Property taxes may seem like a fixed cost, but they are important considerations for investors. A booming market with a rising sale value has already pushed up assessor’s valuations of properties. A slack market, can see the property values fall. This has a direct impact on the annual tax assessment, not only in the next coming year, but often within the three years after the change in value. Taxes levied on property can effect the return you can as an investor and may affect your financial costs.
Different investors have different expectations and forecasts of their profit margins. Most investors want to double return, that’s a positive cash flow for a rental revenue stream and a capital gain over the original purchase price.
Usually, real estate ha gone up an average of about 5 percent per year for the past 30 years. However, this figure could be higher or lower, depending on the real estate cycles, location, the type of the property and other factors. Most investors would like to see equity in their properties increased at least 5 percent per year.
This can effect municipal property taxes which is the main revenue source for the cities. Residential property taxes are often only a small percentage of an annual essessed value, but those few percentage points can eat into your cash flow. Knowing which way property taxes are likely to head in a certain market can help you determine what kind of cash flow you get from the property to cover the costs as well as the long-term drag on your returns.
Capital gain is another consideration. If your property gains average of 10 percent per year in value over 10 years, the property can double in value.
If you buy it for $ 100,000 and sell it for 200,000 dollars, you have a $100,000 as your profit in your original capital investment. You are taxed on 50 percent of your profits. In this example, it means you could save $ 50,000 tax free and pay taxes on the remaining $ 50,000. At the top marginal tax rates of approximately 50 percent, you pay about $ 25,000 tax. At the end of the day, you can keep $ 75,000 of your original $ 100,000 profit, after taxes.
If your original purchase price was $ 100,000, it means a 75 percent return over 10 years, or an average of 7.5 percent a year non-compounded.
But you have to factor in positive cash flow from rental income to identify your actual profit.
On the other side, maybe you just put down 10 percent and borrowed the other 90 percent on mortgage loans. Therefore, you actually received a 75 percent return on your original personal resource down payment of $ 10,000 over the 10 years. The reason is that your original $ 10,000 down “investment” resulted in a $ 75,000 net income, or an average of $ 7.500 per year on your original $ 10,000 or 75 percent return each year. Better than obtaining, a 3-percent return on a term deposits that is taxed as the investment income in your hands in that taxation year. Depending on your tax bracket, you can pay 30 percent or more of the interest income, so that the net after tax you actually receive only about two-thirds of your interest, or 2 percent in the examples given.
The property tax assessment records are available through municipal office or the provincial assessment authorities. You’ll also find an explanation of the trend in the annual report of the municipality in which you hope to purchase. Usually, the local media cover the trends in property taxation, provides you with insight into overal municipal approach to set the tax rates (in some provinces, the provincial government set the rate).
Be sure to discuss the impacts of your property taxation policies on your investment with an appraiser who can coordinate appeals on any assessments you consider out of line with the reality of your holding. Given the large number of factors that affect the property’s values and its performance in the given market, you need to understand how property taxes can influence your own cash flow as well as the property’s appeal to the future investors. Assessment that indicates opportunities for investment can easily rise after the investors move in., improve the properties and improve the tone of the surrounding neighborhood.