Multifamily Tax Assessment v/s sale price

Buying & Selling Real Estate
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Multifamily Tax Assessment v/s sale price

Jackson Sandland
San Francisco, CA · Member since 2016 · 56 posts · 10 votes

I"m looking to buy my second investment property. I've got an off-market duplex in a great Milwaukee neighborhood. Houses on either side of the duplex are selling fast for $140k cash, and up. There are two tenants already renting for a total of ~$1500 / month. Some back of the napkin calculations, including all expenses, shows a possible $600 / month profit. Not too shabby. The property is priced around $100k. Here's the rub:
 I checked the property value assessment for 2017, and it's assessed at $50k. 

When investing in multi-families, do you pay attention to the tax assessed value?

Knowing I'd be paying almost twice the tax assessed value is giving me pause b/c there's no built in equity at the time of sale. Appreciation for the neighborhood is very strong as well. It's been going up 20% / year as of late. What do my fellow real estate investors think of this deal?

Thanks!

Jackson

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Mike Lowery
Rental Property Investor · Milwaukee, WI · Member since 2013 · 180 posts · 104 votes
8y
Comps in the neighborhood are going for $140K. That is more of a driver for me than a tax assessment. When was the last time it was assessed? Perhaps the property was updated and hasn’t since been assessed. The $140K figure is what I’d be more interested in, however, if your assessment goes up to purchase price ($100K) you’re looking at doubling your tax bill, which will affect cash flow. So $100K duplex in a neighborhood where others are selling for $140K is great, but what is your cash flow going to be if your property tax doubles.
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  • Mike Lowery
    Rental Property Investor · Milwaukee, WI · Member since 2013 · 180 posts · 104 votes
    8y
    Comps in the neighborhood are going for $140K. That is more of a driver for me than a tax assessment. When was the last time it was assessed? Perhaps the property was updated and hasn’t since been assessed. The $140K figure is what I’d be more interested in, however, if your assessment goes up to purchase price ($100K) you’re looking at doubling your tax bill, which will affect cash flow. So $100K duplex in a neighborhood where others are selling for $140K is great, but what is your cash flow going to be if your property tax doubles.
    2Reply
  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    8y

    @Jackson Sandland- what area?  

    The city assessments are far below the current value.  Both in Chicago and Milwaukee where I invest the tax assessment is never close to the comps.

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  • Jackson Sandland
    OP
    San Francisco, CA · Member since 2016 · 56 posts · 10 votes
    8y

    @Mike Lowery Not sure they are "comps" considering those other sales are SFH, and this is a duplex, but correct me if I'm wrong about that. I do see it as a positive sign that flippers, and buyers are interested in paying well for the houses next door. The $50k tax assessment is from 2017 :/ I've seen pictures, and the interior, and exterior are in great shape. They've been doing work on the property for the existing tenants. Not sure why an assessment this year would double the assessed price, but yeah it would be hell on the tax bill. The cash flow is ~$600 with taxes considered around $100k. If they remained with the $50k assessment, the cash flow would be almost $700 - that would be icing on the cake.

    @Brie Schmidt Washington Heights

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  • Jackson Sandland
    OP
    San Francisco, CA · Member since 2016 · 56 posts · 10 votes
    8y

    Do you think making a larger down payment is a good strategy to improve cash flow? I'm also considering trying to do a BRRR investment. Seems like that is a great way to get a decent return on your money!

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  • Mike Lowery
    Rental Property Investor · Milwaukee, WI · Member since 2013 · 180 posts · 104 votes
    8y
    Jackson Sandland my mistake. I thought when you said houses are selling in the area, I didn’t equate that as meaning SFR. Washington Heights is one the nicest and growing neighborhoods in Milwaukee. I wouldn’t be going too far out on a limb by saying that pretty much any duplex in that neighborhood would be a heck of deal. When I said if the assessment came back at a $100K or double, I was just taking into an account that if I was an assessor in the city and a property sale occurred for double the assessed value, I would probably raise the assessment to the sale price. There really wouldn’t be an argument from the owners standpoint as that is what they paid for it. I don’t know much about the city assessors and their calculations, but in my experience dealing with REO properties for banks, the only reason I could get a lower assessment was with an appraisal in hand, otherwise they usually based assessed value off the purchase price. The thought being that if someone purchased it, that’s what they are willing to pay for it. It also means they can keep their tax revenue high as home values increase and for the most part, keep them high even in economic downturns. Again, this is just my thought process and what I have seen in a rural community in Michigan. I’m not sure how it works here in Brew City. At the end of the day, if you can acquire a cash flowing duplex in that neighborhood for $100K, I’d be all over it. A higher down payment increases your cash flow, but more than likely lowers your Cash on Cash ROI.....so if I were you I’d figure out what your CoC ROI requirements are and what your cash flow requirements are. At the end of the day, cash is king, and to a point, I would rather spread my cash out amongst properties, then stick additional capital into one.
    1Reply
  • Jackson Sandland
    OP
    San Francisco, CA · Member since 2016 · 56 posts · 10 votes
    8y

    Thanks for breaking that down @Mike Lowery!
    My lender will run their assessment, and if they come back lower than the seller's ask, we can re-negotiate. 

    If we can go under ~$100k that would be an added bonus.

    Tax rationale makes sense. I guess I can benefit from a year at a lower assessment. 

    The CoC looks really good.

    Thanks for your perspective. 

    0Reply
  • Jackson Sandland
    OP
    San Francisco, CA · Member since 2016 · 56 posts · 10 votes
    8y

    @Brie Schmidt Without the tax assessed value having weight, how do you gauge the value of the property you are buying?

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  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    8y

    @Jackson Sandland - by looking at comparable sales

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  • Jackson Sandland
    OP
    San Francisco, CA · Member since 2016 · 56 posts · 10 votes
    8y

    @Brie Schmidt Thanks!

    If you're using a lender to buy a property, how do you find loans with great interest rates?

    One lender just quoted 5.8%, which feels too high. 

    J

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  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    8y

    @Jackson Sandland - it is hard being out of state. Are you buying in a LLC?

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  • Jackson Sandland
    OP
    San Francisco, CA · Member since 2016 · 56 posts · 10 votes
    8y

    I'm not, but I'm not averse to creating one. Would that open up the possibility of better rates? Maybe LLC tax breaks?

    I'm working with a local lender, but their rate is the 5.8%

    Wells did a 5.3% last year for the same investment, except the first was SFH, and this is a duplex.

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  • Dave CarpenterPro Member
    Investor · Cedarburg, WI · Member since 2013 · 439 posts · 150 votes
    8y

    Jackson, just to clarify, is this duplex in the Washington heights neighborhood west of hwy 41 and Washington Park? 

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  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    8y

    @Jackson Sandland in my city the tax assess values are always lower than selling price. Sometimes the values are plain wrong due to un-permitted improvements. There are also some circumstances where where they freeze or reduce value, so the new buyer may pay taxes on a higher basis.

    The value of a property is determined by comparable recent sales. Investment properties are also often valued based on the income approach. That means using the value of the rents and expenses to validate the property value. 

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  • Jackson Sandland
    OP
    San Francisco, CA · Member since 2016 · 56 posts · 10 votes
    8y

    @Dave Carpenter I'll have to check on the map. Why do you ask? What location would affect the price?

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  • Dave CarpenterPro Member
    Investor · Cedarburg, WI · Member since 2013 · 439 posts · 150 votes
    8y

    Jackson, big differences between certain areas, especially in that part of Milwaukee. Generally properties east of hwy 41 are less valuable and in less demand than further west (closer to Wauwatosa). Properties north of North Ave also tend to be a bit less valuable as well. 

    1Reply
  • Rebecca KnoxBusiness Member
    Specialist · Milwaukee, WI · Member since 2014 · 1k+ posts · 1k+ votes
    8y

    I was wondering the same thing Dave--is the duplex in Washington Heights because if so, that seems like a killer deal but the rents would be too low.  I am interested in the neighborhood this deal is located in.  The rents seem low for that purchase price in an appreciating area. 

    We use comparable sales to calculate values but I notice the biggest mistake I see is going too far out. In Milwaukee, sometimes going even 1/2 mile out is an entirely different neighborhood.  I start out with 1/4 mile and work my way out.  Even then, knowing the neighborhood is better because the east side of Holton is a far different comp than the west side of Holton. 

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  • Jackson Sandland
    OP
    San Francisco, CA · Member since 2016 · 56 posts · 10 votes
    8y

    @Dave Carpenter Good to know. This one is south of North Ave, and West of the the park - pretty close to Wauwatosa. Neighborhood comps all look good. 

    0Reply
  • Grant Rothenburger
    Investor · Taylor Mill, KY · Member since 2016 · 2k+ posts · 964 votes
    8y

    @Jackson Sandland Tax assessments could be outdated. They're not the most accurate way to evaluate a property, I wouldn't worry about it. If anything, embrace it! Pay less taxes? Yes please

    0Reply
  • Jackson Sandland
    OP
    San Francisco, CA · Member since 2016 · 56 posts · 10 votes
    8y

    @Grant Rothenburger Yes to lower taxes!

    1Reply
  • Peter B.
    Investor · Ogdensburg, WI · Member since 2016 · 273 posts · 351 votes
    8y

    @Jackson Sandland

    Check the level of assesment (it will be the %number). It may only be 50%? 

    The next thing I would check is where is the current assesment on the cluster of duplexes that have already sold? If the assesor has brought those up to market, you need to underwrite that in your figures. If not, it probably just hasn't hit yet. I would ask your municipality when next revaluation is scheduled. Either way I would plan for it.

    0Reply
  • Austin Tam
    San Francisco, CA · Member since 2008 · 77 posts · 41 votes
    8y

    @Jackson Sandland

    Can you share the numbers you used to get to a cash flow of $700 with a $100k PP and $1500/mo rent?

    I'm asking because I was analyzing a deal for a similar property (duplex) in Washington Heights with a 85k PP, $1500/mo rent. With a 1 month vacancy allowance, $100/mo for water/sewer/garbage, 20% capex & maintenance, taxes, insurance, 12% management, 5% mortgage, I came out with a $215/mo cash flow. 

    I saw the same 140k+ comps as you were seeing so I thought it was a screaming deal, but for some reason it never sold.  

    0Reply
  • Dave CarpenterPro Member
    Investor · Cedarburg, WI · Member since 2013 · 439 posts · 150 votes
    8y

    Where are you San Fran guys finding these screaming deals in Washington heights?!

    0Reply
  • Bill Keast
    Specialist · Syracuse, NY · Member since 2016 · 27 posts · 13 votes
    8y
    On the appraisal we side we see this happen often, especially in NY state the percentage of communities that do annual revaluations is super low. Most municipalities don’t have the capacity to do annual revals, and some wait many years. I would check with the town assessor to see if a sale will trigger a reval on properties. Also google “your county or town name and real property” you should be able to pull up the county or town tax records and hopefully they have a search component and you can bring up other nearby duplex properties to see if they are also similarly assessed.
    0Reply
  • Jackson Sandland
    OP
    San Francisco, CA · Member since 2016 · 56 posts · 10 votes
    8y

    @Rebecca Knox What do you think the rents should be?

    0Reply
  • Jackson Sandland
    OP
    San Francisco, CA · Member since 2016 · 56 posts · 10 votes
    8y

    @Austin Tam We should link up in SF. That's crazy about the 85k property! The cash flow will come down a little, I didn't get the interest rate I wanted on the loan, but I shopped around, and found one at 5% with minimal additional costs. 

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