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Real Estate
Property Tax – The Hidden Cost of Buying a New Home
May 15, 2020
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Veteran homeowners are familiar with hidden costs associated with purchasing a new home. Today, we’ll be turning our focus towards property taxes and how they work. Although a simple concept, property taxes are important to stay informed about to become a smarter homeowner or real estate investor.

What are property taxes?

Property taxes are what you pay local governments to avail important public services in the community. That is, the local parks and other public gathering places are run with the money obtained through property taxes around the area. Moreover, if the road that you use to travel to your home is damaged and the local government decides to send someone down to have a crack at it, the money used in the repair job comes from collected property taxes. Finally, property taxes help fund the local authorities and fire departments to ensure the safety of everyone in your neighborhood.

Property taxes are paid by homeowners. Therefore, if you are on a lease or a tenant, you are not responsible for paying any property taxes and the entire burden is on your landlord.

How should I calculate the amount of property tax I owe?

The amount of property tax that you have to pay depends on two main things.

  1. Local Government’s Tax Rate
  2. Property’s Assessed Value

By calculating the product of these two values you will get the amount of property tax to be paid to the local government for your property.

How is the assessed value of my property determined?

The assessed value of your property is lower than the market value. That is to say, even though it is often believed that the assessed value of a property is the market value, the assessed value of your property is determined by a government assessor.

What is the property tax rate?

The property depends on where you live, and so varies significantly from region to region. More importantly, these are subject to change over time. Therefore, you will find yourself paying varying amounts of a property tax over time.

What is an acceptable property tax rate when paying for your home’s hidden costs?

These metrics come in handy when purchasing a new home. As a general rule of thumb, if the combined mortgage payment, including property taxes, is about more than 25% percent of your actual earnings, forgo the offer and consider looking elsewhere. Otherwise, you will find yourself dealing with a property you will struggle to pay off.

Concluding Remarks

Although the actual payment for the property tax often comes in a bundle with the mortgage payment, including principal interest, among others, once the property has been paid off, you will need to continue to pay property taxes as long as you own the place. Therefore, plan carefully about your payments and do not fall back on them as you run the risk of your property getting reclaimed and sold off.

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Richard Nevis

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