The Hidden Cash Flow Killer Most Rental Owners Don’t Consider

by | BiggerPockets.com

When you consider the reasons your cash flow gets pulled down, you are likely to think about the usual suspects. Maybe your thoughts go to unit vacancy or utilities. These are valid concerns, of course, and these elements play a major part in keeping your properties performing well. But there is another factor that most investors take for granted, and that’s your real estate tax assessment. You may not have even heard of a tax assessment, but in most states, you have one—and you should know what it is.



Related: How to Reduce Your Property Tax Assessment

Download Your FREE guide to evicting a tenant!

We hope you never have to evict a tenant, but know it’s always wise to prepare for the worst. Navigating the legal and financial considerations of an eviction can be tricky, even for the most experienced landlords. Lucky for you, the experts at BiggerPockets have put together a FREE Guide to Evicting Tenants so you can protect your property and investments.

Click Here For Your Free Tenant Eviction Guide

The Effects of a Too-High Tax Assessment

Your tax assessment is your local town or county’s value of your property. They use that number to calculate your contribution to everything from road costs to your local schools. You may not have heard it explained this way, but I’m talking about your real estate taxes. Most states use the method I explain in the video. (Some don’t, and if yours doesn’t, I would like to hear all about it in the comment field below.) If your tax assessment is too high, you are being charged too much in real estate taxes and may not even know it. Knowing how this number is calculated will enable you to challenge your assessment if it’s too high. Most counties do reassessments every 5 to 10 years. I’ve heard of landlords having their taxes double after getting reassessed, which can happen if you don’t take the right actions to make sure you get a fair valuation.

Be sure to watch this video, where I provide a deep dive into the “nuts and bolts” of what you need to know about real estate tax assessments.

If you have some stories to share about real estate taxes or if your town does it differently than I describe in the video, I want to hear from you!

Be sure to leave a comment.

About Author

Matt Faircloth

In 2005, Matt founded The DeRosa Group along with his wife, Elizabeth. At the time, the two person company owned and managed two assets – a single family home and a duplex. Over the last nine years, they have grown the company to a 12 person team owning and managing over five million dollars in residential and commercial assets throughout the central NJ and Philadelphia area. One of DeRosa’s mantras is “to make money while making a difference.”

26 Comments

  1. JL Hut

    So, what % did your mill rate go down?

    In Michigan they throw in a wrinkle, for some reason the SEV (state equalized value) is always 50% so you have to multiply everything by 2 to get assumed market value. Also we have taxable value T.V. for every property that can not be increased by more than the rate of inflation each year. I have some rentals that I have owned for 35 years that the T.V. is about 30% below the SEV. Taxable is multiplied by the mill rate to get your tax. Any time the property is sold the taxable value is unlocked and the new owner is assessed to the current SEV value and it starts all over again.

    • Matt Faircloth

      Hey JL,
      We are not sure what the rate will be on the apartment complex but I do know that the increase in assessment for the complex was less than the increase in value for the town, which should result in lower taxes. They still need to process everyone else’s appeals and finish their budget to get the mil rate in place.
      Michigan taxes seem complex, lol! It seems like it’s an incentive to hold for a long period of time if your TV is low. It also seems like they never to a re-assessment which is intended to bring all values up to current. Interesting!
      I hope to hear from others about how it’s done in their area also!
      Matt

      • Dan Heuschele

        CA seems similar to what is described for Michigan. When a property is purchased a new property tax base is set based on the selling price and a percentage that varies slightly by community but 1.25% of sold price usually will cover the expected property tax.

        After that the taxable value increase is capped at, I believe, 3% a year.

        This was all in response to owners being taxed out of their homes in the late 1970s (I believe 1978) and the Jarvis-Gann initiative (Prop 13).

        So one of my rentals is worth ~$525K but is taxed at ~$220K (was purchased for $167K in 1992 but initially the value decreased so initially there was no increase to the taxable value). My neighbor next door who purchased recently is paying over twice as much in property taxes for a property that is worth less than my property.

  2. Justin Smith

    My first property was an assisted living facility I bought in 2009 in Philadelphia with 16 beds and 100K in income per year. The taxes were north of 3K because of that business income. I was not much of an investor at the time and in fact I was really just trying to live there with a few roommates and slowly turn it into apartments and just couldn’t afford that tax bill my second year in. I noticed nearby comps were paying only 500-800 and with one simple email and a really caring and helpful employee in City Hall, I got it reduced to 800!!! Definitely worth a shot.

    • Matt Faircloth

      Hey Justin,
      Well played! I like that you did your homework on the taxes paid on neighboring properties. In New Jersey they will not consider an appeal based on the taxes paid on other properties, you have to present comparable sales to make your case. Is that the same process in Philadelphia? Although we own property there we have not done a tax appeal. Curious on how it works.
      Matt

      • Justin Smith

        Hey Matt. Thanks for your response. Sorry I missed it. At the time, there was a very simple form on the BRT website. If you’ve dealt much with City Hall, you expect to be sent to hell and back to get something changed in your favor. I really should have attributed this outcome to a small miracle, because after sending in the online form I got a phone call from an employee at City Hall and she said while she could see my point and they were looking in to changing it, but it was too late for that tax year. I was living in Puerto Rico for a few months and figured there was nothing I could do. A few weeks later I got an e-mail from the same employee stating that she had changed it for that tax year!! Like I said, a small miracle. I think I just happened on someone who cared enough about the fact that I was paying 3K and everybody else on the block was paying around $700 and there was a very specific reason for it and this was a very distressed neighborhood at the time.

        Philadelphia completely changed their tax structure in 2011, I’m playing plenty more, but still a very fair amount, and I’m assuming now it will be a long and laborious process. I just took a brief look at their website: http://www.phila.gov/brt/appeals/Pages/default.aspx and yes it looks like an absolute nightmare.

  3. Domenick T.

    Great video Matt! I’m in NJ and have always used a lawyer for this process because it’s a mystery to me. Any advice for doing it your self in NJ? How would you know how to equate the Assessment to a real property value for the comps for example? If I believe my property is really valued at $200k with an assessment of $85k, do I need to find comps that sold for $200k with lower assessed values?

    Domenick | AccidentalRental.com

    • Matt Faircloth

      Hey Domenick,

      Yes, you can do the appeal yourself. I didn’t get into this in the video but in NJ you can. The paperwork has to be turned in before April 15th so you have a little bit of time left. Call your assessor’s office, they will give you the paperwork to file and if they have their act together it might even be on their website LOL…
      With regards to your property in NJ, don’t get value confused with the tax assessment. If the town is using a 40% correction factor you could have a $200,000 value and an $85,000 assessment. If the correction factor is more than that you may have an assessment that is under what it should be, which is favorable to you and you may not want to say anything to the town (smile).
      Matt

  4. Matt,
    Timely article, good comments too. Another rule of thumb is any time your annual tax bill is greater than 150% of your next biggest operating cost (not mortgages) look into it (that percentage does vary by locality). Most property types also have national associations that collects operating ratio statistics (sorting by property, age, size, etc.), very useful (in a gross way) that may help you analyze if your buildings taxes may be out of line. Check the assessor\’s physical data on your property too, sometimes the rentable sq. ft. are way off, and you can request a correction (if it\’s the wrong way) and reduce the assessment that way. By the way your intro says your shop manages $5m property with 12 people? Unless it\’s a hotel that staffing ratio sounds way out of line (those ratios again!). I managed way more than $5m easily with two FT people. I advise local Puget Sound area owners on lots of these issues. Sometimes the problems are so obvious it\’s shooting fish in a barrel. Hope you\’re not a barefoot shoemaker. Klaus in Seattle.

    • Matt Faircloth

      Hey Klaus,
      Thanks for your thoughts. I would say that the tax bill ratio to other expenses would depend on a multitude of other factors. NJ and PA tend to have higher tax bills but higher rents also so that ratio might now work here. On the other hand I have a building with a $10,000 annual tax bill and a $25,000 gas and electric bill (common boiler on 18 units and also common hot water).
      Your rentable square footage comment is spot on. We have an office building that just got reassessed. They tried to value the building based on the entire square feet of the building which is 10,400 SF. The problem is that only 7500 of that is leasable due to common hallways, bathrooms, reception area, etc… We were able to get a reduction in value based on that adjustment.
      I need to update my BP profile! Our $$ under managment is way up now, around double and our employee count is less than half. We used to have an in house construction team which required a high amount of in house labor. We have since subbed that out.
      Matt

      • Matt Mason

        in CA, base property tax assessments cannot increase by more than 2% a year or the inflation rate in that year, whichever is lower. The results can be quite significant after a number of years.

        As an example I purchased a property for $335k in 1999. It is now assessed for about $445k, even though the market value is over $1M. Only a change in ownership triggers the new value, which is the sales price.

        Oregon has a somewhat similar law. Not sure about other states.

        • Matt Faircloth

          Hey Matt,

          That seems like a really good incentive to hold long term, especially if you bought before the boom. I wonder if a sale of the entity that holds the real estate would trigger the tax increase. Many people do that in this part of the world, meaning they sell the LLC that owns the real estate, not the real estate itself. The mortgages and leases come along with that sale also. I’ve seen it done with a land trust also, by selling the beneficial interest.
          Either way, it’s good to hear how it’s done in other states. Thanks for the feedback!
          Matt

  5. Andrew Syrios

    Good video Matt! In KC I challenge the taxes after every purchase. They’ll almost always lower the value down to my purchase price for two years. Easily worth the money and I’m sure many investors don’t think to do it.

    • Matt Faircloth

      What’s up Andrew! Hope all is well with you.
      It seems like the values on the books are higher than your buy price. If that’s the case, it’s a good move. You are correct, most investors don’t think about their tax bill, they assume that it’s just a fact of life that can’t be changed. Just like you I have saved myself thousands over the years with an appeal. It’s worth every dime!

      Good to hear from you! Take care,

      Matt

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here