Texas (Financially) Deadly Property Taxes!

[Justin R.]

Living in California I started investing out of state in 2010. At the time, an investor could invest almost anywhere in U.S. and pencil out a good return. I chose Texas due to what I felt was going to be an appreciating market (DFW), and extremely good rent to price ratio. In 2010 I was able to buy houses for 80-100k in Solid B class areas, and rent them for 1200-1400 a month. 

The cash flow here was about as good as anywhere, yet the market was strong and vibrant.  Then, the Texas property taxes started showing its face. 

Throughout the course of the next 8 years home appreciation went rampant, doubling in values in my area. Although this would typically be a good thing, it takes its toll in Texas. At the time my effective property tax rate was a staggering 2.8% of the property value (Keller ISD.) In Texas there are no statutes which limit the growth of property taxes for non-homesteaders. Even with decent rent growth year over year, it just couldn't keep up with property tax increases. 

The result - DECREASING ANNUAL NET OPERATING INCOME & DECREASING RETURN ON EQUITY

I am not saying investors should not invest in Texas. I actually did quite well by selling my Texas portfolio and 1031 into another location. Texas has a lot to offer, and I truly believe it is a great state that will continue to strengthen. But, if you are from out of state, and already pay a state income tax, you are virtually paying double taxes when investing in Texas (Texas garners a lot of their state revenue off property taxes.) 

There is plenty of opportunity in Texas, just make sure you account for current, AND FUTURE property tax growth.

Justin Rick

[Justin R.]

I agree with what you say.

Not knocking the State of Texas. Taxes have to be collected somewhere. The challenge though lies upon property taxes, which for someone already paying income tax in their home state, is a major disadvantage when combined.

CA can be a great place to invest due to equity gains made on buy and hold properties, especially in conjunction with prop 13 (keeps your home value basis based upon purchase price.)  WIth that being said, typically CA does NOT cash flow for several years, and like you mentioned, CA tenant laws.