"Rental Property Tax: Your 2nd Highest Annual Expense"
You will have to pay rental property tax on each property you own. These payments will be made either by you directly, or via a lender-managed escrow account. Because it's your 2nd largest
item, you'll need to be aware of it when you're conducting your initial
real estate analysis.
RENTAL PROPERTY TAX PRIMER
All local municipalities assess each piece of real property within their boundaries to determine fair market value. For each property, this value is then multiplied by the current tax rate to determine the tax amount.
Towns, counties, and even states earn revenue from property taxes, which are typically used to fund things such as law enforcement, fire fighting, courts, community programs, and school systems.
Municipalities will occasionally reassess all properties and make tax adjustments on an as-needed basis. There are ways to challenge these assessments, but to do so requires a lot of time and your chances of success are very low. So make sure you do your diligence on this expense up front when you're looking to
EVALUATING PROPERTY TAX
As with any expense, you'll want your tax nut to be as small as possible. Some people think that 2-4 unit
multi family homes
are more expensive in terms of property taxes, but I have found that this is not the case. Often, the town's assessment will factor in square footage irrespective of whether this space is for 1 dwelling or split up into three.
The tax rate will vary by town, so consider this as you are choosing your target area. The good news is that this expense tends to be smaller in the lower-income areas that we target. But even 2 separate lower-income towns may have much different tax rates, so again, just keep an eye on it.
All else being equal, the lower this tax, the more desirable the property. For example, your cash flow will look much better if your annual property taxes are $2,000 versus $3,000. So again, you must take this into account as you analyze deals.
PROPERTY TAX ON FIXER UPPERS
Ok, here is one last piece of advice. If you decide to replicate my
fixer upper strategy,
be aware of the potential property tax implications.
If you increase the amount of living space, or build any kind of structure (deck, fire escape, detached garage, etc.), the property will likely be assessed at a higher rate. This of course will increase your rental property tax expense. Just something to keep in mind.
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