Understand Your Property Taxes And What The Future Looks Like.

PROPERTY TAX ASSESSMENTS

ARE YOU READY FOR YOURS TO SKYROCKET?

If you haven’t noticed (somehow), we’re in a state of inflation like we haven’t seen in some time. Gas prices are leading the headlines as we approach the summer travel season but real estate costs have been skyhigh for a couple years now. Those circumstances have provided plenty of opportunities for investors to either refinance and do something with that added equity or possibly sell while prices are where they are. Markets inevitably balance and those advantages that have existed for property owners are being pulled back first by financial institutions, then the Federal Reserve, and now local governments.

Back in January, 2022, Nexus Property Management Vice President of Franchise Sales, Greg Rice, warned us all that the clock was ticking and it was time to do something with your property’s equity before it was too late. He spoke of upcoming requirement changes from lenders to the tune of larger down payments. Pre-pandemic 20% down would typically do the trick. Now 30% is the norm. Combine this with elevated prices and it has become very hard to afford to buy properties. Sadly, the bull market has flattened for most of us. With so much money flying around the banks are making their play to minimize risk (on their part) and maximize cash.

[LEARN MORE: CASH IN ON YOUR PROPERTY’S EQUITY BEFORE IT’S TOO LATE]

INTEREST RATES

The Federal Reserve has also gotten into the mix to help slow inflation. Interest rates continue to rise to decrease borrowing and help steady the most severe inflation we’ve seen in decades. Just recently, the Fed announced the largest interest rate hike since 1994. This means that even if you could afford that down payment, the amount you’ll owe to get a mortgage is also going to rise considerably. There’s too much money in the system and the Fed wants to make it more difficult to borrow. That is bad news for real estate investors looking to borrow substantial amounts of cash. As Greg warned, the days of being in the driver’s seat are in the rear view mirror for a while.

[LEARN MORE: THE FED’S FUTURE PLANS FOR INTEREST RATES]

TAX ASSESSMENTS

And finally, local governments are now getting their chance to bite back. While it is difficult politically to raise tax rates, municipal governments around the country need to raise more revenue somehow and the cyclical approach of increasing property values through tax assessments is their best tool. Think of it this way: Every city or town has a budget. That budget has to cover all expenses a town has to address including police, fire, emergency/rescue, schools, …you name it…snow removal, recycling, parks and recreation, … As the world gets more expensive there are only two options: either cut spending and reduce those services, or raise more revenue. Neither is popular, especially amidst inflation.

So property revaluation is the weapon of choice to make adjustments to the tax roll. Municipalities typically hire a vendor (Vision Government Solutions seems to be getting many of the contracts in Rhode Island) and together with their Assessor’s Office they’ll decide the “new value” of your home. They’ll base this on 100% of market price which is really tricky because it seemed to be common consensus that the height of the real estate inflationary period would be just before the Fed started taking action on interest rates. Many local governments pinpointed that period and subsequently those new assessments are as high as they could be.

Some rental property evaluations increased by over 100% and an average of about 75%. One of our clients had taken Greg’s advice and recently refinanced. To do so he needed to have his property appraised and it came in at $395,000. Two months later, the town told him his new assessment was $470,100. His appeal was heard and rejected. That’s an increase from $332,200 to $470,100 (over a three period term) and that increase is the norm right now.

[LEARN MORE: MORE ON TAX ASSESSMENTS AND WHAT YOU MIGHT OWE]

HOW DID WE GET HERE?

So much of our lives are linear and it can be uncomfortable or difficult to view things through a cyclical lens, but this is how markets work. These are all corrective measures by other entities to curtail the market that was so very favorable to us, the property owners and investors. Our towns and cities create their budgets, based on the services we’d outlined above, and then compile all the properties and structures in town. They then find an average amount they need to collect per structure and from there jockey values around in a way that makes sense and is relatively fair. An increased value of $150,000 is an attempt to catch up with the market and increased cost of living. It stinks right now, but when the cycle shifts again, there’ll be more equity than ever in that property and your potential to borrow off of it will return.

[LEARN MORE: UNDERSTANDING THE FOUR PHASES OF THE REAL ESTATE CYCLE]

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AS A PROPERTY OWNER, WHAT DO YOU DO IN THE PRESENT?

As mentioned above, there is an appeals process that is spelled out for you and most likely it will be accessed online and take the form of a phone interview. There is zero reason not to take advantage of this option. Some people have had success, others haven’t, but it’s still worth the shot. Also, be sure to peruse your town or city’s assessor website for other value reducing options such as Homestead Exemptions.

Unfortunately, the other piece of the puzzle is that you’ll likely need to increase your rents. We all want to provide our tenants with high quality living spaces and when we spend money on our properties we want to add value for those tenants. The reality of having to increase prices for this reason is not a very comforting one, but it may be necessary. Communication so your tenants are not blindsided is a best practice our Nexus team recommends.

[LEARN MORE: POTENTIAL ADVANTAGES TO BELOW MARKET RENT RATES]

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Mick Lefort is the Vice President of Operations for Nexus Property Management®. A National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.

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