Property taxes are the silent killer of rental property cash flow. Two identical houses in two different states can have a $5,000/year difference in property tax — that's $417/month straight out of your cash flow.
The worst offenders:
New Jersey — 2.47% average A $350,000 rental in New Jersey costs $8,645/year in property taxes. That's $720/month before you pay the mortgage, insurance, or anything else. In some NJ counties it's even higher — Bergen County averages over 2.8%.
Illinois — 2.07% average Same $350,000 house costs $7,245/year in property taxes. Cook County (Chicago) regularly exceeds 2.5%. This is the main reason many Chicago rental properties show negative cash flow despite strong rents.
Texas — 1.80% average (no income tax, but...) Texas gets marketed as a tax-friendly state because there's no income tax. But they make up for it with property taxes. That $350,000 house costs $6,300/year. On a property renting for $1,800/month, property taxes alone consume 29% of your gross rent.
The best states for investors:
Hawaii — 0.28% ($980/year on $350K) Alabama — 0.41% ($1,435/year) Louisiana — 0.55% ($1,925/year) West Virginia — 0.58% ($2,030/year) South Carolina — 0.57% ($1,995/year)
The difference between New Jersey and Alabama on a $350K property is $7,210/year — $601/month. That alone can turn a negative cash flow property into a strong performer.
The lesson: Never compare rental markets without comparing property tax rates. A city with slightly lower rents but much lower taxes often produces better cash flow than a high-rent, high-tax market.
Compare property taxes in every state:
See how property taxes affect your mortgage payment:
Next week: Why your homeowners insurance just doubled (and the 5 cheapest states to insure a rental).
— The Numbers Letter