Q&A With Alison Tulio, President, Incenter Tax Solutions

A Conversation on How Property Taxes Influence Investment Property Acquisitions & Management

Whether you are buying, selling, building or managing a real estate investment portfolio, property taxes are an important consideration. They can be a bell-weather for changing market values, an advantageous selling point for sellers and their real estate agents and, of course, they impact the net operating income (NOI), cap rate and financing math.

If a property is over-assessed, a property tax appeal can also deliver an unexpected payday. Property managers may use the savings to make property improvements or add amenities that will attract tenants willing to pay higher monthly rents.

We sat down with Alison Tulio, Esq., President of Incenter Tax Solutions, to get her thoughts on property taxes and their influence on the decision-making process regarding real estate acquisitions. Ms. Tulio has more than 15 years’ experience in this area, and she has previously represented and advised real estate investment companies on acquisitions, sales, financing and leasing matters.

What are the high-level property tax trends in today’s real estate market?

Real estate is always in a state of flux and, therefore, property taxes are as well. The housing market is constantly reacting to interest rate changes, higher or lower occupancy rates, inventory shortages or surpluses and expanding or softening purchase cycles. Property taxes follow these same cycles.

In markets that have experienced significant real estate appreciation over a short period of time, properties may be under-assessed. In other words, local property taxes may rise even as home prices stabilize or cool.

On the other hand, the U.S. needs to add more than 4 million rental properties by 2035 to meet growing demand. If property values in a desirable rental geography such as Austin, Texas, flatten out, taxes should eventually decline while rents continue to creep up — improving property NOI. It is hard to predict from one county to the next which is why monitoring your property taxes is so important. In addition, assessments as well as market values change year to year. If you are not having your taxes reviewed every year, it could result in a missed opportunity for savings.

Meanwhile, if you invest in commercial office properties, you may still be struggling with high vacancy rates caused by the pandemic. Your property values should be coming down along with your property taxes. We have been conducting a pretty steady flow of property tax appeals for commercial property investors and managers for this reason. The savings are typically used to spruce up properties or make upgrades to systems or amenities like common kitchens or bathrooms.

Why do the property tax math up front?

Across much of the country, real estate prices are ‘normalizing’ and interest rates are peaking. However, both remain comparatively high and will be for the foreseeable future. Investors need to be aggressive about managing their borrowing costs and cashflow. Even a slight uptick in property taxes can upset the most judiciously prepared financials. Conversely, a reduction can change property ROI for the better while delivering some liquidity for reinvestment.

If you are applying for financing, property taxes are taken into account as part of the property’s carrying costs and capitalization rate. Therefore, lowering property taxes will lower the projected debt-to-income ratio for financing calculations including borrowing limits and interest rates.

Factoring in future property tax adjustments based on local market values and trends should inform 5-10 year ROI projections on rental properties. Especially in areas where there is a cap on property tax increases. These work as a hedge through markets of strong appreciation. The property values may go up significantly, but the property tax cap protects against tax spikes that negate property income projections. Two percent of assessed value is the U.S. average tax
rate for multi-family rental properties.

How do property taxes influence real estate purchase decisions?

At the very least, local property tax rates indicate if a town or city is ‘business- or industry-friendly.’  For residential real estate investors, tax rates reveal how towns and cities compare on quality-of-life priorities including local investment in schools, public services and amenities such as libraries and parks. This is especially important to investors in SFR and multi-families. Obviously, local property taxes also reflect resident wealth levels — a key consideration in any real estate investment strategy.

Real estate pundits currently predict a 10% decline, a correction really, in property prices as the market normalizes. Checking a city or town’s recent property tax adjustments history may help investors better project near-term property cap rates. In geographies where housing prices have skyrocketed since the pandemic, property taxes that lag behind higher assessment values are likely to go up. This knowledge may help determine if an investor should buy, sell or hold a property.

More tactically, real estate agents may use the prospect of lower property taxes in locales that are over-assessed or beginning to see pricing declines to entice investors. Some go so far as to request a property tax review prior to listing. If the reviewer determines an appeal would likely be successful, the real estate agent can use this as a positive selling point. Reviews are free so the agent has nothing to lose if an appeal is not recommended.

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