High property tax areas and their drawbacks

Corey Dulimba · 2019-12-22T07:41:49-08:00

I live in Austin, TX which has high property taxes, currently 2.19%. I'm working on my first deal and started thinking about property taxes through the years. I'm looking at purchasing ~$200k SFH for long term buy and hold, typically these houses with the county are under valued so its not uncommon for the appraisal value every year to increase by 10%, or more, if there are not covered under homestead while the property is appreciating at an ~4% rate. This would kill my already minimal cashflow if every year they increase this much. I can protest the appraisal and I have done that with my primary home and will plan to do so with my rental. I know I can write off the property tax but even with the write off its still a considerable amount of $ out of pocket every year that will continue to grow. I can increase the rent yearly but know I won't be able to increase it by 10% every year.I wonder if there are other strategies to minimize an ever growing property tax bill or peoples general thoughts on how property taxes long term fit into their long term buy and hold strategy. thanks!

Aaron K.

Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes

6y

In places like TX it keeps inventory moving and hasn't been a huge issue for you yet as you have no income tax so that helps. In CA we have a law that limits the assessment increase which keeps property taxes much more stable. For places that don't have that you need to stay on top of it and protest whenever possible. I thought Austin would be higher than 2.19% though

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Chris Coleman

Rental Property Investor · Washington, DC · Member since 2015 · 429 posts · 393 votes

6y

@Corey Dulimba

Unfortunately there seems to be no magic bullet in Texas. You really have to build the estimated property tax increases into the cash flow calculations and give yourself plenty of margin to work with.

I own property in Houston and DFW, and simply plan for the appeal each year...it’s just part of business if you own rental property in Texas. I would not go too slim on the margins, or you can easily find yourself negative for the year.

Fortunately, there have been some regulatory revisions this year to how assessments are be done, which should give us some relief.

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Jerel Ehlert

Attorney · Austin, TX · Member since 2014 · 888 posts · 759 votes

6y

Texas has no income taxes, so the jurisdictions must rely on property taxes to fund services and projects. Taxes get passed through to tenants to the extent market forces allow.
Property taxes also help insulate against rapid appreciation in a bubble environment like in 2004-08. Because taxes are factored into how much property a buyer can afford, it has a retardation effect when there are a back-to-back transactions. The "correction" in Texas was much less dramatic than in many California and Nevada markets.

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Bryan Noth

Realtor · Austin, TX · Member since 2016 · 1k+ posts · 1k+ votes

6y

@Corey Dulimba it is hard to find many SFH in Austin proper that cash flow on paper for traditional buy and hold. There has been some emerging success with rent by the room scenarios for SFH. It has potential to increase cash flow but also increases number of leases and management oversight. This model has also gained quite a bit of ground in college towns over the past several years because landlords / PMs do not have the headache when a single tenant vacates and leaves the remaining tenants to pick up the missing portion, the landlord / PM simply rents out the room to a new tenant.

In earnest, I do not look at Austin as a high cash flow for SFH rentals in the traditional model. Unless you bought when the property was significantly less expensive or put higher cash down it's a rarity. However, as @Jerel Ehlert commented on, property taxes can make your investment on the appreciation side perhaps better protected. The appreciation gained on owning property typically far outweighs the cash flow when comparing the two variables in a year over year analysis. Not to mention that appreciation can potentially be tax deferred if you exchange into another property later on. $100 a month cash flow is $1200 a year, even if rent increases 5% that brings your total to $1260. Whereas 5% appreciation on $200k home adds $10k in equity.

MF can have better ratios for cash flow, but the buy in cost is often quite steeper and most lenders also require 25% down as well. But, multiple tenants on a single property tax bill is also nice.

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Daniel J Dominguez

Investor · Houston, TX · Member since 2017 · 71 posts · 38 votes

6y

Due to the rapid increase in appreciation due to low inventory in SFH, they dont make for the best rentals from a cashflow standpoint as mentioned by @Bryan Noth, unless you buy unusually low. If your looking for cashflow i would suggest entering the small multi family space in C or C - neighborhoods (2-5 units) and entering SFH as a longterm equity play. I know for a fact Austin is appreciating at an insane rate. In Houston theres no shortage of properties and were forcasting to appreciate about 10.5% over the next 3 years according to Houston Real Estate Market Trends

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Corey Dulimba

OP

Investor · Austin, TX · Member since 2019 · 7 posts · 3 votes

6y

Thanks everyone for your comments. I know SFH don't have the best cashflow but was hoping to get at least $100 a month. I know this is going to be tough in Austin. I was planning on my putting 25%. I keep on hearing about multi family homes cash flowing more so will definitely look into this more.

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High property tax areas and their drawbacks

High property tax areas and their drawbacks

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