney and have been looking at this situation from a similar perspective. We bought our home here in 2000. Property taxes stayed pretty flat until the past few years. It is my understanding that the maximum a person's homestead taxes can be raised is 10% per year- Texas state law.

I'm with you. I don't think we're in a bubble. So I've been doing some extrapolation. I assumed a 10% yearly increase in property taxes (you've done the math, seriously, I'm grateful it's 9% and not 10), applied the rule of 72 and have realized that in about 7 years, my property taxes will double. We're a little above $5,000 for 2016, so a $10,000 property tax bill is significant in my opinion. The good news is, if the property tax continues on its trajectory, it's because property values are increasing. I still believe that relative to national averages, and certainly places like California (average home price $448,000 versus $146,100 in Texas), we have PLENTY of room for appreciation- especially in the north Dallas area. As you noted, the market will equalize, at least to some degree.

At some point, market forces are going to scream at those of us in the DFW area- SELL! When a bubble finally does form, and our house that is now worth about around $250,000 goes to.... who knows, but I'm guessing somewhere from $500-$700K, I've already told my wife. We WILL sell our primary residence. The question in my mind is, what about rental properties? We're currently at 8 rental units. I don't know if we'll sell everything, but I truly do believe at some point, north Dallas, if not north Texas or more of Texas, will in fact have a bubble form and we as investors need to think of an exit strategy not only for our personal residences but investment properties as well.

I am originally from California. A very dear friend owns and lives in a 1960s middle class 3/2/2, around 1,600 s.f. I forget the year (I think it was around 2007), but his realtor friend told him he could get $550,000 for that house in a week. To me, that is a classic SELL signal- a ridiculous price available quickly Of course, it also depends on other factors in the market at the time. That said, we're all aware of the California bubble. He regrets not selling. He could have taken the $550,000 and bought a similar (if not the very same home!) home a few years later for $250,000.

This leads me back to your main point- the role of property taxes in forming a bubble. I think it's significant. I am certainly no expert and haven't quite figured out how that brings a halt to the market. But I think we both (and probably others here) can agree it will be a factor. 

Furthermore, I ponder how this affects investors. Example: we bought a duplex in the Fort Worth area. Tarrant County is proposing an over 50% property tax increase! The new assessment would be $30,000 more than our purchase price and $15,000 more than the value appraised at the time of purchase. I submitted a two-tiered protest, using of course the purchase price as the first line of defense and the appraisal as the second. We'll see how that goes.

The point of this bit of a tangent is, what will be the market rent increases be in comparison with property tax increases? My guess is over the long haul, property tax increases will outpace market rent increases. So how will that affect the investment property market, when looking at it through the lens of purchase price, possible diminishing monthly income and increase in values. That's a tough prediction to make- especially given how in a city like McKinney you can forget the 1% rule for rentals as pretty much impossible, while in the Tarrant County I wouldn't touch anything that wasn't significantly above the 1% rule- 1.4% or better is my preference.

Anyway, excellent topic and can of worms you've opened up here. I look forward to more people's thoughts on this.

Kyle: 

I especially love your idea of getting into multifamily via making it your primary residence.  I believe you need only make it your homestead for one year before moving on to the next. When one thinks about it, just maximizing that strategy alone virtually guarantees long term wealth accumulation- not to mention your plans to flip. And another great point of course is it maximizes your leverage by bypassing the 25% down payment requirement for MFRs.

 Whew, thanks. I've read your posts, you know your stuff. I had a moment of paranoia after reading what you said.

All is well.  :)

Heya Jeff.... why is going from one pre-tax retirement plan to another pre-tax retirement plan a taxable event? It sounds like a rollover to me, which is non-taxable. We did this with a 401(k) as a rollover and paid no taxes. What am I missing?

 Robert, he and his partner have (at least) two books out, titles like The Real Estate Wholesaling Bible and another one on rehabbing, same title format. I've read both of them and there's some decent info in there. Of course, there's a lot of good books out there. 

 Texas will change them, they won't change Texas.  ;)

 I read a book called My Life and 1,000 Houses, by Mitch Stephen. He's from San Antonio and literally did 1,000 deals. He did a LOT of it with credit cards. He had times when he was carrying $200,000 just in credit card debt, playing the game you're talking about on a massive scale. 

To me, it's always about the math. Of course, people have brought up good points like  watching your credit score, etc. If that's not an issue, go for it. $10,000 really isn't much credit card debt- and I say that as someone who has none.