Over the past few months, I've spent way too much time scouring real estate listings, both in Maine and beyond.
It's a common occurance to spend most of my time thinking about the mortgage payment, down payment, and renovation costs. What frequently flies under the radar is property taxes.
The truth of the matter is that property taxes is an expense that you have a huge amount of control over before the purchase is made (as you can buy in another city or town), but have nearly zero control over after the fact.
Unlike a mortgage or down payment, property taxes never go away, and in Maine, I don't think they ever go down.
As long as you own the property, you will have a property tax payment. It's like a subscription fee you can't get rid of.
Anyways, I wanted to break down how property taxes is a hidden expense. Hopefully this brings a new perspective to anyone interested in purchasing a home in the future.
Bath vs. Harpswell
If you live in Maine, here's a good example to illustrate the hidden cost of property taxes. Let's say I have a budget of $350k, and I'm looking to buy a home in Bath or Harpswell. These towns are very close to each other in proximity, but the property taxes are very different. Yes, I'm aware that I can get more home for my money in Bath vs. Harpswell.
In Bath, if I purchase a $350k home, I pay $20.81 for every $1000 in value. This means if the city assesses my home at the purchase price, I will pay approximately $7,283 every year in property taxes.
Bath property taxes annually: $7,283
In Harpswell, if I purchase a $350k home, I pay $6.07 for every $1000 in value. This means if the city assesses my home at the purchase price, I will pay approximately $2,124 every year in property taxes.
Harpswell property taxes annually: $2,124
The difference over the life of a mortgage
Now, let's extrapolate these numbers over the lifetime of a thirty-year mortgage - let's pretend that these numbers don't change over this time.
Bath - property taxes paid over 30 years:
Harpswell - property taxes paid over 30 years:
Difference saved over 30 years:
We're not done yet!
That's not all we need to factor in though. Money in my pocket today means I can save it over time, whether that's invested in the stock market or sitting in a bank account.
Now, let's imagine if I purchased the home in Harpswell, I decided to save the difference in property taxes vs. Bath and invest it in the stock market instead.
Bath property taxes annually - Harpswell property taxes annually = $5,159 annually that I can invest in the stock market (which has returned 10% annually over the past 30 years).
If I invested this every year and it generated 7% annually, what would I end up with at the end of thirty years?
Yup, that's right. Almost $527,000.
Now, let's say we actually return 10% like the stock market has done over thirty years. What does that end up being?
Almost $939,000. Remember, the home was purchased for $350k!
When I ran these numbers, I was terrified. The idea of living in a township sounds kindof appealing for some weird reason.
Property taxes is a silent expense that very few people think about. Over time, it can make a huge difference.