📈Decoding Real Estate Taxes

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How are Real Estate Taxes Calculated?

Alright, time for the meat and potatoes - how are property taxes actually calculated? Let's break it down.

Real estate taxes are based on two key factors:

  1. The assessed value of the property

  2. The property's location

Location matters because it determines the tax rate, aka the mill rate. Generally, more valuable properties in certain areas get hit with higher taxes.

Here's a simple example:

Let's say you add up all the different tax levies in your region, and the total mill rate is 0.045 (or 4.5%). You have a property assessed at $500,000. To calculate the tax:

Assessed Value x Mill Rate

That means, in this case:

$500,000 x 0.045 = $22,500

That's your annual property tax bill.

Now, different cities, counties, school districts, etc., in the same region can have different mill rates–location impacts your rate and taxes. You'll want to bear that in mind.

How to Assess Property Value

So, you want to determine how much your property is worth for tax purposes? Assessors usually look at it in one of three main ways:

  • Sales Evaluation: They'll compare your place to similar homes or buildings sold recently in your area. This is mainly used for residential properties.

  • Cost Method: They'll calculate how much it would cost to replace your property from scratch, factoring in depreciation over time. This is often for brand-new or unique places without good sales comparisons.

  • Income Method: For rental and commercial properties, they'll estimate the value based on how much money they bring in.

Each of these can impact the final valuation and property taxes differently. It's helpful for owners like us to understand them so we can double-check the assessment if needed–no one wants to pay more than they should! 

With some insight into how assessors work, we can make sure we're being valued fairly.

Bottom Line:

Every county works differently for assessing and reassessing property tax values. For the property you are underwriting, it would be worthwhile to call the county tax assessor’s office and ask how they assess property values.

Additionally, you can hire a third party tax consultant who can give you a year 1 through year 5 breakdown of where they expect real estate taxes to be. You can then use this tax estimate and use it for your underwriting assumptions.

In the Next Level Value-Add Model, we have a section where you can override the year 1 - year 5 tax amounts for this reason.

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📈 Chart of The Week

Florida Apartment Performance Slows Notably

After raising rents notably in the heightened traffic of 2021 and 2022, apartment operators across Florida have pulled back in recent months. In the July to September quarter, Florida rents were cut by an average of 1%, which was quite a different move compared to the average U.S. increase of 0.5%, according to data from RealPage Market Analytics.

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