When you buy an apartment building, your two biggest costs will be your mortgage and your property taxes.
It’s easy enough to estimate your what your mortgage payments will be (try this calculator)… but how do you estimate your property taxes?
In California, we’re blessed with Proposition 13, which effectively limits your property taxes to approximately 1.25% of the purchase price of your property with a maximum annual increase of 2%.
What this means is that you can estimate what your property taxes will be in year one by multiplying the price you propose to pay for a building by 0.0125. So, for example, if you bought a duplex for $500,000, your property taxes could be estimated at $500,000 x .0125 = $6,250 / year or $521 / month.
But you also need to be aware of Mello-Roos (sounds like some kind of weird plague, right?).
Mello-Roos taxes are special levies designed to pay for specific improvements in a particular neighborhood. Say the neighborhood wanted to add street lighting three years ago. It issued bonds to borrow the money to install the lights, then used the Mello-Roos process to impose a property tax surcharge on each piece of property in the neighborhood to pay off the bonds.
Mello-Roos can therefore drive your property tax bill up above 1.25% of your purchase price if your property happens to be in a neighborhood with a Mello-Roos assessment. The additional amount owed is usually not too large relative to the overall tax bill, but it’s definitely important to check it out before buying your property.
It doesn’t hurt to ask your agent or the escrow company to give you an estimate in writing of what your property tax will be post-purchase. That way, you avoid any nasty surprises when your first tax bill shows up.