Author Topic: the new 1% rule (property taxes and insurance)  (Read 993 times)

clarkfan1979

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the new 1% rule (property taxes and insurance)
« on: January 24, 2022, 06:24:52 PM »
As a new metric, if your annual property taxes and insurance are under 1% of the value of the house, it's a good thing.

Property #1: Property Taxes & Insurance: $5428. Property Value: $1,100,000. Percentage = .49%

Property #2: Property Taxes & Insurance: $3700. Property Value: $460,000. Percentage = .80%

Property #3: Property Taxes & Insurance: $4600. Property Value: $350,000. Percentage = 1.31%

I've got two under the 1% rule.

uniwelder

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Re: the new 1% rule (property taxes and insurance)
« Reply #1 on: January 24, 2022, 06:44:11 PM »
This sounds like a fun game.  Not sure if its a useful metric, but it is nice to keep those costs down.

Property 1--- property tax + insurance: $935, property value: 120k.  Percentage = .78%
Property 2--- property tax + insurance: $960, property value: 130k.  Percentage = .74%
Property 3--- property tax + insurance: $2880, property value: 350k.  Percentage = .82%

AccidentialMustache

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Re: the new 1% rule (property taxes and insurance)
« Reply #2 on: January 24, 2022, 08:05:11 PM »
I live in a high property tax state, so all the rentals I own, not to mention my own home are over 2%. At one point, our first house was north of 3%, closing in on 4% on that scale. Oh, that's just the taxes, by the way.

I don't like this game anymore.

August26th

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Re: the new 1% rule (property taxes and insurance)
« Reply #3 on: January 25, 2022, 02:33:27 PM »
Genuinely curious, is this just a metric for funsies?

Or does this somehow matter to you for your rentals? I have a home and a rental and would happily play if beneficial.

clarkfan1979

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Re: the new 1% rule (property taxes and insurance)
« Reply #4 on: January 25, 2022, 03:36:25 PM »
Genuinely curious, is this just a metric for funsies?

Or does this somehow matter to you for your rentals? I have a home and a rental and would happily play if beneficial.

In my opinion, it has a huge impact on your cash flow. When a rental has high property taxes and insurance, the price to rent ratio might appear to be favorable to a potential landlord. However, you need to dive deeper. Just because you can buy a house for 150K and rent it for 1500/month doesn't make it a good deal. 

For example, one of my previous childhood homes in the Chicagoland area sold for 140K in 2013. At that time, property taxes were $7850/year. Even if it rented for $1400/month, it wouldn't be a good deal.

It is also my personal opinion that high property taxes and insurance is a drag on appreciation. I was listening to a real estate podcast and they were talking about Sep 2020 to Sep 2021 data. The top 20 metro areas based on population averaged appreciation of 18%. Chicago was #20 on the list (dead last) with an appreciation of 11%. 

My primary home has property taxes and insurance at $3100/year. Current market value is 365K, so my primary comes out to be at .85%

AccidentialMustache

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Re: the new 1% rule (property taxes and insurance)
« Reply #5 on: January 25, 2022, 05:04:06 PM »
You aren't wrong. I see landlords in my area being villianized by the affordable housing crew, but I've had rentals and done the numbers and honestly, if we had any form of rent control going on (or taxes continue to increase at the rate they have been), small landlords would be losing money on rentals. I pass (or vastly lowball) a lot of for sales, because the numbers are a non-starter if you take the property taxes from the current assessment to the asking price. Near-$0 cashflow per year is a no-go, we aren't a hot market, there's no "you'll make it up in appreciation."

August26th

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Re: the new 1% rule (property taxes and insurance)
« Reply #6 on: January 26, 2022, 12:35:34 PM »
Primary: Taxes and Insurance:  $6100.  Property value = 950K.  Percentage = .65%

Rental: (itís a condo): taxes and insurance: $2600. Property value = 700K. Percentage = .38% (HOA dues of $421 monthly)

waltworks

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Re: the new 1% rule (property taxes and insurance)
« Reply #7 on: January 26, 2022, 01:37:58 PM »
In that case my house is an awesome rental. Value per Zillow $2.5 million (which is probably at least close). Property taxes+insurance $6k/year.

Woot, .24%!

It would rent for like $8k at most, though. Somehow I think my $2.5 million would work harder for me elsewhere.

-W

SailingOnASmallSailboat

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Re: the new 1% rule (property taxes and insurance)
« Reply #8 on: January 26, 2022, 02:00:22 PM »
Isn't this just a matter of property tax rates where you are? With insurance on top?

PMJL34

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Re: the new 1% rule (property taxes and insurance)
« Reply #9 on: January 27, 2022, 01:52:16 PM »
I feel bad for anyone looking to get into real estate and who is doing their best to learn and clicking on this thread and thinking that sub 1% property tax + insurance to price ratio makes a good rental. Or that it is in fact some new kind of 1% rule.

Clark, you are steering people in flat out bad directions. You and I know that Hawaii and Colorado are 2 of the lowest property tax states (New Jersey and Illinois being two of the worst). Furthermore, property insurance doesn't really fluctuate that much to move the needle across this country.  You are essentially saying to only invest in low property tax states which is absolutely wrong.

Furthermore, every house is already priced with consideration to the local property taxes, insurance, appreciation potential, weather, and everything else you can imagine. There are literally tons of terrible/overpriced rentals in Hawaii and Colorado and equal number of amazing/underpriced rentals in New Jersey and Illinois.

We ask for case study for a very specific reasons and it's the best metric we have at the moment.
« Last Edit: January 27, 2022, 01:54:13 PM by PMJL34 »

clarkfan1979

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Re: the new 1% rule (property taxes and insurance)
« Reply #10 on: January 28, 2022, 08:43:29 AM »
I feel bad for anyone looking to get into real estate and who is doing their best to learn and clicking on this thread and thinking that sub 1% property tax + insurance to price ratio makes a good rental. Or that it is in fact some new kind of 1% rule.

Clark, you are steering people in flat out bad directions. You and I know that Hawaii and Colorado are 2 of the lowest property tax states (New Jersey and Illinois being two of the worst). Furthermore, property insurance doesn't really fluctuate that much to move the needle across this country.  You are essentially saying to only invest in low property tax states which is absolutely wrong.

Furthermore, every house is already priced with consideration to the local property taxes, insurance, appreciation potential, weather, and everything else you can imagine. There are literally tons of terrible/overpriced rentals in Hawaii and Colorado and equal number of amazing/underpriced rentals in New Jersey and Illinois.

We ask for case study for a very specific reasons and it's the best metric we have at the moment.


I don't understand the last sentence. Do you want me to provide an example? I provided an example for property taxes. I agree that insurance probably has less variability than property taxes. However, I think there is enough of a difference to move the needle.

Kauai rental is 1.1 million. Insurance is $1296/year. Roof is 30 years old.
Fort Myers rental is 350K. Insurance is $1350/year. Roof is 20 years old.

Both rentals have a $2500 deductible on FIRE and a 2% hurricane deductible. The insurance on Fort Myers house is 3 times as much as the Kauai rentals,  relative to the cost of the house. The Fort Myers rental also qualifies for all the building discounts. It was built in 1991, but the construction is consistent with the new building codes of 2002 for hurricanes. Other houses in Fort Myers that were built before 2002 that had less than ideal construction have insurance costs much higher than me.   





uniwelder

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Re: the new 1% rule (property taxes and insurance)
« Reply #11 on: January 28, 2022, 09:01:08 AM »
I feel bad for anyone looking to get into real estate and who is doing their best to learn and clicking on this thread and thinking that sub 1% property tax + insurance to price ratio makes a good rental. Or that it is in fact some new kind of 1% rule.

Clark, you are steering people in flat out bad directions. You and I know that Hawaii and Colorado are 2 of the lowest property tax states (New Jersey and Illinois being two of the worst). Furthermore, property insurance doesn't really fluctuate that much to move the needle across this country.  You are essentially saying to only invest in low property tax states which is absolutely wrong.

Furthermore, every house is already priced with consideration to the local property taxes, insurance, appreciation potential, weather, and everything else you can imagine. There are literally tons of terrible/overpriced rentals in Hawaii and Colorado and equal number of amazing/underpriced rentals in New Jersey and Illinois.

We ask for case study for a very specific reasons and it's the best metric we have at the moment.


I don't understand the last sentence. Do you want me to provide an example? I provided an example for property taxes. I agree that insurance probably has less variability than property taxes. However, I think there is enough of a difference to move the needle.

Kauai rental is 1.1 million. Insurance is $1296/year. Roof is 30 years old.
Fort Myers rental is 350K. Insurance is $1350/year. Roof is 20 years old.

Both rentals have a $2500 deductible on FIRE and a 2% hurricane deductible. The insurance on Fort Myers house is 3 times as much as the Kauai rentals,  relative to the cost of the house. The Fort Myers rental also qualifies for all the building discounts. It was built in 1991, but the construction is consistent with the new building codes of 2002 for hurricanes. Other houses in Fort Myers that were built before 2002 that had less than ideal construction have insurance costs much higher than me.

Clarkfan79, I think you're intentionally skirting around the issue.  You know what the '1% rule' means and you've created a post for the 'new 1% rule', which is misleading to those who aren't in the know, to think there might be real advantage.  PMJL34 is saying that if someone really wants to see whether a house makes a good rental, it needs a case study written--- lay out the purchase price, annual costs, mortgage terms, market rent, etc.  With low mortgage rates, properties that don't meet the traditional 1% rule can still make decent rentals, so there aren't really any good simple metrics to use. 

Paper Chaser

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Re: the new 1% rule (property taxes and insurance)
« Reply #12 on: January 28, 2022, 09:52:16 AM »
I didn't interpret this post as being a serious declaration about rental rules of thumb. It just seemed like a simple game to me that's being thrown out to illustrate the importance of keeping overhead costs low when it comes to overall return.

clarkfan1979

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Re: the new 1% rule (property taxes and insurance)
« Reply #13 on: January 28, 2022, 04:08:31 PM »
I didn't interpret this post as being a serious declaration about rental rules of thumb. It just seemed like a simple game to me that's being thrown out to illustrate the importance of keeping overhead costs low when it comes to overall return.

This is pretty close to my original intention.