Texas - No income tax, but higher property tax. Worth it?

Question

Most states have a 6% income tax, so if someone is earning $100,000 per year, that's $500 per month. If you're a real estate investor in Texas with multiple properties, there is a higher property tax. Is it worth it? Any investors from Texas like to comment?

Hattie Dizmond · Answer

As stated above, property taxes in Texas vary wildly from one municipality to the next.  Saying they are the highest in the country, with the exception of New Jersey is about as ridiculous as saying all of Michigan is a gang infested slum, simply because parts of Detroit are.

Also, Texas State sales tax is 6.25%, with local cities and municipalities adding on top, but it is capped by the state at 8.25%.  A simple Google search reveals these facts.  (Perhaps I need to write a new post on how to use Google?)

As for the fact Texas' property taxes are higher than a number of locations, I'll just restate my previous responses...

1. Texas is (I won't say immune.) highly resistant to the bubble or boom-and-bust phenomenon that occurs in many of the larger markets.  (Google "Texas" and "real estate bubble" for a great article by Texas Monthly examining why.)

2.  Texas has a balanced budget.  Our cities are not in bankruptcy.  Our infrastructure is sound.  Our schools are good.

3.  Rehab permits can generally be obtained...cheaply...in a single day.  New builds - existing lots - in less than 1-week.

4.  Texas has produced more new jobs this year than the remainder of entire nation combined.

I really could continue this list for a while.  But, the simple facts are, people are moving to Texas, and good quality properties will continue to be in demand for both purchase and rental.  The property taxes mean it is not the easiest place to generate positive cash flow in A & B neighborhoods.  However, it is possible.  And, I would suggest that some of the areas of DFW which I classify as "C" neighborhoods would easily be a "B" in other large metropolitan areas.  "C" areas of DFW do provide excellent cash flow opportunities, even without hitting the magical 2% number.

Yes...I was born and raised in Texas.  Yes...I'm biased.  However, I also lived through the banking crash of 2008, while living in Charlotte.  I saw what that did to a vibrant, hot economy and market.  You literally couldn't give houses away in Charlotte.  The white collar unemployment was ridiculous.  I had friends who purchased houses in 2006, 2007 and early 2008 who suddenly were so far under water on their mortgages they couldn't see the surface.  That was Charlotte.  I can't imagine what it was like in CA, FL & AZ.

Texas didn't crash.  It was hard to sell, because suddenly no one was lending money to anyone without 20% down and an 800 credit score, but property values held.  I got back to Texas as quickly as I could.  Anyone who wants to complain about the property taxes or the sales tax or whatever, great...stay away.  It's less competition!

Account Closed · Answer

It is much easier to legally manipulate your income taxes than your property taxes.  I would never invest in a high property tax state.  That is money out the door.

James Park · Answer

@Vincent Crane,

Atlanta has a great future ahead in terms of business climate and building your real estate empire. If you find the cash flow to be tight in the Atlanta market, I can assure that is even worse in Austin, Houston or Dallas for same class properties. There is no need to force the deal, just wait for the right deal and opportunity to arise and let the prices cool off a bit. When I was 25 I bought my first primary residence which was a small 2 bedroom condo in the northwest suburbs of Chicago, then once I moved out, I turned it into a rental. Perhaps your first step is buy your primary first 3.bed / 2 bath SFH in the best neighborhood you can afford. Once you get married and have kids of your own, you may neeed to move to a bigger property where you can turn your first primary residence into a rental.

Wayne Gretzy said, "Do not go where the puck is, but go where the puck will be." This is same in Atlanta real estate. Prices are already expensive  inside the perimeter because the puck has already been there. You have to now figure out where the puck is headed in the future in Atlanta.

Also keep in mind we have two fine public universities in Georgia: Georgia Tech and University of Georgia - Athens. Children of the Georgia residents are eligible for the HOPE scholarship where the state will cover the tuition. From an early retirement standpoint. this can either set you back or set you ahead by 10 years vs going outstate or to a private institution if you have three children.

Jay Hinrichs · Answer

@Vincent Crane  Nevada is the best for tax's in an all around situation.

if you live in CA like @Kathy Stewart  does and invest in texas it makes no difference with the income tax situation other than you don't have to file a Texas tax return. Like you would in another state that has income tax.. and if you pay income tax in another state its a dollar for dollar credit against your CA income tax.

Give me prop 13 and people that bought pre 1mid 80's run up and you have the best investments in most of the US... LOW tax's great CA weather.. UBER appreciation Texas does not come close to being as good as investment as CA under those conditions.

Bottom line though for a buy and hold investor Property tax's are an important component and all things being equal if your in non appreciating states. .Like Texas basically has been for ever and a day ( except Austin ) and the little bit of run up they have had.. There are far better cash flow plays in the US..

Chris Soignier · Answer

I've lived in Austin for about 20 years, and love it dearly.   However, I do have concerns about the sustainability of growth.   Local leaders have had their heads in the sand regarding growth, and infrastructure has lagged terribly, resulting in terrible traffic.    The airport is also a bit weak for international travel especially.

While I believe Austin real estate will continue to appreciate, I also expect the growth rate to decline.   I'm not as up to speed on Austin as I am on North Texas, but my understanding from investor friends in the area is that pricing makes cash flow from rentals very tight.

Vincent Crane · Answer

@James Park I like Atlanta a lot, but I'm having a hard time finding my first deal, that I actually plan on living in and house hacking with. The days of getting a duplex, or 4 bedroom SFR for $250 or less, inside the perimeter in a decent location seem to have all expired in 2013 or 2014 when appreciation came roaring back. I'm really questioning if investing in real estate here for cashflow, is viable in the long run.

Fred Conway · Answer

Texas property taxes are very high, i believe the highest in the nation with the exception of New Jersey. Also insurance is pretty expensive there as well but it comes down to whether it can cash flow or not. If you make 100k a yr in profit, then states w no income taxes is your best bet. If you really want no state income taxes, id look into florida, lower property and insurance costs.

Also, something that isn't going to be talked about too much is appreciation because you cant really count on it. States w no income tax tend to have higher swings in property values, florida, nevada, tennessee, although texas has done a very good job of avoiding those. People in states w no income taxes tend to have more cash for rent and buying homes, so if you can buy right, you can make some serious profit.

James Park · Answer

@vincent crane,

You are not going to leave us for texas are you? What we should be trying to figure out is how to own real estate in Georgia for less than 1% property tax and own a corporation in florida for the zero state income tax benefit like Texas. Get the best of both worlds.

Mark Creason · Answer

Sales tax usually does not have anything to do with whether to buy an investment property.  Property taxes are high here in Texas.  The lack of an income tax is a great offset.  I have lived in a few states.  Colorado is cheaper on property taxes but has a 6% or so income tax.  California has a 12% cap on income taxes, but has a great property tax situation with prop 13.  AZ has an income tax but reasonable property taxes.  Nevada has no income taxes and reasonable property taxes.  Illinois has high property taxes and a 5% income tax.  Of course, you can always do a 1031 exchange to get your properties out of a high income tax state.

Mark

Mike Landry · Answer

I love not having an income tax. Property taxes can vary widely depending on where you buy. In regards to Houston area, Nice neighbourhoods with new mud (municipal utility district) run on average 3 to 3.5%. But you can find pocket areas where the tax rate is closer to 2% due to an older mud district or none at all. That's also why I try to stay out of Houston's Harris county. Montgomery county to the north is a little less too....And insurance is cheaper in Montgomery county too.

Texas - No income tax, but higher property tax. Worth it?

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