The property tax trap hiding in your real estate underwriting

When most investors begin underwriting a real estate acquisition, they start with the numbers provided by the seller or broker. Rents. Utilities. Insurance. Repairs and maintenance. Property taxes. Most of those numbers provide a useful starting point. Property taxes can be different. One of the easiest mistakes to make when underwriting an investment property is simply taking the current property tax bill, plugging it into your pro forma and assuming that expense will continue after you buy the property. It may not. And on a larger deal, getting that one line wrong can materially change both your cash flow and what the property is actually worth. The seller’s taxes aren’t necessarily your taxes Consider a simple example. Assume an apartment property was purchased 10 years ago and currently has a tax assessment of $1 million. For simplicity, assume the combined effective property tax rate is 2%. The current owner is paying approximately $20,000 per year in property taxes. Now assume that during those 10 years, rents increased, the property’s net operating income improved and multifamily values appreciated substantially. Today, the property is worth $3 million. You purchase it for $...