When investing in residential rental property, investors want to find the best homes to deliver the best ROI. This can be challenging if you’re not sure about all of the factors that go into making a great rental. For example, you might see a fantastic house in a great neighborhood, and the price is right. Your first thought might be to jump on the deal. However, as good property managers will tell you, there are several other components to your investment besides the price point.
Property taxes are another element to consider when making a move on an investment rental property. With property management experts by your side throughout the process, you can be sure of knowing all you need to know about taxes and more. Keep reading to learn how property taxes can affect your return on investment!
What Are Property Taxes For?
If you’re like most people who own homes, you might be wondering what your property taxes are for. In a nutshell, property taxes help pay for local and state infrastructure, schools, roads, and emergency services, such as fire and police workers. In a community, property tax rates can determine the quality of city services, parks, transportation services, and other amenities that can attract (or deter) potential renters from choosing your investment property.
Variations in Property Taxes
One critical thing to keep in mind when searching for new rental investment is that the property taxes can vary from neighborhood to neighborhood or from county to county and state to state. Property taxes in Logan, UT, might not be the same as in nearby cities or compared to other states.
Sometimes a higher tax rate indicates the area is in an excellent place to live. The schools, roads, hospitals, and amenities are superior to other neighborhoods with lower property tax rates. Investors must determine whether the amount of property tax will be too high that you won’t be able to make a profitable ROI. A better neighborhood may attract more tenants, but you’ll need to adjust the rental rate to account for the tax liability.
A professional property management company can help you research property taxes and other factors that make an investment worthwhile.
How are Property Taxes Calculated?
Different factors determine the property taxes, but the tax is based on the home’s assessed value in most cases. Therefore, the percentage of the assessed value that goes toward property tax varies, depending on the area. In 2021, Utah’s median amount of property tax was $1,351 annually, which is low compared to other states. As a result, the average tax percentage for Utah is 0.6%.
Will Your Property Tax Increase?
To find tax information for properties in Logan and surrounding areas, visit the county assessment office. The assessor’s office should also have information about historical rates and trends to tell you if the tax will increase over the next few years.
Before purchasing a property, real estate investors can also talk to homeowners in the community and ask them if they see frequent tax increases. A property manager can also help you with the local perspective of current and potential tax rates and how they affect a rental property’s ROI. Also, keep in mind that if you purchase a property with a low rate because it’s in a financially distressed area, there could be an increase later if the local municipality decides to make improvements.
Can You Lower Your Property Taxes?
If you disagree with the property tax amount for a potential investment or rental properties currently in your portfolio, you can file an appeal to fight it. There’s no guarantee this process will lower your tax rate. However, sometimes assessors adjust the rate if they find that they assigned a value to your property that is too high.
Cache County also offers a primary residential exemption. This exemption is for 45% of the home’s market value, which means you’ll only pay property taxes on 55% of the value. Almost all homeowners qualify for this exemption, even if the property is a rental investment property. However, there is one stipulation to receive the exemption—the owner must be present in the residence for at least 183 consecutive days, which is just over six months. This may be something you could write into the lease, but it’s best to discuss the pros and cons with a property management advisor.
Are Property Taxes Deductible?
The good news about paying property tax is that you can deduct this expense when filing your income tax returns. Property management companies can tell you that deductions will help reduce your overall income so that you won’t have to pay as much income taxes on the rent you receive. The added amount in property taxes might be worth it, considering you can deduct it, and your property manager can help you set the rental rate to stay competitive while covering a slightly higher tax rate.
Get Property Tax Insights from a Property Management Company
A professional property management company applies strategies to ensure your properties generate the best ROI, no matter the property tax rate. Work with property managers familiar with the Logan and Cache Valley area taxes to advise you when evaluating property taxes and returns for a potential residential investment property. Reeder Asset Management is here to help!
Learn more about what an excellent property looks like with our free “Biography of a Perfect Investment Property.“