How Government Sets Home Rental Price

Even in rural areas, it’s tough to get a rental unit for less than $800 per month. In big cities, this rental price can go up to $4,000. For example, in the Bronx, New York, a typical one-bedroom apartment costs about $1600. A standard apartment costs about $1000 per month in upstate New York.

Throughout America, rental costs are rising. Various intertwined factors determine the rental price. However, the government indirectly sets rental unit costs that we generally don’t discuss.

Understandably, the rents would be higher in cities where home prices are exorbitantly high, such as Los Angeles, San Francisco, New York City, Houston, and Boston. However, the rent is not significantly lower in less populated cities and rural areas where home costs far less than in big cities. One of the primary reasons is property taxes.

In China, none owns the property. Everything belongs to the CCP government. The Chinese government allows its citizens to lease land, apartment, or houses for a maximum of 70 years. 

Even though people buy and own property in America, the local government collects taxes each year and has the upper hand. If a property owner fails to pay due taxes, the county takes possession of the property and sells the house or lands in a tax deed sale foreclosure auction. In this sense, even though the owner paid for the home, they are a renter in their own house.

In America, nothing is certain except for two things, death, and taxes. In the early days of America, there were no property taxes. Later, various states introduced property taxes as a temporary measure to keep the local government running. However, every permanent program in America starts as a temporary program. And these temporary property taxes have remained permanent since then.

There are two ways a county collects unpaid property taxes. 

  • Tax Lien Certificate Sale
  • Tax Deed Sale

Many localities sell property tax lien certificates such as New York City. If the homeowner doesn’t pay the taxes, a third party can buy that lien. Later, they will collect the lien from the homeowner with interest. If the owner repeatedly fails to pay, the tax lien certificate holder can go to court and take possession of the homes. Sometimes, the lien certificate holder can ask collection agencies to collect the tax lien.

However, only a handful of municipalities sell tax lien certificates. Most counties take possession of delinquent properties through tax foreclosure proceedings. Later, they sell those properties through auctions to raise the lost revenue. 

Even though the timing varies, in most counties, four-year delinquent taxes trigger tax foreclosure proceedings. Therefore, if a homeowner fails to pay property taxes for four years, the owner will lose the home.

Income tax is tied to income. If a person is unemployed or earns less, there’s no income tax. However, a property owner must pay yearly taxes regardless of income, health, or financial situation. 

Depending on municipalities, there are three property taxes.

  • School Tax
  • County Tax / Town Tax
  • Village Tax / City Tax

Regardless of location, everyone pays school tax. Property that resides within the City boundary pays city and county tax separately. For Village municipalities, there are village and county taxes. For Towns, there’s no separate county tax; in a single bill, the town collects the county and town tax.

Most county and local governments need to raise a minimum tax dollar to keep all the roads, water, sewer, police department, and others running smoothly. 

Thus, if a locality has fewer houses, the tax rate will be higher; if a locality has more businesses and homes, the tax rate could be lower, but not always. An inefficiently running company goes bankrupt. Sometimes they lay off people to keep the cost down. However, a government agency is a business that never goes bankrupt. Inefficient and corrupt government agencies even get bigger over time — for example, Illinois and New Jersey.

In New York City, a house may cost $800,000, but the yearly tax bill comes to $5,000 to $6,000. Whereas a home in Albany that costs $250,000 gets a property tax bill of around $8,000 (city/village, county, and school tax combined). 

New Jersey, Illinois, New Hampshire, Texas, Connecticut, and Vermont have the highest property tax rate. Counties like Alcona, Salem, Allegany, Westchester, Rockland, and Nassau have the highest property tax rates in the US.

Therefore, if a house has one unit and the yearly property tax bill is $8,000, the owner can’t rent the house at a lower price. Apart from the $670 property tax per month, an owner must pay the mortgage and a casual repair bill. All these costs add up. Therefore, a renter, not the house owner, indirectly pays the property tax. And because of these property taxes, a house or an apartment rent will never go lower.

Moreover, many counties have strict laws regarding tenant eviction. Sometimes, these laws favor the tenant more than the homeowner. Some renters who know these laws use them for their benefit. For example, in New York City, it takes 8-10 months to evict a tenant. It costs the homeowner a lot of money in legal fees, and it also means a loss of 8-10 months of rental income.

Property owners also have to pay income tax on rental property. Therefore, 10-15% of the rental income goes to the federal and state government. 

Many people buy a home as a source of income. Almost none can buy a home with cash, and most homeowners carry a 30 years mortgage. However, when a renter refuses to pay, and the law makes it harder for an owner to evict the tenant and collect back payment, it puts undue pressure on landlords. For example, in New York City, many lose homes due to these legal issues.

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To prevent these problems, many owners raise the rent and only accept those tenants who have stable and good-paying jobs. As a result, many minimum wage workers struggle to get apartments in many neighborhoods.

The laws regarding tenant-owner relationships should be balanced and unbiased. As the current rules are biased towards tenants, it creates a tricky situation for many homeowners and indirectly affects rents and renters.

Bottom Line:

It’s easy to vilify landlords for asking too much money for rental properties. However, when we factor in the mortgage and property taxes, it’s understandable why home and apartment rents are high.