The Impact of Property Taxes and Insurance
In this article I will demonstrate the impact of property taxes and insurance costs on return. I will do this by comparing return of the same property in three different locations. Below are the characteristics of the example property.
- Purchase price: $200,000.
- Rent: $1,200/Mo.
- Financing: 20% down, 4.5% interest, 30 year term.
- Debt Service (PI): $600/Mo.
- Property tax: $800/Yr. or $67/Mo.
Note that assuming the above assumes 100% occupancy, no maintenance, etc. in order to keep the example as simple as possible. Below are three cities with property tax rates and landlord insurance cost:
The formula I will use is for cash flow. Cash flow is:
Cash Flow = Rent - Debt Service - Property Tax - Insurance
The calculations are as follows:
- Austin: 1200 - 600 - 2.5% x 200000/12 - 1625/12 = $48/Mo or $576/Yr,
- Indianapolis: 1200 - 600 - 1.07% x 200000/12 - 802/12 = $355/Mo. or $4258/Yr.
- Las Vegas: 1200 - 600 - 0.55% x 200000/12 - 350/12 = $479/Mo. or $5748/Yr.
As you can see, the difference in property tax and insurance resulted in a huge difference in annual cash flow.
|City||County||Property Tax||Insurance||Ann Cash Flow|
While the example used was over simplified it demonstrates the importance of including all major costs when comparing properties in different locations.