Rental Property Investor · Newport Beach, CA · Member since 2017 · 218 posts · 138 votes
Hey BP,
I'm finishing up my first BRRRR deal in Indianapolis, and I have a great team in place. BUT, I'm thinking about moving to a different market.
Indianapolis has a special real estate tax equal to 2% of appraised value for non owner occupied homes. Owner occupied is 1% of appraisal.
This 2% of appraisal can make the RE tax on a B-Class, $140k ARV 1% rule home equal 2 full months of rent ($2800)! Then you add on 1 month for PM leasing fee, the PM's % of rents on other months, repairs, mortgage, etc. and the cash flow is greatly reduced as a result.
My question for you all: why not invest in a market with lower real estate taxes? Like certain markets in Alabama and Louisiana where RE taxes are closer to 0.50% of appraised value.
For the same $140k ARV, 1% rule home, that would mean real estate taxes of $700, a $2100 savings! Even 1% would be a $1,400 savings, all of which would end up as cash flow on the bottom line.
Multiply that by a portfolio of 30-40 rental properties and you're talking about an extra $42,000-56,000 of cash flow per year!
Indianapolis property taxes are calculated by the One-Two-Three Tax Cap Rule. The only one we're talking about is the 2% cap calculation without homestead exemption. The 2% cap is saying that a non-owner occupant should pay no more than 2% of the tax assessed value in property taxes annually (not appraised value) less special assessments. If the Indy tax assessors are somehow as accurate as appraisers, please let me know and I'll create a new automated real estate appraisal company and kill the Zillow Zestimate once and for all.
Indianapolis has a relatively low tax rate compared to most other areas. Using the same figures for MD, the tax base for a 140K home is amount the same.
Also depending on how you hold your property property taxes can be a deduction.
Indianapolis property taxes are calculated by the One-Two-Three Tax Cap Rule. The only one we're talking about is the 2% cap calculation without homestead exemption. The 2% cap is saying that a non-owner occupant should pay no more than 2% of the tax assessed value in property taxes annually (not appraised value) less special assessments. If the Indy tax assessors are somehow as accurate as appraisers, please let me know and I'll create a new automated real estate appraisal company and kill the Zillow Zestimate once and for all.
It's not a bad tax rate compared to most markets and usually, the tax assessed value is lower than the actual value, this is not true in all cases so I do see your point. BUT you can file for a reevaluation too and I have had luck getting the appraisals lowered. Also we right that off 100% too as expensive on our taxes.
@Brian Van Pelt Hi Brian, thanks for the good point - I agree that the taxes are deducted from you income before calculating after tax income. But it’s better to have lower taxes and higher after tax income in most cases, yes?
I agree that, in some cases, the tax assessment on a house will be low and thus your pre-rehab purchase price (which is used to immediately reset the tax assessment), won’t have an impact.
A refinance appraisal has no impact on tax assessment value, but a transfer of ownership does.
I guess I'm talking more about buying houses from the MLS. Those purchases will increase the tax assessment value up to your purchase price right away, and thus the 2% tax is charged on your total purchase price, making it a of drag on rental property cash flow.
@Jason Tressler Hi Jason, thanks for the input - have you ever had luck reducing your tax assessment to a number below what you just bought a house for? As in, off of the MLS?
@Nick Giulioni et al, I agree it’s better than some places but I think my point still stands - isn’t it better to pay 0.50% than 2%? If I can get the same general characteristics for the other variables on the investment?
I’m thinking it’s worth changing markets, since I’m not physically in Indy anyway, and capture that 1.5% of assessment value per year, in perpetuity.
Just wanted to see if anyone had a similar thought and if there was anything that I wasn’t considering, like insurance or repairs etc being more expensive etc, that would offset the gain from lower RE taxes.
What markets are you thinking about? Seems to me that it's hard to find the characteristics of Indianapolis in a lot of places that won't have taxes in the same ballpark.
@Sean McCluskey - I'm going to agree with you. If you do move to another market, I kindly ask that you send me any and all Indy leads you have. Thanks! :-)
I think you are missing my point , At the end of the year the difference in tax rates do not matter, or only by a couple hundred dollars. So why move out of a market you know and have done the research for ? Talk to your accountant and crunch the numbers for similar properties.
Here's a proforma of what I'm talking about.. I think my problem is that I've started getting impatient and I'm considering buying rentals via making low bids on the MLS. This would mean less forced appreciation, and an assessment value closer to the ARV than when you do a BRRRR on an older house.
But to me, this delta based on real estate taxes, multiplied across multiple properties, seems meaningful. So I'm wondering if people are managing to pay 1%? Or if there is something that I'm missing that really makes the # of available deals much better in Indy than say, Birmingham or Montgomery AL?
Because....rents? Real estate taxes are also high where I own. But rents are also pretty high. It’s not just the expenses, it’s about the net. And I can self manage by investing where I live. And it’s where my knowledge also lies.
As of 5/2019 "No matter what kind of real estate business you are in, you can deduct all of the mortgage interest and property taxes paid on your investment properties, just like you do for your personal residence. "
This means there is ZERO cost to you for Monthly Taxes on an After Tax Basis and for the RE Taxes % of Assessed Value
Sure you pay on a monthly basis, but it's like putting money in a savings account, it sucks while you have to do it, but you don't complain at the end of the year when you do your taxes.
I factor all my calculations on a After Tax Basis which is the true measure of the delta of a deal.
But if that's your comfort level it's your comfort level.
@Brian Van Pelt deducting all your property taxes doesn’t mean you get it all back at the end of the year. If that were the case there would never be a need for an investor to challenge the assessed value. You only “get back” your tax rate percentage of the taxes paid. So there is a cost.
Edit: I am not an accountant nor have I ever played one on TV.
@Mark Jones Yes, 100% agreed. @Brian Van Pelt $100 of property taxes will save you $100 * your marginal tax rate (maybe 30%, $30?), on your taxes. Not $100. It's a deduction, not a tax credit.
This is why I'm thinking about going to a lower-tax city.
@Anthony Wick I would love to invest locally but I'm not in a cash flowing region. I do agree with your premise that I could reduce expenses via a lower cost PM, or increase rent to value ratio by A) going to a market with a better ratio or B) going down market in quality. But I don't like that strategy for rollover costs, being a remote investor.
So what I'm looking at is improving the rent to cash flow ratio by going to a lower tax city. And I wanted to access the BP forum's wisdom to see if I was missing something.
@Mark Jones As a local investor, have you heard of any structures or strategies that would allow an investor to pay the 1% owner-occupied tax in Indianapolis?
I don’t think you are going to find what you are looking for. You might find a lower levy but the appraised value will be higher there. Basically taxes pay for the city/county etc budget. If you think you can find an area where a city is that efficient you don’t understand government.
Also, realistically tenants pay the taxes, so in high tax area rents will be higher than lower tax areas.
@Sean McCluskey others have made the point too, but I’d encourage you to consider the full picture. Frankly, as a local investor, I’d be happy if you and all the other coastal investors left town and gave those of us based here more deals to evaluate.
But alas, that’s not likely to happen. So I’ll just tell you that you’re not likely to find any way around the 2% cap. It’s the result of a massive property tax overhaul about 10 years ago.
But despite the taxes, I believe in the Indy market. Rents are rising, the economy & labor market are strong, urban revitalization is happening at a steady clip, the population & regional employment is growing, etc.
On a 5-10 year holding period, I’m confident the extra $900/year (60% post-tax of 1% on your example) will be paid back in the form of rent increases and/or property value increases.
And if all else fails, send any properties you’re looking to unload my way!
@Sean McCluskey getting the 1% property tax in Indy (as an investor) would be the golden goose. But I haven’t found it yet. Just need to run your numbers using 2% and see if it works.
The good thing is assessments here are usually lag the market and are pretty steady. Challenging the assessment isn’t too terrible of a process either other than how long it takes.
@Sean McCluskey just to clarify, it's 2% of assessed value, not appraised value. Being from CA, you may be assuming that IN reassess based on sales price at the time of transfer. That is not the case.
Feel free to look up Jersey taxes if you want your head to explode.
The taxes "don't matter" if the end goal (cash flow) is achieved. There are houses in Jersey right now selling for 100k with 4k in annual property taxes. A few towns over, 150-200k townhomes have 7-8k in property taxes. It's no joke.
But if the cash flow is there after you account for taxes, along with all other expenses, and you're investing for cash flow, then fantastic. If not, it won't fly in any market.
@Sean McCluskey just to clarify, it's 2% of assessed value, not appraised value. Being from CA, you may be assuming that IN reassess based on sales price at the time of transfer. That is not the case.
Hi Mike,
I was definitely assuming that IN reassesses based on the sales price. I even thought that I googled it and confirmed it through other people's comments on BP / an article. So you're saying that the purchase price of an SFH in Indy for say $100k, won't flow through to the tax assessment immediately?
Meaning, if the house was previously assessed at $60k, it would stay there for some length of time, and then I assume jump up to at least the sales price on the next assessment?