High property tax areas and their drawbacks

[Corey Dulimba]

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!

[Jerel Ehlert]

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.