Rental properties can be a great way to invest in real estate. Some might even argue the best. But, as with any large investment, there are many considerations that will individually and collectively impact how well your rental property investment serves you. Often the first considerations are things like, “Can I afford tenants who don’t pay rent on time?” Or, “Does the property need a lot of work before I can rent it?” Each of these points can have an impact on your financial goals — but they can also be vague and hard to factor into your calculations. Thankfully, you have public record data at your fingertips to help you plan around hard costs like property taxes — and here’s how.
Adding concrete property tax costs into your calculations can help you cut through the ambiguity of the true value in your investment. These hard costs impact your profit margin monthly and over the lifetime of the property. Taking a deeper dive here can not only help you maximize the return on your investment, but also budget appropriately. Managing your costs and income through planned budgeting just might be the key to avoiding the tax payment blues and knowing whether you can get away with not updating the kitchen this year and still keep good tenants.
Consider tax impounds
Though you can’t legally decide whether you pay taxes, you can decide how you pay them. Once you know how much the taxes will be, which you can get by running a property report, consider if you want to pay them monthly with what is called Tax Impounds, or be billed bi-annually. Paying a lump sum when billed might be the right choice for you if you aren’t concerned with cash flow. But, if you need to update the bath before your new renters move in, why not think about a progressive monthly payment model so you can keep more cash up-front to cover your planned — and unplanned — expenses.
Learn more about these two options and how they could work for you from our short tutorial video below.
Leverage income tax deductions
In celebration of one more tax season behind us and never starting your preparation for next year too early, know your tax deductions. Budgeting with deductions in mind could open up new opportunities. Owning a rental property inherently implies tax cuts for things like depreciation and building maintenance. Read more about what rental deductions you can count on to put more money back in your pocket — and your balance sheet — come next April.
Keep a beat on the value of your home
If you plan to add two rooms to your rental next year to increase income, make sure to consider the implications on your property taxes. Chances are your structure will be more valuable and your taxes will increase proportionately. In your budget you will not only be taking on the cost of the upgrade but also the additional taxes, so make sure you are prepared before seeing the new rental income has a chance to flow in.
Alternatively, the market goes up — and down. If your home depreciates in value (let’s hope not!), your tax burden will be less, but only if it is appraised as such by the country tax assessor’s office. So be sure to make that call if you see home prices dipping in your neighborhood to avoid overpaying during a market downturn.
Understanding the nuances around property taxes and how they affect your ROI could save you from making a less than desirable investment — or simply from leaving money on the table. So make sure to understand your unique property tax situation and how these costs fit into your current and future budget. And if you don’t yet have a budget, get started with our free cost calculator resource. that has all the basic considerations.
Or, if you are looking for a more detailed tool, you can check out the rental property calculator resource provided by BiggerPockets. Happy budgeting!