As Kevin Bupp explains, when property taxes are reassessed, there can be an unexpected jump in value, causing your once “good” deal to not be as good anymore. He recommends asking the tax assessor’s how they are calculating value or if they can provide any updated information regarding a home you’re planning to purchase.
If you’re basing your numbers on current property taxes, there can be an unpleasant surprise when they get reassessed.
Mike: Welcome back, to the www.flipnerd.com REI Classroom, where experts from across the real estate investment industry, teach you quick lessons, to take your business to the next level. And now, let’s meet today’s expert host.
Kevin: Hey guys. Kevin Bupp here from the www.mobilehomeparkacademy.com, and the Real Estate Investing for Cash Flow podcast. Today, I’ll be the host of your REI Classroom tip, and in today’s show, I’m going to share with you a potentially catastrophic mistake that new investors make when running property pro formas, and how to avoid being the next victim.
Mike: This show is sponsored by passiverental.com.
Kevin: So, we in our business, we specialize in mobile home parks and multi-family properties, and we look at properties all the time. And some of these properties have been owned for a number of years by the same exact owners, and haven’t been reassessed since the last sale date. And in some cases, that last sale date could have been 10, 20, 30, or even more years, okay.
Well, the problem starts when you’re evaluating an actual property that hasn’t been reassessed for a long period of time. And what you end up doing is you end up using the current year’s tax bill to use your, you know, to run your financial projections on this property, okay. Because that’s typically all you have at hand. Either the owner gave it to you or the broker gave it to you.
Well, when a sale occurs, it’s basically an invite for the property assessor to come in and reassess the property, which means that the previous assessed value was a million dollars, but you just paid 4 million for it. Well, I can almost promise you that your tax assessment will increase, maybe not all the way up to 4 million, but even if it doubled, guess what that does to your tax rate, right?
This can easily equate to tens of thousands of dollars in yearly tax increases, which means if you ran all your pro formas off the current year tax bill, you might be in for one rude awakening in the very near future. And commercial real estate brokers are notorious at using the current year’s assessment in their marketing packages, and so I urge you to do your own homework by calling the assessor’s office in the county you’re buying, and find how they calculate their millage rates, so that you can easily project this potential change that might occur. Which again, if the property hasn’t been reassessed in 10, 20, 30 years, and you’re paying triple what the current assessment is, I can promise you that at some point in the near future, it’s probably going to get reassessed. Your tax bill is going to go up, okay.
So, let me just give you a quick example to show you how this mistake can have very large consequences. This is assuming you’re looking at a property that’s being valued at an 8% cap rate, and shortly after closing, your tax bill increases by $10,000, and it’s $10,000 that you didn’t plan for, right, because you ran the numbers based on current year’s tax bill. On that eight cap, if it . . . you saw it increase to 10,000, you basically just overpaid for that property by $125,000. That’s a huge number. I mean, that’s a huge hit to your cash flow as well, because now if you’re running your pro formas on cash flow using last year’s tax bill, but now it’s $10,000 less, because you’ve got obviously $10,000 more in expenses well, it’s a big deal. It’s something that you should have known about on the front end.
So, it’s important to never use the current year’s tax bills in your underwriting. Do your homework or find out how the taxes might adjust, should it be properly be recessed shortly after you acquire it, okay guys? It’s your job to do that. Don’t rely on brokers to give you this information. Don’t rely on property owners to give this information. Go directly to the tax assessor’s office, make the call. They’re readily available. A lot of times they’re just dying to talk to people on the phone. So, you could probably easily get someone on the phone there at the assessor’s office, and find out exactly how they calculate the millage rates, and you can even talk to them about the particular property, because it’s not a secret when the transaction happens.
So, don’t think you’re trying to hide something from them because you’re buying this property at such a higher price than what the current assessment is, okay. So, guys that’s all I have for today’s classroom tip. I want to thank you for listening in and being a part of our awesome community that we have here, and until we meet again next time, I want you to get out, take massive action, and make some cash flow happen.
Mike: Passiverental.com is your source for turnkey, done for you rental properties. If you’d like to be an investor and not a landlord, please visit passiverental.com. To learn how to purchase cash flowing, professionally managed rental properties, in the hottest rental markets across the country. We can also help connect you with financing for your next property. Invest the easy way today, and get started by visiting passiverental.com.
Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of www.flipnerd.com, or any of its partners, advertisers, or affiliates. Please consult professionals before making any investment or tax decisions as real estate investing can be risky.
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