Property Tax - Impact on your margins

The property tax rate impacts margins of your rental income. The rental income is based on cap rate or CR percentage which depends on NOI. NOI is greatly affected by overall property tax rate. As property investors, we work so hard to increase CR rate by even 1%. But high property tax rate can easily eats up 2%.The taxes on property include both state taxes and local taxes. The percentage rate mentioned earlier is mandatory state wide rate. On top of that, you may need to consider some local taxes which include possible county taxes, city taxes like NYC, last but not least the special assessment taxes or mello roos in CA. The aggregated tax could be around 3%+. The taxes will continue increases on annual basis with certain cap such as 2% of property value in CA. Based to the original purchase price, the actual rate you pay will be even much higher than typical 1-3% rate. This kind recurring cost will significantly offset you hardworking earned cash if the rent stays at the same level.Because of the high tax rates, the appreciation of the property value could be limited. The buyer power will be reduced by the high cost. As results, the housing price has little room to grow.Therefore it's very important to choose locations for investing income properties. You may want to avoid states like Texas with up to 3.4%. You may also ask your agent if there is any special assessment or mello roos kind of costs. If so, what's the percentage. You may also look at the MLS report which normally disclose the tax dollar amount. You may do a simple calculation to figure out percentage. you may also check county treasure website.If you buy properties in crashed market, the tax post-purchase should be reassessed based on the newly purchased price. in this case, the tax will be reduced. don't forget to follow up with the county in this regards as a post-purchase step.There are still a lot of cities with low tax rate no more than 1% such as Las Vegas, Salt Lake City etc. Keep in mind of this cost factor when you choose your next investment location.