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Are you overvaluing the property you are underwriting?

Real estate taxes are one of the largest operating expenses. What’s one of the first thing most investors ask when underwriting a new deal?

How much will the taxes be after acquisition?

Here’s how you can add an extra layer of being conservative to your underwriting analysis.

Tax Reassessments

Unfortunately, there is no ‘rule of thumb’ you can use for property taxes. Property tax assessments vary from state to state (or county to county).

Some states will reassess property values immediately upon sale, and your property tax value will be directly related to your purchase price.

Some states do not reassess property values immediately upon sale. Your assessed property value could be directly related to the previous year’s value and then increase organically over time.

Some states do not follow either of these methods and could reassess the property value on a predetermined schedule (every X number of years) and phase in that reassessment over time.

Exit Assumptions

The next buyer is going to take into account what they potential tax increase will be. Depending on how significant the reassessment will be, this will directly impact what they can afford to pay for your property.

If this potential increase is not figured into your assumptions, you could have inflated exit assumptions in your underwriting model. Thus, hurting the returns for you and your investors.

Solution:

Here we are assumption the next buyer will face a property reassessment at 85% of purchase price with a millage rate of 2.20%.

Based on an 85% reassessment rate, the new buyer could potentially be faced with a $120,095 tax bill. We will then take the difference of our current tax bill ($59,159) and the new potential tax bill, to offset our exit NOI (value).

The $60,936 will be subtracted from our exit NOI, thus hurting our value, but making the analysis more conservative.

Bottom Line

Take into account how property taxes could or will be reassessed when you sell the property. Depending on how significant this reassessment is, the next buyer may not be able to afford to pay what you are modeling in your exit assumptions.

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📈 Chart of The Week

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On a month-over-month basis, effective rents fell 0.56% in October 2023. That compared to a 0.54% cut in October 2022, according to data from RealPage Market Analytics. Those cuts rank as the deepest for any October since the Great Financial Crisis.

📈 Modeling Your Success,

• Free Multifamily Underwriting Crash Course (free model included)

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• Outsource Your Underwriting

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