My name is Jordan and I had a question about property taxes...first a little background. My wife and I are looking to enter the real estate investment field through an FHA loan. We have ~$6k in cash with some family offering a little help if needed. We were both raised in the central NY region and have lived here all our adult lives. Ideally we're looking for a multifamily property (where we'd live for a year) or find a great deal on a single family we could sell / refinance with a nice chunk of equity in 3-5 years.
My main question has to do with property taxes. I have read many blogs and books...including this site....where property taxes are normally estimated around 1-2% of property value per year. I believe this estimate is assumed in the 50% rule as well. We have been looking at properties for a few weeks now and have noticed that our property tax rates seem to be much higher than these estimates. For instance, for almost all areas within 15-20 miles of Syracuse:
Areas with no Village Tax:
Town & County -1.27% + ~$560
School - 2.93%
Total - 4.19% + ~$560 per unit
Areas with Village Tax:
Town & County - 0.78% + $390 per unit
School - 2.57%
Village - 1.22 %
Total - 4.57% + $390 per unit
As you can see the effective tax rate in the area is closer to the high 4, low 5 % range. So first...when people estimate their taxes at 1% are they including all the taxes I included above? Second, if taxes in this area are in fact 3-4 times higher than what is normal, should my wife and I seriously consider moving if we wish to develop a thriving portfolio over the long term? (Currently there is not too much keeping us here...family is the main thing....my wife stays at homes with the kids and I am currently overqualified in a clerk position for an investment bank earning low 30's). Purchase prices tend to be a bit lower in this area, however, in my spreadsheet it seems - cash flow wise - the higher tax rates more than offset the lower mortgage payments. Any insight into this matter would be greatly appreciated. Thanks for your time.
@Jordan Holt undefined. While the property taxes are higher in this area the low prices more than make up for it. Not sure which areas you are looking in but the city area has inexpensive multi families where in most cases 1 unit pays the mortgage and property taxes for the month. Don't let the high taxes sway you from investing here.
Thanks for your response Jim. Your response intrigued me and I just made a spreadsheet to calculate the relationship between purchase price vs different tax rates given the same monthly payment. A couple things I see:
- With a 3.5% down payment, 4.25% - 30yr loan. Comparing a 5% tax area vs a 1.5% tax area allows you to pay 48.6% more for the purchase price to maintain the same monthly payment. Some others: 5% vs 2% = ~39% more; 5% vs 3% = ~23% more; 5% vs 1% = 59.7% more.
Other interesting changes at the original setup (holding everything else equal: Changing to a 20% down payment increases the percentage to 56.25%. Only increasing the interest rate to 5.25% reduces the percentage to 44.3%. Also, only decreasing the term to 15 years decreases the percentage to 34.3%.
Now a higher purchase price means higher down payment, means lower cash on cash return given the same NOI. However, it seems like for at least a buy and hold strategy you'd be better off in the long run paying more for the loan and less for the taxes, as you'd be building more equity and once the loan is completely gone you're ahead month to month.
Again, I am new to the practical side of real estate investing, however to me it would seem that there is a significant disadvantage to investing in this area, if in fact other areas have much lower tax rates (I have only lived here in central NY so I don't know if other places charge their taxes in a different form that I'm not capturing with this model). I am in no way trying to offend anyone with any of this and am just trying to make sure I start my family off on the best possible foot. If anyone would like to give me their two cents or clue me into something I've missed I would greatly appreciate it, as well as any advice in general for a young (28) man eager to make a start. Thanks.
Another area I touched on in the OP, the 50% rule. So far in my estimates I've been using the 50% rule as well as a breakdown of what I think the expenses will actually be. Pretty consistently there is a considerable difference with the 50% rule looking like the rosy picture.
Am I correct in assuming that in this area I will need to change this rule (to maybe the 60-65% rule) to account for these higher taxes (~$3,600 a year for a $70k assessed property) or am I somehow being a worry wart and overestimating things? Instinctively I want to say to adjust the rule, but it is generally referred to as a conservative estimate to begin with and I'm talking a drastic change to it. Thanks.
@Jordan Holt You might be worrying about it to much. Granted I am thinking of multi families that aren't owner occupied so maybe that would be throwing off the numbers. In most of my calculations on using the 50% rule on houses in the city I am consistently passing that rule. Also, not sure if you have looked at any houses in particular but I am seeing units that are well below market rates on the rent they are charging.
Hello @Jordan Holt , as @Jim Wilson mentioned, our high property taxes put downward pressure on property values. The high tax situation is certainly not ideal but the low property values do provide an opportunity to get into deals with less up front money out of pocket which seems to fit your situation. Additionally the local market is such that you should be able to find properties that consistently meet or exceed the 2% rule. Having a high gross rental income as compared to property value certainly helps in dealing with the property taxes.
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