Do you consider property taxes when you look for rentals?

Question

Hello All,

I am looking for long term rentals for retirement and one thing I have been wondering about is "how much is too much" in property taxes?  Some areas around town appear to be higher than others but it seems that 1.5 to 2.5 months of rental income can be eaten up by property taxes alone.  What should I expect to spend and should that be a major determining factor in an acquisition?

Thanks!

Stephanie Dupuis · Answer

Yes, I definitely consider property taxes when running my numbers.

1. As @Joel Owens  said, I look at where taxes are heading. Very important b//c this can bite you down the line.

2. I also take into account each individual property like Mehran K. b/c the amount of rent a property brings in may offset the taxes.

3. I also look up the county records to make sure there's not a senior discount in effect or other discount creating an artificially low tax. This will mess up your numbers and may create a lien situation if ownership changed and the county didn't catch it. They will charge the current owner.

Joel Owens · Answer

Hi David,

It's a part of it. Taxes in the area might be devalued for years and fixing to have a big increase.

I usually go back 10 years for due diligence to see how assessments have played out and how much they have gone up and down each year.

Mike H. · Answer

To @Pat L., I feel your pain. Let it out. :-)

Here in Illinois we have a very interesting situation with how they do the taxes. The schools ask for a certain amount and the increase in that amount is capped every year. So if they ask for 10 mil this year, they can only go to 10.2 mil next.

That has an interesting effect on taxes though. When you finally get your tax assessment to come down, your taxes still end up going up. All they do is raise the tax rate so that the numbers come out to that 10.2 mil number.

Its definitely a scam here in Illinois. Sounds like New York has their own con game going though and it sounds even worse. Its really hard here though having a house thats assessed for 100k that I'm paying 4k in taxes. When I know that about 30 minutes east of there in Indiana, that same 100k assessed house is costing the owner 1k a year.

Somewhere along the way, Indiana put in some statewide law that limits the tax rate the counties can levy on a property. I think its 1% there. Yet somehow that state is paying all their bills.

I guess the moral of the story there is to move and/or invest in Indiana. :-)

Pat L. · Answer

It's insane.......

up here our tax bill/mo can be higher than the mortgage pmt (with current interest rates).

in most areas we invested in our property assessments usually run at least 20% over the true mkt value of the home. You get code violations for how the place looks & then they re-assess you after you improve the property. For example we added new siding/windows on one (cost $3500) & they re-assessed us from $28,000 to $68,000 (& we pay $50/$1000).

the taxes on our personal residence run over $925 a month & my BIL pays $1200 a month & our home is 2x size, but he admits he has a bloated school system :)

& to think you guys had a revolution over a little old Tea tax!!!

my apologies......end of rant !!

Mehran K. · Answer

I definitely consider property taxes when I am evaluating properties. They are a fixed expense and will always be there. Be sure to know what they will actually be AFTER the sale.

I don't worry about properties that have higher taxes than others etc. I just run my calculations and if the numbers still meet my buying criteria, it's a non-issue for me. It is smart to do a little due diligence into where the property taxes might be headed as Joel mentioned.

David P. · Answer

@David W we have also found that property taxes play a huge role in how we buy properties as with other fees.  We use the REI Property Analyzer - an Excel file to help us to determine what our cash flow, CoC, etc.  We average the taxes for last 5-10 years and other fees such as property managers and HOA fees if applicable to evaluate if the property meets our criteria.   You need to understand your numbers and what they should be for cash flow prior to making a bid for a property and stick to your plan - don't be a motivated buyer!  We like to have higher numbers than most, but we are picky and want our rentals to cash flow well from day 1 so when hard times come we can survive.

@Joshua Dorkin posted it here: (we have modified for our purposes)

http://www.biggerpockets.com/forums/88/topics/25519-free-property-analysis-worksheet

Elizabeth Colegrove · Answer

@David W

Yes and No, when I first started I didn't even think to check (beginner mistake). We ran all the number taxes included and they worked. Later I realized that tax was 3% of the house price. Yes this price was in our numbers, I just never realized how much of the house was going to tax. We bought these at a great deal because they were short sales so the house were even more depressed than normal. Therefore I became more afraid of how real estate value growth would affect our bottom line.

I started to look in other areas. What I *personally* found was that great areas that had cheaper houses prices at my same market level (South TX and SC) had very high taxes at 3%. Southern Virginia and Middle California had .98%-1.5 respectively but the purchase price was 25-50% more with rents not being at the same rate.

Based on my research and anaylsis. I came to the opinion that I invest in both. When I find a great house with lowere taxes YEAH! Otherwise if the numbers work, high taxes are the cost of doing business.

Bob Hines · Answer

Taxes are a part of where I look for rentals.  In St. Louis City I am averaging around 1 month rent for taxes with some a little more and some a little less.  When I started looking in St. Louis County and St. Charles county, taxes were 2+ months rent for taxes so I keep to the city.  So check out different municipalities and start focusing on the ones that are more profitable.

Do you consider property taxes when you look for rentals?

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