Calculating Real Estate Taxes for Multifamily Apartments

Real estate taxes are most likely the largest line item in the operating expenses for a commercial multifamily apartment. Getting this number correct is critical to have an accurate analysis.

Every county will have a specific way on how a property can/will be reassessed and therefore, how the taxes will be calculated. Let’s cover some basic guidelines when it comes to calculating real estate taxes for your next acquisition.

Calculating Real Estate Taxes

Alright, time for the meat and potatoes – how are property taxes actually calculated? Let’s break it down.

Real estate taxes are based on two key factors:

  1. The assessed value of the property
  2. The property’s location

Location matters because it determines the tax rate, aka the mill rate. Generally, more valuable properties in certain areas get hit with higher taxes.

Here’s a simple example:

Let’s say you add up all the different tax levies in your region, and the total mill rate is 0.045 (or 4.5%). You have a property assessed at $500,000. To calculate the tax:

Assessed Value x Mill Rate

That means, in this case:

$500,000 x 0.045 = $22,500

That’s your annual property tax bill.

Now, different cities, counties, school districts, etc., in the same region can have different mill rates–location impacts your rate and taxes. You’ll want to bear that in mind.

Check out the Next Level Value-Add Model. We have a tax calculation where you can determine your year 1 tax number after inputting the assessment percentage and millage rate. If applicable, we also include an early payment discount calculation.

How to Assess Property Value

So, you want to determine how much your property is worth for tax purposes? Assessors usually look at it in one of three main ways:

  • Sales Evaluation: They’ll compare your place to similar homes or buildings sold recently in your area. This is mainly used for residential properties.
  • Cost Method: They’ll calculate how much it would cost to replace your property from scratch, factoring in depreciation over time. This is often for brand-new or unique places without good sales comparisons.
  • Income Method: For rental and commercial properties, they’ll estimate the value based on how much money they bring in.

Each of these can impact the final valuation and property taxes differently. It’s helpful for owners like us to understand them so we can double-check the assessment if needed–no one wants to pay more than they should! 

With some insight into how assessors work, we can make sure we’re being valued fairly.

Bottom Line:

Every county works differently for assessing and reassessing property tax values. For the property you are underwriting, it would be worthwhile to call the county tax assessor’s office and ask how they assess property values.

Additionally, you can hire a third party tax consultant who can give you a year 1 through year 5 breakdown of where they expect real estate taxes to be. You can then use this tax estimate and use it for your underwriting assumptions.