How Do Taxes Affect Real Estate Deals?

Philadelphia, Pennsylvania
Real Estate Deal Analysis & Advice
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How Do Taxes Affect Real Estate Deals?

Aliyyah Carter
Member since 2023 · 25 posts · 7 votes

I'm curious about the role property taxes play in determining whether a deal is good. I've noticed that properties in Delaware County are often more attractive than those in Philadelphia, but the property taxes are quite different. 

When evaluating potential real estate deals in Philadelphia, Delaware County, or Montgomery County, how do the differences in property tax rates impact the overall assessment of whether a deal is financially sound? To what extent do property taxes play a role in determining the attractiveness of one location over the other?

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    2y

    Property taxes are an operating expense and are important when factoring whether you should invest in a property or not.

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  • Benjamin AakerPro Member
    Rental Property Investor · Brandon, SD · Member since 2015 · 1k+ posts · 1k+ votes
    2y
    Just add the property taxes into the ordinary expenses of the property when you are doing your calculations. Higher tax will increase expenses, which decreases the net operating income, and decreases the property's value.

    High property taxes on the other hand, (might) mean better roads and schools and other amenities that would increase the property's value. These are not very tangible and should come out in the rental comp numbers (better location means that renters are willing to pay more). Rent is income and adds to net operating income, so the benefit of higher property tax would be hidden there.
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  • Alan AsriantsBusiness Member
    Real Estate Agent · Philadelphia, PA · Member since 2019 · 1k+ posts · 1k+ votes
    2y

    They affect your returns

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  • Stuart UdisPro Member
    Attorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
    2y

    If you are considering properties in Philadelphia be mindful of the tax abatement. While a great tool (especially the prior legislation version), I frequently see properties trade higher than they should because buyers analyze the properties with an extremely narrow lens without appreciating the favorable impact the abatement has on operating expenses. The abatement should have an impact on the valuation, I just find its often over emphasized.

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