One Dollar Allowance

At the end of last year, I received each property’s revised assessments for 2024 tax purposes. To no surprise, every single property drastically increased. A harder pill to swallow is to see how much it increased just from two years ago.

Higher home sales are great – if you’re in the market to sell. If not, it’s just fueling the local jurisdiction’s ability to increase their tax income. Again, this increase is great for a resale opportunity, but it’s not great when we’re content in our “buy and hold” at the moment.

Where I live, we received our property assessments recently as well. There was an uproar from the citizens. The Property Valuation Administration explained the increases and how they work, noting that home values in our area have exactly doubled since 2014. While their valuation process only occurs every few years, and home prices are increasing about 10% each year, people are seeing 30-50% valuation increases when they receive their notice.

COMPARABLE SALES

When determining a property’s assessed value, whether it’s for tax purposes or a bank loan or such, nearby home sales are used as the basis. Home sales denote what buyers are willing to pay (and likely what an assessor determined as fair market value) for a home. To determine your home value, you would need to look at sales in your neighborhood or close geographic area, for homes (and lots) that are of similar size with a similar number of bedrooms and bathrooms. There are factors that you can use to compensate for a different number of bedrooms and bathrooms, but it’s easiest if you find homes with similar data points.

In today’s market, you’re also going to focus on home sales in very recent months. The amount that a person is willing to pay, and the amount that a bank is willing to loan, is increasing regularly. A home value in 2021 is different than today’s.

HOW DOES A PROPERTY ASSESSMENT AFFECT YOUR RENT?

I wrote a post that went into the details of how our expenses have changed over the last year on these rental houses. It’s noteworthy, as a renter, to be aware of the changes in property assessments because it’ll help you anticipate and understand the need for rent increases that will be coming.

I recently saw someone complain that a landlord was raising rent with no improvements. Rent increases aren’t tied to improving the house (well, they can be). Rent increases are keeping up with the costs that are increasing for the landlord.

I’m a broken record on this, but I’ll continue to work to educate. When you rent a house, you see the one cost. You don’t see that the landlord is holding the mortgage. That mortgage likely has escrow that pays for insurance and taxes, which both increase every year. Even if it’s not escrowed, the landlord is taking the time to manage the income/expenses of the house and paying out the taxes and insurance.

You also don’t see the maintenance costs. When you call me to have a plumber come out, that’s an expense. I used to pay $125 for a service call and minimal work. Now that’s $200-375. Your rent is covering that possible future expense. Could you imagine if you found out you needed a new water heater in the house; would you have $1500 to hand over in a day’s time? As a renter, your rent is set to cover those future expenses.

We typically reserve rent increases for every other year, and it’s usually $50 per month. There have been some cases where a tenant has negotiated less, and a few other cases where we increased the rate more than $50 per month because of the drastic expense increases we incurred. I learned that if I don’t increase $50 every two years, I end up behind on the increases that are coming in future years. I don’t want to increase rent by $100 /month on a good tenant, so I try to keep with this schedule. I always explain that this increase is due to carrying costs. I also always provide a written documentation and give the tenant the option to move out. I’ve never had a tenant move out because of a proposed increase.

SUMMARY

If you’re interested in knowing more about these numbers, review the post that I linked. You’ll see that my annual costs increased by over $4,500 on these properties. You’ll also see that in some cases, where I prefer to only increase rent every two years instead of annually for tenant satisfaction, I’m not keeping up with the cost increases I’m incurring. House3’s two year cost increases of that property’s insurance and taxes total over $125 per month; I increased their rent $50 per month. I have other properties that can float that loss I’m taking there, but having happy, polite, and courteous tenants who take care of the property like its their own is more important to me than drastic rent increases and risking someone less vigilant moving in.

So the next time a landlord increases your rent when your lease term expires, understand that it’s to cover the expenses they’re covering for you to live there. When the property sales in the area increase, know that the landlord’s taxes are increasing, which equates to a higher rent needed to cover it.