Why do we live where we live? Often, we settle in a town because it’s proximate to a job or we have family and friends nearby. These non-financial variables are extremely important, but people must also consider the financial side. In considering the financials, my experience is that many (primarily first-time homebuyers) only consider purchase price and interest rate and do not give much weight to the ongoing costs of homeownership. In this article, I will examine the lifetime implications of settling in a town, based solely on property taxes.
Property tax varies greatly. It is assessed by town or county, and state averages do not suffice because of variability. The measurement used is called a mill rate; the term comes from Latin and means “thousandth.” 1 mill means $1 in property tax assessed for every $1,000 of property value.
Let’s envision a fictitious couple who live in the Boston metro and are both 50 years old. They want to buy a $1M home and live in it for the remainder of their lives — possibly 50 more years.
Given a host of assumptions, this fictitious couple’s sustainable living standard is $71k/year if they decide to live in Acton, MA (where the mill rate is 16.67). However, if we hold all variables constant except property tax, their sustainable living standard would be $75k/year if they found a $1M home that checked all their boxes in nearby Bedford, MA (where the mill rate is 11.88). Take it a step further, it would be $77k if Melrose, MA fit the bill (where the rate is 9.93). Said differently, one has more to spend on other items — day-to-day living — when one pays less in property tax.
These are not necessarily life-altering differences, and they do not matter to some people. For example, this fictious couple might have an actual (current) living standard of $60k. This means that even the most expensive example, Acton, is within their means and affords them flexibility should they receive poor market returns over their lives. The annual spending surplus of 11k ($71k – 60k) in this example yields a lifetime surplus of $380k, which can be thought of as a buffer against poor markets. (Indeed, Bedford and Melrose provide larger lifetime surpluses.)
On the flip side, if their current living standard is $70k, choosing the Acton home would not afford them any flexibility should their investment returns be lower than expected. Lifetime surplus would only be $19k. Then, the couple would evaluate their goals; they might prioritize living in Acton (in which case they may choose a less-than-$1M home) or they might decide that a town like Bedford is suitable (yielding a lifetime surplus of $195k).
Another way to think about this is that a $1.1M home in Melrose yields a similar living standard as a $1M home in Acton. Although this difference is not monumental, it represents the effect of one variable.
I have chosen these towns randomly, but these property tax disparities exist in every region and every state. I acknowledge that there are a multitude of variables in play. A $1M home in one town is not necessarily the same as a $1M home in another. In addition, higher property tax may directly result in a better education for one’s children, if applicable, or in a higher level of other municipal services. I believe this extra level of research is worthwhile so that people accurately weigh the financial and non-financial considerations.
No two situations are alike, so it is important to understand your financial plan and make decisions confidently knowing that they are sustainable for you.