The Impact of Overhead Costs
It’s not about how much you gross but how much you net. When choosing an investment city, don’t rely solely on simple return calculations; take into account all major recurring costs. Property taxes and insurance are typically the two biggest recurring costs. Below is a comparison of three states with no state income tax.
Sources for insurance and property taxes: Insurance – ValuePenguin, State Property Tax Rates – Rocket Mortgage.
In order to demonstrate the impact of taxes and insurance on net rental income, I compared the overhead costs of a $400,000 property in three different states. (These averages represent state-level data, and individual cities may levy additional taxes.)
To achieve the same level of cash flow as a property in Nevada, you would need to generate a higher cash flow in Texas and Florida to offset the higher operating costs.
- Texas: The property must generate $5,700 ($9,194 – $3,494) more cash flow annually to compensate for the higher operating costs in Texas.
- Florida: The property must generate $2,123 ($5,617 – $3,494) more cash annually to compensate for the higher operating costs in Florida.
Summary
Overhead costs can have a large impact on cash flow.