What Is A "Reasonable" Annual Cost For Property Taxes?

Question

When you are evaluating a new real estate investment, what do you consider to be a "reasonable" annual cost for property taxes?

I know there are a lot of factors that can go into the determination of a property's annual tax bill. I also know that a property's annual tax obligation can change drastically when it is transferred from one unrelated party to another (and then varies slightly from year to year with the property's assessed value).

In my experience, most of my annual tax bills have fallen within 1% - 2% of the property's current market value (and with non-homestead rental properties, the cost is up to 3% - 4%). In most cases - I generally consider this range to be "reasonable".

Is this what you all have seen as well? Would you agree with me on this?

On some rare occasions, I've come across properties that have a HUGE annual tax bill relative to the property's value (e.g. - a $10,000 property with a tax bill of $1,000). This usually happens when the local municipality makes a major improvement (e.g. - new sewer system, road improvement, etc.) and then passes the amortized cost along to all of the affected property owners.

I'm curious, at what point do you consider the annual cost of property taxes to be acceptable or unacceptable?

Steven Hamilton II · Answer

Always appeal the property taxes if it makes sense.  I appealed one property from 4277 to 853.  I MADE money on the tax credit given to me by the previous owner.

I just appealed another from 7300 down to 5k.

-Steven

Uwe S. · Answer

Seth,
In my case the property tax should be not more than 2 monthly gross rents as buy and hold candidate but I prefer under 1.5 monthly rents.

-Uwe

Scott W. · Answer

i agree; and don't just accept their "offer." go into the office. one tax lawyer told me they'll give you a 20% discount at least...probably cuz they don't wanna work.

Steven Hamilton II · Answer

Seth Williams, You can often find that at the assessor's website when looking at the property's tax bill.  Some townships and cities will have different rates.  There are always appeal options.  I can tell you my personal residence, the property tax rate itself increased 18.3% over last year.  You better believe everyone is throwing a fit.

Seth Williams · Answer

Interesting Steven Hamilton II - what is your process for finding out what the current tax rate is on a property (i.e. - how do you determine when it's "high")?

Do you have any ways of making an educated guess as to what the taxes WILL be, based on the sale price you're purchasing the property for (i.e. - is there some standard calculation you use)? Seems like there could be a lot of different factors at play in the assessor's office.

I understand the idea of appealing for a lower property tax rate, but how do you know if a municipality will comply with your case for a lower assessment? I know we can always try to make our best argument to an appeals committee, but isn't the final decision ultimately out of our hands? Is it really safe to assume that the people with control over our taxes can be swayed by our opinions (which are obviously biased)?

Steven Hamilton II · Answer

Seth Williams,

Sometimes high taxes to me are a plus, that is often extra money that can be made based upon the tax credit given at closing.

RUN from a high tax rate.

In my example above, I was given a tax credit for half the year based upon that pro-ration (4277/12 * 6 months =2138.50 tax credit).  I then appealed it down to 853.  I made 1285.5 on the tax credit.

Yes, I'm that cheap.  That is MY money, I never want to give money away.  I bought my first house with a downpayment of $1435

-Steven

Seth Williams · Answer

That's awesome Steven Hamilton II - way to stick it to the tax man!

High taxes are a big red flag to me, simply because they don't go away - ever. If I'm going to be stuck with a permanent obligation, I want it to be as small and insignificant as possible.

Mark Turner · Answer

I agree.  I just call the assessment office in that town and I ask for current tax and a rate to apply if my buy price is higher/lower than assessment.

Shea Stringert · Answer

Hey Seth -

I'm fairly new to the game myself but the best advice I ever received was to never estimate property tax.  Case and point, I reviewed two properties in Jersey City, NJ that were basically the same property (same number of units, size, neighborhood, quality, etc.) with property 1 having a cost of $5.9K and property two having a cost of $7.4K - a HUGE difference.  You can usually find the most recent year's costs on realtor.com when reviewing properties.

The property tax # doesn't matter as much as all the numbers in unison working for your investment criteria or not.  Of course the higher they are the harder it is to make the numbers work so I'm sure you can  come to some general consensus after doing many analysis' but just my two cents, never use an estimate when evaluating.

Best of luck!

Seth Williams · Answer

Thanks Uwe S., that's a good reference point for me to keep in mind.

What Is A "Reasonable" Annual Cost For Property Taxes?

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