Depending on where the property is, paying property taxes on real estate you own can be a curse or a blessing. For real estate investors, it's normally the second biggest fixed cost they need to consider, next to their monthly mortgage payments, when calculating potential cash flow on investment properties.
Although they can be averaged out at the state or metro level, setting property tax rates is usually a function of city or county government, since the money collected goes to pay for public services, such as police and fire departments. With a wealth of new data added to its database, RealtyTrac recently released the results of its first-ever study of property taxes, called the "U.S. Property Tax Rates Report for 2014."
"The highest tax rates are on people who have owned between five to 10 years and 10 to 15 years," says Daren Blomquist, vice president at RealtyTrac. "Those tend to be the people who are still feeling the worst effects of the housing bubble."
In determining which areas had the highest and lowest tax rates, RealtyTrac relied on two metrics, the average property taxes paid and the effective tax rate for the more than 1,000 counties studied nationwide with populations equal to or exceeding 100,000, accounting for a majority of the U.S. population.
In calculating the effective tax rate, RealtyTrac took the average tax rate for single-family homes (SFRs) in the particular county during 2014 and divided it by the average estimated value of single family homes at year-end 2014.
As Blomquist explains it, "We thought taking the tax rate as a percentage of the property's market value is a more consistent methodology to compare tax rates in different markets."
Based on those effective tax rates here are the best and worst counties for property taxes as of the end of 2014:
The top 10 best markets for property taxes:
1. Sussex County, Delaware
Average 2014 property tax on SFRs: $652
Effective tax rate: 0.23 percent
2. Baldwin County, Alabama
Average 2014 property tax on SFRs: $607
Effective tax rate: 0.28 percent
3. Hardin County, Kentucky
Average 2014 property tax on SFRs: $390
Effective tax rate: 0.30 percent
4. Terrebonne Parish, Louisiana
Average 2014 property tax on SFRs: $703
Effective tax rate = 0.37 percent
5. Davidson County, North Carolina
Average 2014 property tax on SFRs: $645
Effective tax rate: 0.38 percent
6. Montgomery County, Alabama
Average 2014 property tax on SFRs: $583
Effective tax rate: 0.40 percent
7. Morgan County, Alabama
Average 2014 property tax on SFRs: $537
Effective tax rate: 0.41 percent
8. Mesa County, Colorado
Average 2014 property tax on SFRs: $929
Effective tax rate: 0.43 percent
9. St. Louis City, Missouri
Average 2014 property tax on SFRs: $893
Effective tax rate: 0.43 percent
10. Lafayette Parish, Louisiana
Average 2014 property tax on SFRs: $921
Effective tax rate: 0.44 percent
The top 10 worst markets for property taxes:
1. Westchester County, New York
Average 2014 property tax on SFRs: $56,124
Effective tax rate: 7.53 percent
2. Bexar County, Texas
Average 2014 property tax on SFRs: $6,107
Effective tax rate: 3.32 percent
3. DeKalb County, Illinois
Average 2014 property tax on SFRs: $4,937
Effective tax rate: 3.27 percent
4. Passaic County, New Jersey
Average 2014 property tax on SFRs: $8,904
Effective tax rate: 2.98 percent
5. Milwaukee County, Wisconsin
Average 2014 property tax on SFRs: $3,517
Effective tax rate: 2.96 percent
6. New York County, New York
Average 2014 property tax on SFRs: $38,574
Effective tax rate: 2.65 percent
7. Kane County, Illinois
Average 2014 property tax on SFRs: $6,319
Effective tax rate: 2.60 percent
8. Gloucester County, New Jersey
Average 2014 property tax on SFRs: $5,935
Effective tax rate: 2.58 percent
9. New Haven County, Connecticut
Average 2014 property tax on SFRs: $4,782
Effective tax rate: 2.54 percent
10. La Crosse County, Wisconsin
Average 2014 property tax on SFR: $3,512
Effective tax rate: 2.54 percent
"Especially for an investor looking at a market outside their comfort zone, property taxes are something they need to factor into their cost of investing," Blomquist notes. "That could be the difference between healthy cash flow and a property that's a money pit."
Down south: for richer or poorer. Based in Lake Wylie, South Carolina, real estate investor, author and coach Larry Goins is not surprised that most of the best markets for property taxes on RealtyTrac's list are located in the southern part of the country.
"You have to realize that a lot of the southern states are poorer states and housing prices are lower as well. It allows the investor to pay a little more for a property that meets their business model," Goins says. He has expanded his investment strategy to include properties in North and South Carolina, Alabama, Georgia, Tennessee and Virginia.
At the end of the day, for investors looking to buy rental properties, the goal is positive cash flow. Taxes are a crucial factor in calculating a property's cash flow potential, along with insurance, maintenance costs, property management and vacancy rates.
Up north: varying across the borders. Investing in the Northeast is a challenge for Gavin Reilly, CEO of Tri State Fine Homes based in New York, because property taxes can change just by crossing a border between cities or counties.
"We have towns right next to each other where one will have high taxes and high property values, and the other has low taxes and high property values," Reilly says.
In Greenwich, Connecticut, for example, where homes have high property values, homeowners pay half of the property taxes paid by their next-door neighbors in Westchester County, New York.
"In the Tri-State area, you have these pockets that come across as high-tax areas, but you will also find areas with low property values and high taxes. You also have areas with low taxes and low property values. They are further away from the metro areas," Reilly says.
As an investor, Reilly deals with such disparity by adjusting his investment strategy, depending on the neighborhood. If the home is located in a middle class neighborhood, he tries to buys right so he can fix and flip a property in an average of six to eight months, without feeling the full impact of high taxes, because he is in and out of there quickly enough.
In the high-end luxury markets, by contrast, Reilly prefers to buy original ranch-style homes in neighborhoods where all of the surrounding properties have already been upgraded.
"I find the least expensive home on the block, especially if it's a foreclosure," he says. "Right off the bat, my taxes are proportionately less compared to the surrounding houses. And then I go in and knock down that ranch-style home and then build a new colonial style home that appeals to that particular neighborhood."
Having purchased the property at the lower end of the area's tax base, Reilly doesn't feel the full burden of property taxes. Any impact he does feel is also offset, to some extent, by the higher return he gets upon sale of the property.
"No matter if an investor is bidding for properties online, or buying them through more traditional marketing channels, property taxes are an important part of the equation when conducting your due diligence. To not consider them, or to take on the risk of a heavy tax burden, can be disastrous, especially for less experienced investors," says Rick Sharga, executive vice president at Auction.com.
Joel Cone is a southern California-based freelance business writer who specializes in the fields of real estate, economics and law. His articles have appeared both in print and online for many publications including California Real Estate, OC Metro, GlobeSt.com and The Los Angeles Daily Journal. He is also a contributor to Auction.com.