Showerthought: my property tax bill made me see cap rates in a new way

I was looking at a small retail strip in Phoenix last Tuesday, and the seller's pro forma had a 7% cap rate. Then my own tax bill for a duplex came in, and the city raised the assessed value by 12% out of the blue. It hit me that the pro forma didn't budget for a tax hike like that, which would have crushed the actual net income. Now I run the numbers with a 2% annual tax increase baked in, and deals look different. Anyone else get burned by not modeling for tax jumps?

2 comments

2 Comments

nora_park722d ago

That part about the pro forma not budgeting for a tax hike... it's so true. It's like they always use the current tax bill and just hope. Do you add any kind of extra cushion in your model now, like a higher yearly expense growth rate, or do you try to guess what the city might actually do?

shah.zara2d ago

Honestly I read a piece that said to just add a flat 3% buffer every year for tax creep.