SS58: How To Calculate Property Taxes When Purchasing a Property

One of the biggest mistakes real estate investors make is not calculating the new property taxes or not correctly calculating the new property taxes when investing. In this episode, Charles explains how to quickly calculate the new estimated property taxes on a piece of real estate.

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Talking Points:

Real estate taxes are usually the biggest if not one of the biggest expense items – learning how to calculate/estimate property taxes is crucial when underwriting properties
First off, there are 3 main ways of valuing a property:
- Sales Comps – usually not enough like-kind sales comps in one municipality
- Replacement Cost – is not very useful when determining the true value
- Income Approach – usually used
If the property is on market, the broker will usually have a proforma with which they feel the property taxes will adjust and this is great to consider but you always should calculate the estimated taxes yourself
About property taxes
- Taxes are set by the county/city property assessor/appraiser
- You are trying to determine where taxes have been in the past and where have they adjusted after a previous sale
- Utilize the property info (from the broker or seller), the purchase price, the current taxes, current valuation, historical sales, and bumps, how often do they reassess and what is the process? Then, based on the historical numbers, what is the millage and assessment percentage?
How do you calculate them?
- First, Google the city/county, the state, and the tax assessor, and you will find the tax assessor page for the municipality, usually the first organic result
- Municipalities make it very easy to search for property tax information on their website since they do not want you calling in. Find the property search tool and search the property by its address – it will allow you to pull up all of the information on the property
- First, I would find the current taxes and the current value stated on the county’s website – you will see values for just land and just improvements but the total value and the current taxes are the numbers you want to find – you will sometimes find an assessed value but you want to find the total value or total market value and divide it by the current taxes to find the tax rate
- Next, figure out what you feel the property will trade at (ask the broker). This is where learning about the reassessment process comes in. Most municipalities will reassess the total value at 70%-90% of the sale price. You can run different models on different estimates of where you think it will end up.
- For example; a property has a $100k total value and the taxes are $2,500 currently. The tax rate is 2.5%. The broker says it will sell for $150k; you can now take; 70%-90% of the estimated sales price and multiply that by 2.5% and that will give you an idea of the new taxes. I would probably shoot for 80% and possibly make a couple of underwriting scenarios at 80%, 85%, and 90%. Lastly, I would compare that to the property taxes on your broker’s proforma.
A few closing thoughts:
- If available, you can download/view the current tax bill which is normally available online from the property’s page on the assessor’s website – this is what is sent out to the owner – this bill will breakdown what the total tax amount consists of; the city, the county, schools, police, etc.
- If you are buying a property with multiple parcels; make sure you are not missing any – there is usually a link for a parcel map and you can compare that to Google Maps
- Make sure there are no special assessments or tax rebates
- Usually, it will take 1-2 years for taxes to be reassessed
- Call the assessor if you have any questions
- Remember, your lender is going to be underwriting the property as well and their final value and appraisal are going to be based on this type of analysis

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing how to calculate property taxes when purchasing a property. Now, real estate taxes are usually the biggest, if not one of the biggest expense items and learning how to calculate them, estimate these property taxes is crucial when underwriting properties. Now, first off, there are three main ways of valuing a property sales comps, which are usually used for residential properties, one to four units, but there’s usually not enough like kind sales comps in one municipality. When you’re dealing with income properties. For example, you’re buying a 12 unit apartment building built in 1982, and you’re trying to find a comp for that in the near area that’s recently sold is very difficult. The next is replacement costs, which is usually used by insurance companies. And it’s not a very useful way though, of determining the true value for resale.

Charles:
And number three is the income approach. And this is what’s usually used where all we need is a net operating income of a property. And then the market cap rate to figure out what the value of the property is. Now, if the property is on market, the broker will usually have a performer. And with this, this is where they will feel the property taxes will adjust to. And this is great to consider, but you always want to calculate the estimated taxes yourself. Like for example, if they tell you where rents could go to on property, the perform, you wanna verify that that’s actually realistic for the property. You’re looking at now about the property taxes that taxes are set by the county in city property, assessor appraiser. You’re trying to determine where taxes have been in the past and where have they adjusted to after a previous sale.

Charles:
That’s very important. You know, when you lines the property info from the broker or seller the purchase price, the current taxes, the current valuation, historical sales and bumps, how often do they reassess and what is the process then based on the historical numbers, what is the milage rate and assessment percentage? Now, this sounds very complicated, but let me explain how to, how to calculate them yourself. Now, first I would Google the city and the county and then the state, and then add tax assessor in there. And you’re gonna find the tax assessor’s page for the municipality. Usually the first organic search result, municipalities make it very easy to search for property information on their website, since they do not want you calling in buying the property search tool and search the property by address, it will allow you to pull up all the information on the property.

Charles:
First, I would find the current taxes and the current value stated on the county’s website, you’ll see values for just land and just improvements. But the total value is what you want. Now, if we are doing something about depreciation or something like that, then we we’d really care what the land was and what the, what the value of improvements was is. But the total value is what we need when we’re looking for current taxes. So that’s what you want find you will find and assess value, but you want to find the total value or total market value and divided by the current taxes to find the tax rate. Next, figure out what you feel. The property will trade for. Ask the broker. If they’ve done any type of re reassessment recalculation of where they think the taxes will adjust to, they had to use some sort of sale price.

Charles:
So ask the broker where they think it will trade or where it’s gonna sell. And you use that number. This is where learning about the reassessment process comes in. Most municipalities will reassess the total value at 70% to 90% of the sales price. Now you can run different models on different estimates of where you think that will end up. For example, let’s say a property has a hundred thousand dollars total value, and the taxes are $2,500. Currently. Now the tax rate is 2.5% and the broker says it will sell for $150,000. Well, you can now take 70 to 80 or 70, 80, 90% of the estimated sales price and multiply that by the two and a half percent. That will give you an of the new taxes. Now I probably would shoot for 80% and possibly make a couple underwriting scenarios at 80, 85, 90%. And lastly, I would compare that to the property taxes on the broker’s performa, if you’re somewhat near where they are, then, you know, you’re in the ballpark and you’re on the right track, but this is important to do for all different taxes.

Charles:
And I would also, when you’re reviewing when you’re reviewing any of the expenses on the property, you have to also take this into consideration. Is this accurate? Or it’s not just because that’s what they’re paying doesn’t mean. That’s what you are gonna be paying in property. Taxes is a, is a main thing. If you’ve ever bought a one to four unit residential property in the United States you’ll know that there’s always a writer that come is on there, that you have to sign that tells you about how property taxes they’re, you know, the, the owner, the seller is paying currently is most likely what not, what you’re not gonna be, what you’re going. You’re not gonna be paying that in the future. And you have to sign that. So you agree that, you know, this is like what it was before. It’s not what it’s gonna be.

Charles:
And most people don’t do that. They just hoping that it doesn’t go up too high. Now, a few closing thoughts is if available, you can download and view the current tax bill, which is normally available online from the properties page on the assessor’s website. Now this is what is sent out to the owner and this bill will break down what the total tax amount consists of the city, the county, the schools, the police, et cetera. I mean, usually in municipalities in the United States schools and police are gonna be the largest line items on any type of property tax bill, but that really doesn’t matter too much. If you really wanna dig into it, you can find that. But main thing is you’re looking at is current current current taxes, and then also the total market value. Now, if you’re buying a property with multiple parcels, make sure you’re not missing anything there.

Charles:
And usually there’s a link for a parcel map, which you can compare to Google maps right there on the assessor’s page. Next is make sure there are no special assessments or tax rebates if you’re buying a property and maybe from a developer or someone that went through and redeveloped a whole area, maybe cuz it was a low income area or something else. They might have gotten a special assessment, a tax rebate, a tax abatement. And you have to make sure that this isn’t going to expire anytime soon. Or it’s something that you know, it could jump years on the road and you don’t really know, then you find out that wow, a huge part of my taxes was was being rebate it because of this previous developer that had gone in and done all this work. Now usually it’ll take one to two years for taxes to be reassessed.

Charles:
And I would always call all the assessor. If you have any questions, I’d probably do it either way and tell them what you’re, you’re looking at a property, what you’re looking at, you’re thinking of putting an off, ran at where they think the taxe will go. And if you’re using your own estimates, if you’re using the proforma from the broker, and if you’re speaking to the, the tax assess office, you have now three different way, three different kind of routes of getting the property taxes of where they think it’s gonna recalculate to. And this should help you when you’re underwriting a property, really figure out where it’s probably going to calculate to, or it’s gonna recalculate to and reassess to in about one to two years. Now, remember your lender is gonna do the underwriting on the prop as well. And their final value in appraisal is gonna be based off of this type of analysis.

Charles:
So it’s important that you’ve done your analysis and you know exactly what you’re gonna be looking at for expenses because this won’t happen right after you buy it. It’s usually two years. It depends on the and the municipality, but I’ve seen, you know, one year, two year, three years it also depend on if there was any kind of increase in the near future that happened that order that happened in the past that could happen again in the near future. So make sure that you speak to your, the assessor’s office and review all the information. And that should give you a very good idea of where you can expect the taxes to readjust to. Well, I hope you enjoyed, please remember to rate review, subscribe, submit comments, and potential show topics at global investors, podcast.com. Look forward to two more episodes next week. See you then

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