Property Taxes can be one of the largest fixed costs in apartment building investing. Properly accounting for them when running the numbers on a potential purchase (called the ‘underwriting’ process) can make the difference between a nicely cash flowing property and an expensive headache. Multi-Housing News has a good article with the five key questions investors should have answered before making an apartment building investment:
- How often are values reassessed? Is there an automatic reassessment triggered by a transaction?
- What is the exact millage rate? How are they set? How often do they change?
- Are there limitations to the increases in assessed values during the hold period (a la Prop 13 in California)?
- What is the timing of the assessments and when exactly are bills due?
- What is the appeal process and how long does it typically last?
Don’t let this happen to your deal: “We recently had a client call us one week before closing and ask us to verify what they had in the underwriting for property taxes. They had neglected to reset the assessed value upon acquisition, and thus underestimated their obligation by roughly $200,000. This equates to $4,000,000 in value. Unfortunately, I had to be the bearer of bad news, and the deal never closed.”
Properly accounting for property tax expenses after purchase is part of our due diligence process for every acquisition. If you are considering an apartment building investment and want to make a profitable, successful purchase contact us for very thorough due diligence that shows the real costs and benefits of the property.
Hat tip: Andrew Holowetzki