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.

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 $3 million.

If the property is reassessed near its new market value, that $20,000 tax bill could eventually become approximately $60,000. That's a $40,000 increase in annual operating expenses.

For an investor, however, the damage isn't limited to losing $40,000 of annual cash flow.

Real estate is generally valued based upon its net operating income, or NOI. If expenses increase by $40,000 while everything else remains equal, NOI falls by $40,000. At a 7% capitalization rate, that $40,000 reduction in NOI translates into approximately $571,000 of value

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