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Texas (Financially) Deadly Property Taxes!
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
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I assume you started investing out of state because California is very toxic for landlords and the prices make investing untenable in most instances. And you're not alone. Look at the growth of Texas versus California in 2022/2023...California has a net loss of .19% and Texas has a net gain of 1.6%. Investors in Texas love California investors because we know they'll overpay for properties we're selling...it's actually a long standing joke here but one that I've personally confirmed. I agree taxes are high here and I don't like it either, but we don't have not state income tax here either which is why between 2010 and 2020, 25% of the net positive migration to Texas was from California. We saw some of the highest tax increases (post Covid) that I've ever experienced in my 24 years of investing yet we successfully raised rents on our properties to ensure we maintain our cash flow and not one tenant left. Another issue is that out of state investors seldom bother to protest their taxes which is an essential part of the process each year...if you don't push back, that's on the investor. Government everywhere is like a parasite that needs a host (taxpayer) to survive. You have to push back or accept the consequences for not doing so.
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.
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@Justin R. Agree with the problem with Texas property taxes but not just on rentals also on primary residences.
My sister has a portfolio of several SFH in Denton, TX that she's owned for years. While the value has appreciated nicely during the pandemic, and over the years, and she was able to refinance to low interest rates, it has been no match for the exponential growth of the property taxes. She barely receives $100/unit in cash flow if that and any major repairs such as a new appliance or an HVAC comes right out of her pocket.
Not to mention the cost of primary home taxes. My parents home taxes went up went up the last 4 years 20%, 40%, 40%, and this past year 60%. They mostly don’t do much work to their house but did have to do a major renovation due to a toilet leak that caused $150,000 worth of damage. Yes, it’s possible. Once it was repaired the new work didn’t really do anything to increase the value of the property, just repaired the damage to its original state. According to the appraisal district this house is now worth $1.2M but other comparable properties on the same street and the next street that have sold have only sold for around $600,000. This has been fought in court as far as it can go (my father is a lawyer and has been fighting property taxes in court for 40 years) and has only gotten about $40,000 in relief.
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@Justin R. One thing I have seen many investors do, unfortunately, is ignore the asset after purchase. And property taxes can adjust every year. So if one is not on top of it , it can become suffocating.
Even homeowners are guilty of not protesting their taxes so every year the appraisal district wins because not enough owners protest.
As always just my opinion
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I'll always take property taxes over income taxes. I would pay way more in total. Switch to commercial NNN leases are great.
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Tons of inventory in major Texas areas Dallas/Fort-Worth/San Antonio/Houston and many others besides the above property tax woes is resulting in a decline in overall cash flow as is every evident from all data around. Know tons of homes in Dallas/Forth Worth area which have been empty for months at end and so many are trying to sell instead. With the housing market upcoming adjustment winds in process and economy adjusting, the prices in Texas market will ONLY decline back to 2021-22 or lower levels when it comes to correction. Was intending to buy something and even put an aggressive offer out on a home there but am going to sit on the side and see how the winds blow in the next 6 months.
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Quote from @Justin R.:Revenue has to come from somewhere. Local taxes on local assets for local benefits sounds reasonable. If the taxes come from income or from property values—no difference.
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
If you made a bad investment due to failing to anticipate higher taxes, sell.
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Great points Justin. Personally would not buy investment real estate in TX unless its NNN commercial (and have done so), for the very reasons you've stated. TN is the place to be. Sure, sales taxes are higher, but that's a choice of personal expenditures. Property taxes are relatively reasonable & no state income tax.
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@Justin R. Nice point. I think investors should be aware of the property tax system. If TX has a true ad valorem tax system (as tends to be on the east coast), the tax itself holds relatively steady inspite of rising property/assessment values.
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I just looked a bit. SEEMS like tx does run an ad valorem system. So it’s not the valuation. So it’s not the assessments that are driving the increases (unless radically skewed), but the budgets of the municipalities that more likely sky rocketing.
I could be wrong since I have no experience in tx…
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Quote from @David M Trapani:“[C]hoice of personal expenditures” seems rather flippant when buying food, children’s clothing, gasoline, or utilities taxes.
Great points Justin. Personally would not buy investment real estate in TX unless its NNN commercial (and have done so), for the very reasons you've stated. TN is the place to be. Sure, sales taxes are higher, but that's a choice of personal expenditures. Property taxes are relatively reasonable & no state income tax.
All taxes have negatives, but you’ll never see state trooper salaries paid exclusively out of bake sale proceeds.
The only legitimate question is: Is the tax system sustainable?
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Flippant? Funny. Apparently someone drank the koolaid & may be bitter. Not my problem pal.
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Quote from @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
yup i learned that just flipping a few houses there.. just holding them short term the taxs were eye watering and I have spoken to other CA investors who also sold out like you did.. just think if you bought and the appreciation was not so good then with CA tax's and TX prop tax's not that great of investments on top of weather and soil conditions in many areas.. So for CA OR residents who pay some of the highest state tax in the US to invest in a market with some of the highest prop taxs can be quite questionable. I think you have to live in Texas and not pay state tax to make those work personally..
Thats were Vegas shinned at the same time the 100k houses one could buy in 2010 are now over 300k and the prop tax's are some of the lowest in the country along with weather that is far more mello than Texas. So all in all because of this Vegas out did Texas from what I have seen. although many wont invest in Vegas because todays cash flow is not as good as other areas.
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Quote from @David M Trapani:Not at all. Pointing out that regressive taxes on necessities hardly qualifies as some form of personal choice is economic analysis, not emotion.
Flippant? Funny. Apparently someone drank the koolaid & may be bitter. Not my problem pal.
So expenditures on necessities cannot be blithely categorized as personal choice, and therefore taxes on them, particularly regressive taxes, need to be analyzed for sustainability.
The only real question is whether the tax system in place is sustainable. If it isn’t, then property values will be affected, if only because government services will be affected eventually.
No koolaid, n
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Disagree. Nothing blithe about it Apparently your mind is too limited to understand freedom of movement. There are numerous states and places to be. Freedom of movement is a Constitutional right. What you spend, where and how much - These are all, in fact, personal choices. Don’t appreciate personal attacks. Apparently, you are tied-down to one location (you don’t say where). You are responsible for your personal choices. Stop the personal attacks.You have been reported.
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Quote from @David M Trapani:I haven’t made any personal attacks, I just pointed out that sales taxes are not necessarily a personal choice of expenditure.
Disagree. Nothing blithe about it Apparently your mind is too limited to understand freedom of movement. There are numerous states and places to be. Freedom of movement is a Constitutional right. What you spend, where and how much - These are all, in fact, personal choices. Don’t appreciate personal attacks. Apparently, you are tied-down to one location (you don’t say where). You are responsible for your personal choices. Stop the personal attacks.You have been reported.
Given that most states have sales taxes (regressive) they are hard to avoid. You will find that those states without sales taxes have relatively high property taxes (regressive) which are impossible to avoid as one either pays them directly or as a component of rent.
So it doesn’t always come down to saying “lifestyle.”
as for freedom of movement, we are all aware of the concept of voting with one’s feet. We are also aware that when it comes to personal expenditures and the resulting taxes, Muhammad Ali said it best: “You can run, but you can’t hide.”
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Been buying BRRR rentals in TX for under $100k since 2017 and they all cash flow. The property taxes are unpleasant but don't make my properties bad investments. The problem at present is high purchase prices due to the current real estate bubble. For the last couple years I've been building small apartment buildings which lets me avoid the high purchase prices. Also, in TX it's a good idea to make real estate purchases taking into account.local differemces in local
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@John Clark Don't worry much about it. I think that person just needs to grow up some.
The tax structure is an interesting issue. Yeah, I mentioned it before and the usual response is "just move." Nothing against that, just odd to create/support a structure that seems to "sort people out."
I read an interesting article not long ago considering how sort of "good intentions" lead to potentially bad/undesired results. As other states are considering eliminating their business/corporate income tax to attract business, that requires shifting the tax base elsewhere which tends to make it more regressive. Yet, that's not the intent.
So you incentize companies to bring work to your state by making yourself more "tax competitive," and thus make more money. But, the company doesn't want to pay the employees anymore than they have to and now you've shifted the tax burden increasingly on the workers/people that followed the company.
I forgot which state govenor they interviewed, but he/she realized it. But, didn't have an idea on how to address it. By dropping their progressive income tax system, they are trying to "grow their state" by bringin in more business, but in the end just taxing their citizens more so businesses can make more money. One scratches their head on how that helps the citizens, which was the original point.
(shrug) not going to solve it here.. :)
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As has been said, taxes have to be collected somewhere to run a civilized society. Choose your poison I guess....
It seems to me that one could take their Income Tax savings and use them to assist with the property shortages if/when they occur. After all, California has a tax rate of over 10% in the tax bracket that most investors will fall into. I'd personally rather pay property taxes.
Just my $0.02...
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Quote from @John Clark:
Quote from @David M Trapani:I haven’t made any personal attacks, I just pointed out that sales taxes are not necessarily a personal choice of expenditure.
Disagree. Nothing blithe about it Apparently your mind is too limited to understand freedom of movement. There are numerous states and places to be. Freedom of movement is a Constitutional right. What you spend, where and how much - These are all, in fact, personal choices. Don’t appreciate personal attacks. Apparently, you are tied-down to one location (you don’t say where). You are responsible for your personal choices. Stop the personal attacks.You have been reported.
Given that most states have sales taxes (regressive) they are hard to avoid. You will find that those states without sales taxes have relatively high property taxes (regressive) which are impossible to avoid as one either pays them directly or as a component of rent.
So it doesn’t always come down to saying “lifestyle.”
as for freedom of movement, we are all aware of the concept of voting with one’s feet. We are also aware that when it comes to personal expenditures and the resulting taxes, Muhammad Ali said it best: “You can run, but you can’t hide.”
oregon has no sales tax and prop tax's are more in line with the 1% rule but income tax is 2nd highest I think and then if you live in the Portland metro area there are 2 other layered tax's that dont affect lower or middle income but higher income you can pay an additional low 6 figure tax to shelter the homesless and pay for the metro line.. but Oregonians love their state and most that are born and raised here will never leave..
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Quote from @David M.:
I read an interesting article not long ago considering how sort of "good intentions" lead to potentially bad/undesired results. As other states are considering eliminating their business/corporate income tax to attract business, that requires shifting the tax base elsewhere which tends to make it more regressive. Yet, that's not the intent.
I remember as a child in the early 1960s being in the car and seeing these highway construction site signs that said: “Your federal tax dollars at work.” Much later there was a New Yorker cartoon with these guys laboring in Hell – flames, overseen by demons, etc. -- to build a road, and a sign that read: “Your good intentions at work.”
I had a very hearty laugh at that.