hey BP - I've been looking around in Ohio for smaller multis and apartment buildings, and while the rents can be great, the neighborhoods that I like just have property taxes.
For example, I'm looking at 4plex in a B- neighborhood that is listed for $140k and rents for $2400/mo, but annual taxes are $6100 (4.4%!) .
In my calculations, I'm just allotting $500/month of rent purely towards taxes, so that I can stay conservative and see if the numbers still work (so basically I'm running the numbers assuming I actually get $1900/month in rent). Anyways, something still feels uncomfortable about buying a property with this high rates, and I'm worried things could increase in the future.
Anyone have experience buying a property with 4%+ property tax, or do you just avoid those?
If you did buy it, did you regret it?
Did you find a way to bring it down? Would love to hear everyones thoughts on this.
I've actually had this experience once. My first time investing, i didn't factor in the county/school tax in the area and was only looking at the local city tax, which was an additional $1000 per year. Ultimately the cash flow was still really good, but I did try to fight the county on the taxes - had a representative do a re-appraisal. At the end of the day, it still didn't matter because they gave every excuse to justify the tax $$ was correct.
After that, I typically am extremely conservative when I look at opportunities and do as much research as possible. When modeling these opportunities, I would use 5% of purchase price - even though it may not be realistic in different areas.
Keep in mind please, that if you are buying the property at a premium to a prior sale - i.e. paying $100K vs previously sold at $60K - the taxes may actually increase, because the government may actually use your price as a justified appraisal value.
I would think it would be deal-by-deal. Do the numbers make sense? Is there room for changes in taxes?
I don't know about Ohio since I am in Texas. Here, property taxes are fairly high since there is no state income tax.
It does not matter what the property taxes are on a given property. It only matters is if the rent you can charge covers all the expenses and makes you profit.
It sounds like you are assuming the same monthly tax amount across all the properties you are analyzing. That is not correct since the taxes vary. Use actual numbers, they are available from the county website since it is public information.
Every year, the county gives you a chance to protest the tax assessment. You should always do that if the property is assessed too high. Remember, you have to have facts to support your opinion of the property's value. The county won't accept generic answers like "My taxes are too high".
I hope this helps and good luck investing!
hi @Neil Aggarwal and @David Dachtera - thank you so much for the quick replies! I don't think I'll be able to get the taxes re-assessed, so I'll assume they'll stay the same for now.
However, even when allotting $500 of rent each month purely for this extra tax fee, the numbers still make sense.... which is why I'm going back and forth on whether I like this property or not.
I think I just have this irrational fear of buying a 4-unit out of state with incredibly high taxes... it's like I almost feel like a bad investor if I'm paying so much of my cash flow towards something like taxes.
I was curious to hear BP's general thoughts on high tax rates, and it looks like you guys have calmed my irrationality :) I'm going to look and see how much the tax rate has appreciated in the past decade or two, but if the numbers still hold, I will start moving the ball forward on it.
feel free to let me know if anything else comes to mind that I should consider when buying in a higher tax area! Thank you
buying a 4-unit out of state
Why are you buying something far from you? There should be properties in your area and those will be much easier to manage. I prefer to be close to my investments.
I regret my current primary residence. A single family home and I have a veteran's deduction to taxes, but my taxes are still near $8,000 per year. Also the tax appraiser just viewed my house last year and they tax appraise it at about $100,000 more than my real estate agent says they can sell it for in todays market! Go figure!
I've actually had this experience once. My first time investing, i didn't factor in the county/school tax in the area and was only looking at the local city tax, which was an additional $1000 per year. Ultimately the cash flow was still really good, but I did try to fight the county on the taxes - had a representative do a re-appraisal. At the end of the day, it still didn't matter because they gave every excuse to justify the tax $$ was correct.
After that, I typically am extremely conservative when I look at opportunities and do as much research as possible. When modeling these opportunities, I would use 5% of purchase price - even though it may not be realistic in different areas.
Keep in mind please, that if you are buying the property at a premium to a prior sale - i.e. paying $100K vs previously sold at $60K - the taxes may actually increase, because the government may actually use your price as a justified appraisal value.
I don't know about Ohio since I am in Texas. Here, property taxes are fairly high since there is no state income tax.
It does not matter what the property taxes are on a given property. It only matters is if the rent you can charge covers all the expenses and makes you profit.
It sounds like you are assuming the same monthly tax amount across all the properties you are analyzing. That is not correct since the taxes vary. Use actual numbers, they are available from the county website since it is public information.
Every year, the county gives you a chance to protest the tax assessment. You should always do that if the property is assessed too high. Remember, you have to have facts to support your opinion of the property's value. The county won't accept generic answers like "My taxes are too high".
I hope this helps and good luck investing!
That reason of property taxes high because no income tax is such BS. Florida has no income tax and has HALF to property tax Texas has, Tennessee has no property tax and has a 1/4 of the tax Texas has. Wyoming, same scenario...
well, NH has about double what FL has and I had previously thought FL property taxes were astronomical. Both NH and FL have zero income tax on wages. NH does have a state income tax for investments.
I wish there was a place where appreciation and property taxes were tax-advantaged like a retirement account, so that my "buy" price (after I've paid my taxes on the income used to buy it) is primarily what establishes any future property taxes I would have to pay, no matter how much the asset increased in value, over my long-term ownership of the asset, so that I'm not double taxed on my income and then taxed AGAIN based on the future increased value of the asset I purchased with that income.
It would be completely mind blowing if such a place existed, making that place truly unique for real estate investing, on the global stage, even so much so that a bunch of Billionaires from East Asia might want to buy those assets because they've found the best place possible to park money for long-term growth, while receiving CoC ROI for the duration of their ownership, compared to anything else on the planet Earth.
@Chris Mason - or better yet, property not taxed (or rented....) from the city/county. Imagine actually buying something, paying taxes on it and then owning it. But I'll have to live in my dream world and be a renter from the city/county.
Here in PA, there is a wide variance in the range of property taxes from 1% to 6%. Certain areas have higher taxes and that is a consideration for purchase. Sometimes the deal is so sweet that it makes up for the high taxes and you can always appeal a high assessment. Typically the lower tax areas are more rural and have less services and lower taxes.
In DE, real estate taxes are much lower, as low as 1/10%. In one areas with low taxes there is no public water or sewer, no municipal trash service, you contract with a company yourself, no natural gas service, no police service below state police and no municipal government lower than county level (so no municipal taxes in unincorporated areas). In some respects you get what you pay for.
government may actually use your price as a justified appraisal value.
They do this all the time in Texas.
Ok, maybe Texas just likes to spend money so it needs the tax revenue.
hey BP - I've been looking around in Ohio for smaller multis and apartment buildings, and while the rents can be great, the neighborhoods that I like just have property taxes.
For example, I'm looking at 4plex in a B- neighborhood that is listed for $140k and rents for $2400/mo, but annual taxes are $6100 (4.4%!) .
In my calculations, I'm just allotting $500/month of rent purely towards taxes, so that I can stay conservative and see if the numbers still work (so basically I'm running the numbers assuming I actually get $1900/month in rent). Anyways, something still feels uncomfortable about buying a property with this high rates, and I'm worried things could increase in the future.
Anyone have experience buying a property with 4%+ property tax, or do you just avoid those?
If you did buy it, did you regret it?
Did you find a way to bring it down? Would love to hear everyones thoughts on this.
Sometimes seeing the taxes can make anyone jump back, but the deal lies in all of the numbers. I am also in Ohio, and I know sometimes there can be high taxes, but if the total numbers work out and you receive a good ROI, than it might be worth it!
In Ohio home prices are very affordable and rent is very decent for the price of the home. This allows you to have some flexibility with the high taxes. In other markets it might not work out, but I see in Ohio that it often works out.
The important part is your monthly cash flow. Take a look at your CoC and see if it works out in your favor.
Feel free to send me a message, happy to help.
@Rohan J., I agree with the majority of the previous posters. This is a numbers based decision and you have to train yourself to look at this without emotion. Those taxes being what you consider to be unreasonably high is no different than the properties in your primary residence area, Los Angeles, being unreasonably overpriced. The difference is that in the area you are looking to invest, you can still cash flow. Analyze a bunch of deals out there so that you get used to the taxes being so high and numb yourself to the feeling that it gives you. The deal either works or it doesn't, period......
Good luck!
Hi Rohan,
Just my 2c, $500.00 a month for the property taxes is not enough. So, $500.00 X 12 = $6000.00, you mentioned they are currently $6100.00 a year and will continue to increase. You also have other things that could happen, like unexpected repairs. You would need to increase the rents every year.
Again just my 2c!
Good luck with your deal!
There are some areas that are not tax attractive. In Cali with prop 13 essentially the state subsidizes your property tax. There will be a big difference in returns in the long run picture when compared to many other states. This investing difference I measured awhile back and as I recall it was about 150k over 20 years TX vs Cali on same priced assets (500k). That is likely close to what the difference is in many states. Cali sucks for all other taxes except property taxes. That is huge for buy and hold rei though.
@Rohan J. Are you currently looking in the Midwest? What do you invest in?
@Rohan J. - I currently live and invest in a County with one of the highest property tax rates in the country. It just requires a bit of a mental shift (and getting over the fact that even if you owned the property outright, you'd still pay several hundred, if not thousand, dollars a month to the government, which would otherwise be in your pocket.)
If the numbers work, they work. If you don't like the thought of so much of your monthly 'mortgage' payment going to taxes, well, you're in good company. One thing to keep in mind is that your 'mortgage' payment might not change much in a lower tax area, but the percentage of it that is taxes will be much lower (meaning you'll wind up with the same cashflow, but likely have a higher return due to increased equity buildup.)
That's why nobody likes all you snooty Californians @Chris Mason :-P
But seriously, the state of California has over $400 Billion dollars in debt obligations currently, and is projecting a potential $2 Billion dollar budget deficit for this year. How confident are you that the property tax (and all of the other state tax) situation isn't going to change when that bill comes due? Especially when politicians cotton on to the exact situation you just described, with a bunch of foreign interests stashing money in the RE market? (often as more of a security play, or hedge against inflation, than actual 'investment') And with the current political climate, a lot of major cities run the risk of losing their Federal funding - which would further exacerbate the problem. I'm not saying I know what's going to happen, or even have an opinion on the policy. I'm just curious if you have concerns as an intelligent investor.
@Rohan J. - I currently live and invest in a County with one of the highest property tax rates in the country. It just requires a bit of a mental shift (and getting over the fact that even if you owned the property outright, you'd still pay several hundred, if not thousand, dollars a month to the government, which would otherwise be in your pocket.)
If the numbers work, they work. If you don't like the thought of so much of your monthly 'mortgage' payment going to taxes, well, you're in good company. One thing to keep in mind is that your 'mortgage' payment might not change much in a lower tax area, but the percentage of it that is taxes will be much lower (meaning you'll wind up with the same cashflow, but likely have a higher return due to increased equity buildup.)
That's why nobody likes all you snooty Californians @Chris Mason :-P
But seriously, the state of California has over $400 Billion dollars in debt obligations currently, and is projecting a potential $2 Billion dollar budget deficit for this year. How confident are you that the property tax (and all of the other state tax) situation isn't going to change when that bill comes due? Especially when politicians cotton on to the exact situation you just described, with a bunch of foreign interests stashing money in the RE market? (often as more of a security play, or hedge against inflation, than actual 'investment') And with the current political climate, a lot of major cities run the risk of losing their Federal funding - which would further exacerbate the problem. I'm not saying I know what's going to happen, or even have an opinion on the policy. I'm just curious if you have concerns as an intelligent investor.
Anything could happen but for now the new guy gets to pay the higher taxes initially. It is quite possible one guy pays $700 and the next door guy pays 7k. There is talk of adjusting prop 13 for commercial properties. For the rest it would be considered the 3rd rail. No one dares touch yet. Cali added 2 mil residents since 2010. They seem to take the tax base growth approach first. The deficit at 2 billion seems low and I recall this being easy double digits in years past. 2015 had a 8 billion surplus so they just spend it all whatever the number.
That's why nobody likes all you snooty Californians @Chris Mason :-P
But seriously, the state of California has over $400 Billion dollars in debt obligations currently, and is projecting a potential $2 Billion dollar budget deficit for this year. How confident are you that the property tax (and all of the other state tax) situation isn't going to change when that bill comes due?
I'm not at all confident that the state budget will not change. It probably will.
Changing Prop 13, however, would require an amendment to our Constitution & approval by 2/3 of the voters. The voters have actually modified Prop 13 twice, both times to strengthen it, both times via Constitutional amendment, and both times with overwhelming support of the voters: Once to allow parent to child transfers of the property tax basis, and a second time to allow grandparent to grandchild transfers of the property tax basis.
I think jacked up income taxes are more likely. I do not spend a lot of time looking at state tax returns, but fortunately at the federal level at least, you can offset rental income by writing off nearly all landlord expenses.
To the commenter that jokingly refered to Californians as "snooty", I find that odd as from my several years living in California (in the 1990's), they were the most open and friendly I have seen all accross the country. I was born and spent my childhood in the midwest. Teen years in CA. Early 20s in Seattle, Las Vegas and New Mexico, then South Florida and New Hampshire. I connect so much with the free spirit and open Californian. The worst for my personality are the New Yorkers in FL because they come of so brash and it was culture shock. And then coming to NH I found everyone keeps to themselves and everone seems so private_reluctant to open up. Sorry, do not mean to offend anyone, just sharing my personal first impressions of certain areas.