As you start putting together a plan to get into real estate investing, there are a lot of aspects to consider. First and foremost is where to invest in real estate rentals. Investors mainly look for locations that have positive rental market trends, strong job growth, and potential for appreciation. These factors will affect the profitability of your rental and your return on investment. However, there’s another important aspect that plays a role in the investment’s success that beginner investors sometimes forget – real estate property taxes. In this blog, we list top states with no property tax that are also recommended for real estate investing. But first, we need to clear up a few things about property taxes starting with…
What Is a Real Estate Property Tax?
As the name suggests, the real estate property tax is a tax that is charged on immovable property. Immovable property includes land and structures that are permanently attached to the ground like a house, building, or land. It is considered a regressive tax and is levied by the jurisdiction in which the property is located. If you own a home or an investment property, you pay property tax directly to your local tax assessor or indirectly with your monthly mortgage payment.
Property tax is based on the value of the investment property and varies from state to state. Thus, property taxes can be a small inconvenience or a major burden depending on where you live or invest in real estate. You can find the value of property tax by multiplying the property tax rate by the property’s value. According to the US Census Bureau, the average American household spends $2,375 on property taxes each year.
Related: Real Estate Taxes: Everything a Beginner Investor Needs to Know
How Does Property Taxes Affect Investors?
Why should you find states with no property tax for buying an investment property? Well, there are a lot of expenses that are associated with owning a rental property business, and property taxes are just one of them. Some rental property expenses vary in amount depending on how much you need to spend on them. These include repairs and renovations, for example. However, there are other expenses that are fixed within a rate. Clear examples include mortgage payments and the topic of this article – real estate property taxes.
Overall, rental property expenses can have a considerable impact on renal property cash flow. Of course, every investor aims to own positive cash flow properties that generate rental income that covers their monthly and annual expenses and leaves extra money that goes to their pockets. So, if you’re not careful and you’re not investing in tax-friendly states, this will have a negative effect on your cash flow. Actually, the fact the property taxes vary significantly from place to place encourages some real estate investors to invest out of state.
Related: What to Consider Before Investing in Real Estate Out of State.
Do States with No Property Tax Exist?
Unfortunately, there’s no such thing as states with no property tax. Every state charges real estate property taxes because they are used to fund essential government services like education, infrastructure, law enforcement, public transportation, parks and recreation, as well as water and sewer improvements. However, the phrase is still used by real estate investors to refer to the US states with the lowest property tax rates. In these states, property tax is so small that it’s basically negligible and doesn’t affect positive cash flow and return on investment. Keep in mind, however, that states with the lowest property tax rates might have higher costs elsewhere in order to make up for the costs.
10 States with the Lowest Property Tax
Once again, states with no property tax don’t really exist in the US housing market. The good news is that some states are better than others when it comes to the rate of property tax assessed and collected. For example, New Jersey, Illinois, and New Hampshire are the top 3 US states with the highest property tax rates. Property tax rates for these states are 2.47%, 2.30%, and 2.20% respectively according to WalletHub’s Property Taxes by State 2020 ranking. However, there are 28 states that have property taxes below 1% and are essentially next to nothing. Plus, these are some of the best states to invest in real estate.
Here’s a list of the 10 lowest property tax states along with the annual property taxes paid at the state median value according to WalletHub. For the complete ranking of WalletHub’s property taxes by state, click here.
1) Hawaii Real Estate Market
- Effective Property Tax Rate: 0.27%
- Median Home Value: $587,700
- Annual Taxes on State Median Home Value: $1,607
Hawaii has the lowest real estate property tax rate in the US! However, before investing in the Hawaii housing market, keep in mind that the median house cost is very high here. Hence, the annual property taxes you’ll have to pay are pretty high (3rd highest in this list). Hawaii also has the second-highest income tax. Buying an investment property here can generate $2,161 in monthly rental income according to Mashvisor’s real estate data and analytics.
2) Alabama Real Estate Market
- Effective Property Tax Rate: 0.42%
- Median Home Value: $137,200
- Annual Taxes on State Median Home Value: $572
While Alabama is second when it comes to states with no property tax, it’s #1 when it comes to lowest annual property taxes in the US. As you can see, Alabama property owners pay a median property tax of only $572 a year. This low property tax rate is thanks to the below-average home values. This makes the Alabama housing market one of the most affordable for real estate investing. A rental property here can generate $1,174 in monthly rental income. Affordable prices and high rental income is the perfect combination of high cap rates!
3) Colorado Real Estate Market
- Effective Property Tax Rate: 0.53%
- Median Home Value: $313,600
- Annual Taxes on State Median Home Value: $1,647
Over the past few years, the Colorado housing market has been experiencing a strong population and job market growth. One of the main reasons residents and investors are attracted to this state is the fact that it’s one of the lowest property tax states in the US. In addition to being a tax-friendly state, Colorado is also landlord-friendly making it a great location to consider for investing in real estate. A Colorado rental property can generate $1,935 in monthly rental income.
4) Louisiana Real Estate Market
- Effective Property Tax Rate: 0.53%
- Median Home Value: $157,800
- Annual Taxes on State Median Home Value: $840
The Louisiana housing market might not be your first choice when thinking about where to invest in real estate. However, there are surely some benefits to buying an investment property here, the first of which is the low property taxes. Also, home values and prices here are affordable. Real estate data also shows that rental property in Louisiana can generate $1,332 in monthly rental income. Use Mashvisor’s tools to find rental properties for sale in Louisiana with even higher rental income and ROI potentials.
5) District of Columbia Real Estate Market
- Effective Property Tax Rate: 0.55%
- Median Home Value: $568,400
- Annual Taxes on State Median Home Value: $3,113
D.C.’s policies are the main contributors making it one of the states with no property tax. The homestead deduction policy lowers the amount of a property’s assessment that is subject to property tax. While the state’s property taxes are the highest in this list, the District of Colombia has an assessment cap that limits the annual increase in taxable assessment to 10%. Meaning, no matter how much your investment property value grows in a year, the taxable portion won’t grow over 10%. You can expect $2,602 in monthly rental income when investing in D.C.
6) Delaware Real Estate Market
- Effective Property Tax Rate: 0.56%
- Median Home Value: $244,700
- Annual Taxes on State Median Home Value: $1,377
Unlike most other states, the Delaware housing market relies the least on property tax collection as a main source of revenue. This is since local governments in the state don’t reassess property values on a regular basis. Instead, they base their property taxes on the values calculated the last time all property was reassessed. Keep in mind, however, that the state’s low property tax rate is offset by its high income tax rate. Rental properties here can generate $1,544 of monthly rental income according to Mashvisor.
7) South Carolina Real Estate Market
- Effective Property Tax Rate: 0.57%
- Median Home Value: $154,800
- Annual Taxes on State Median Home Value: $887
While South Carolina has a higher property tax rate than Colorado, Louisiana, D.C, and Delaware, it has much more affordable home values. As a result, residents and real estate investors won’t be paying as much in property taxes per year. In addition, you can expect a decent monthly rental income of $1,333 from buying an investment property in the South Carolina housing market. For more information about the state, read: Should You Invest in the South Carolina Real Estate Market? Where?
8) West Virginia Real Estate Market
- Effective Property Tax Rate: 0.59%
- Median Home Value: $115,000
- Annual Taxes on State Median Home Value: $678
West Virginia is not only one of the states with no property tax – it’s also one of the best states in America to invest in property. Furthermore, West Virginia is one of the most affordable places to live in the nation. This explains why the West Virginia housing market appeals to both residents and investors from out-of-state. According to our data, rental properties here can make an average monthly rental income of $1,098.
9) Wyoming Real Estate Market
- Effective Property Tax Rate: 0.61%
- Median Home Value: $213,300
- Annual Taxes on State Median Home Value: $1,298
The average property tax rate in Wyoming is well below the US average. State and local sales taxes here are also lower than the national average, and there are no estate or inheritance taxes either. When combined, this helped make the Wyoming housing market more affordable than many other areas in the country. The rental income potential is also higher than many others ($1,533 per month). So, investing in real estate here is surely profitable.
10) Arkansas Real Estate Market
- Effective Property Tax Rate: 0.63%
- Median Home Value: $123,300
- Annual Taxes on State Median Home Value: $776
The Arkansas housing marketing is emerging as one of the best places to invest in real estate. Besides low property tax rates, there are more reasons to buy property here. Arkansas’ economy is growing, home prices are affordable, and values are appreciating. Arkansas is also one of the top five states with the lowest mortgage rates. Along with these positive real estate market trends, investors can also expect a monthly rental income of $1,524 from an Arkansas rental property and a good cap rate as well.
The Bottom Line
As we’ve mentioned, there aren’t any states with no property tax. Nonetheless, investors use the term to refer to the best tax-friendly states where they won’t be burdened by property tax rates. By investing in real estate in these states, you can save thousands of dollars every year.
You can find rental properties that have even higher rental income potential in any of the states mentioned above using Mashvisor’s real estate search tools and enjoy low property taxes with real estate investing. Mashvisor will also provide you with the tax history for properties for sale on the platform. This will reveal if there are any taxes that are overdue or unpaid and will help you determine how much you’ll pay in taxes to be more prepared by the time tax season comes around.
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