States with no property taxes are appealing to investors because it means their profits may go up. But it’s not enough to only invest in a state with low taxes.
You also need to know the value of your home and the rental income you can expect to make to start making an informed decision.
Both of these factors will also impact the property taxes you pay.
What Is a Real Estate Property Tax?
Real estate property tax is charged on properties that are permanently affixed to the earth. These properties are known as immovable properties. Some examples include houses, buildings, and even land itself.
Property tax is the responsibility of the locality in which the property is found. It’s paid either directly to the local tax assessor or indirectly as part of the monthly mortgage payment. The value of your real estate determines how much property tax is paid, although the specifics themselves vary from state to state.
How Does Property Taxes Affect Investors?
Investing in real estate means potentially paying a lot of expenses. If your property tax is high enough, that can significantly eat into your return on investment (ROI), which is the measure of how much money your money is making you when all of the costs associated with your investment are accounted for.
This is different from cash-on-cash return (CCR), which basically tells you how much your money is making when only the cost of the property itself is taken into account.
Property taxes can be high enough to inspire investors to look outside of their states for investment opportunities. And since investors are always looking to increase their CCR, property tax rates are another reason to invest in Class C or Class D real estate.
These two classes of real estate require more maintenance and repair, are in less desirable areas, and may have higher turnover and more challenging tenants; but it’s for all these reasons that these properties cost less money and, as a result, can increase your CCR.
How is Your Property Tax Calculated?
How much you pay in property taxes is contingent upon the assessment of your property’s value. This assessment is done by a government employee who works at your local tax assessor’s office. It can happen yearly or once every five years. That’s up to the state and locality to decide. So, after your property is assessed, you get your property tax bill soon after.
How is Your Property’s Value Assessed To Calculate Property Tax?
There are three common ways in which the value of your property is assessed.
Cost Method
The assessor calculates the cost of reproducing your home entirely, including materials, labor, and land. If your property is older, depreciation is included.
Income Method
Used primarily for commercial and business properties, this method entails estimating the potential income the property would generate if it were rented. Cost of maintenance, insurance expenses, prevailing rental rates, and other factors are all considerations.
Sales Comparison
This method entails arriving at a property value after comparing your property to similar properties in the same area that were recently sold and then adjusting that amount based on factors that may make your property more or less valuable.
Do States with No Property Tax Exist?
You may have noticed that there was no mention of states that are exempt from property taxes. That’s because there aren’t actually any states with no property tax. And for good reason: property tax pays for everything from education to infrastructure.
Nonetheless, many real estate investors use the phrase “no property tax” when talking about the states that have property tax so low that it makes a negligible impact on ROI. Although, keep in mind, low tax rates may be offset by higher costs elsewhere.
What States Have the Lowest Tax Rates in 2020?
The median value of homes in the states with no property taxes will raise the annual taxes you would pay on those homes. However, given the low property tax rate, that annual amount won’t be high. And your annual taxes can be even lower if you invest in a Class C or Class D property.
The average cost of living may actually end up eating more into your profits than property taxes, given that you may spend more on repairs, maintenance, and rehab. The Missouri Economic and Information Center (MERIC) calculates the cost of living by averaging indices of participating cities and metro areas in every state and territory. It ranks the results accordingly, with one being the most affordable and 52 being the least affordable.
1. Hawaii
- Effective Property Tax Rate: 0.27%
- Median Home Value: $587,700
- Annual Taxes on State Median Home Value: $1,607
- Potential Monthly Rental Income: $2,161
- MERIC Rank: 52
2. Alabama
- Effective Property Tax Rate: 0.42%
- Median Home Value: $137,200
- Annual Taxes on State Median Home Value: $572
- Potential Monthly Rental Income: $1,174
- MERIC Rank: 7
3. Colorado
- Effective Property Tax Rate: 0.53%
- Median Home Value: $313,600
- Annual Taxes on State Median Home Value: $1,647
- Potential Monthly Rental Income: $1,935
- MERIC Rank: 35
4. Louisiana
- Effective Property Tax Rate: 0.53%
- Median Home Value: $157,800
- Annual Taxes on State Median Home Value: $840
- Potential Monthly Rental Income: $1,332
- MERIC Rank: 17
5. Washington D.C.
- Effective Property Tax Rate: 0.55%
- Median Home Value: $568,400
- Annual Taxes on State Median Home Value: $3,113
- Potential Monthly Rental Income: $2,602
- MERIC Rank: 51
6. Delaware
- Effective Property Tax Rate: 0.56%
- Median Home Value: $244,700
- Annual Taxes on State Median Home Value: $1,377
- Potential Monthly Rental Income: $1,544
- MERIC Rank: 36
7. South Carolina
- Effective Property Tax Rate: 0.57%
- Median Home Value: $154,800
- Annual Taxes on State Median Home Value: $887
- Potential Monthly Rental Income: $1,333
- MERIC Rank: 22
8. West Virginia
- Effective Property Tax Rate: 0.59%
- Median Home Value: $115,000
- Annual Taxes on State Median Home Value: $678
- Potential Monthly Rental Income: $1,098
- MERIC Rank: 13
9. Wyoming
- Effective Property Tax Rate: 0.61%
- Median Home Value: $213,300
- Annual Taxes on State Median Home Value: $1,298
- Potential Monthly Rental Income: $1,533
- MERIC Rank: 20
10. Arkansas
- Effective Property Tax Rate: 0.63%
- Median Home Value: $123,300
- Annual Taxes on State Median Home Value: $776
- Potential Monthly Rental Income: $1,524
- MERIC Rank: 3
Bottom Line on States with no State Tax
As an investor, you want to hit that sweet spot where the cost of purchasing and maintaining your investment is low enough that your monthly rental income makes it all worth it.
Knowing the property taxes, value of the home, and the cost of living in the area will help you winnow down your choices significantly.
Then you can start considering other investment strategies like buy, rehab, rent, refinance, repeat (BRRR), rehabbing or flipping, or wholesaling.
