Down payment. That’s one of the first expenses you think about when buying a house, especially an investment property, but it’s not the only one to watch. Two other important factors can impact your ROI: taxes and any homeowners’ association (HOA) fees associated with a property.
Do Your Property Tax Research
As a future real estate investor, you definitely need to take note of property taxes. It’s important to remember that this cost impacts your monthly bottom line and will hang around long after your tenants pay off your mortgage.
Your goal should be to find the most profitable combination of property taxes and price points possible. When we help clients search for investment properties, we use our knowledge of local taxes to ensure that you don’t lose monthly profits or miss opportunities for more well balanced costs. Let’s consider a couple of scenarios:
On one hand, let’s say there are two areas with equal price points. One deciding factor between these areas might be the property taxes. Choosing the area with higher tax rates would simply mean money that could have been profit is going toward taxes. So, your search should narrow to the area with lower taxes.
On the other hand, let’s say you’re looking at a property in an area with low price points (and probably low land values). If that area also has high property taxes, you could potentially achieve the same monthly cost in an area with slightly higher prices, but lower taxes and better land values. In one case, you’re spending more on taxes. In the other, you’re taking that difference and putting it toward an even better investment. For example, Kyle and Buda often appeal to new investors in Austin due to relatively low asking prices, but their higher taxes can be a disadvantage.
Pay Close Attention to HOAs
HOA fees are more than a monthly cost; they can entail restrictive rules that impact what you can do with your investment property. Ask yourself two questions when you’re looking at a property with an HOA:
- Will the HOA’s rules impact your ability to rent or renovate the property? If only a limited number of homes in the area can be investment or rental properties, the HOA could easily inhibit your goals. The HOA may also have restrictions on construction that you should be aware of if you are considering a property flip. Be sure to read the fine print of the policies you’re buying into.
- Will the HOA’s amenities deliver enough value for the cost? If the amenities have a strong appeal for your target tenants, and you can increase your rent by as much or more than your monthly fee as a result, the cost is worth it. However, if your HOA is loaded with amenities that ultimately won’t appeal to your tenants or that are too expensive to add value, the fee may simply be lost monthly profits.
We have the inside scoop on properties across the Austin area that balance these monthly costs to your maximum advantage. Believe it or not, we know about some pockets in the area that still have great property tax rates.