REI Ink | September 6, 2023
A Conversation on How Property Taxes Influence Investment Property Acquisitions & Management
Whether you are buying, selling, building or managing a real estate investment portfolio, property taxes are an important consideration. They can be a bell-weather for changing market values, an advantageous selling point for sellers and their real estate agents and, of course, they impact the net operating income (NOI), cap rate and financing math.
If a property is over-assessed, a property tax appeal can also deliver an unexpected payday. Property managers may use the savings to make property improvements or add amenities that will attract tenants willing to pay higher monthly rents.
We sat down with Alison Tulio, Esq., President of Incenter Tax Solutions, to get her thoughts on property taxes and their influence on the decision-making process regarding real estate acquisitions. Ms. Tulio has more than 15 years’ experience in this area, and she has previously represented and advised real estate investment companies on acquisitions, sales, financing and leasing matters.
What are the high-level property tax trends in today’s real estate market?
Real estate is always in a state of flux and, therefore, property taxes are as well. The housing market is constantly reacting to interest rate changes, higher or lower occupancy rates, inventory shortages or surpluses and expanding or softening purchase cycles. Property taxes follow these same cycles.
In markets that have experienced significant real estate appreciation over a short period of time, properties may be under-assessed. In other words, local property taxes may rise even as home prices stabilize or cool.
On the other hand, the U.S. needs to add more than 4 million rental properties by 2035 to meet growing demand. If property values in a desirable rental geography such as Austin, Texas, flatten out, taxes should eventually decline while rents continue to creep up — improving property NOI. It is hard to predict from one county to the next which is why monitoring your property taxes is so important. In addition, assessments as well as market values change year to year. If you are not having your taxes reviewed every year, it could result in a missed opportunity for savings.
Meanwhile, if you invest in commercial office properties, you may still be struggling with high vacancy rates caused by the pandemic. Your property values should be coming down along with your property taxes. We have been conducting a pretty steady flow of property tax appeals for commercial property investors and managers for this reason. The savings are typically used to spruce up properties or make upgrades to systems or amenities like common kitchens or bathrooms.
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