Every year I protest my property tax valuations and almost every year it is time well spent. It allows me to learn something new about how my property is valued and what other property is valued at surrounding my property and is a general adventure in dealing with people.
So this year I started out with the commercial stuff. I sat down with the same guy that I talked to last year. He remembered that I had my son with me last year but this year I happened to have to go on his birthday so he did not come along (“his loss :)” just kidding son ). I asked for my property to be reduced about 15% from where the county had them appraised at. After showing him my p&l for the year he agreed to get me to a value about 7.5% lower then where the county was at. I decided that it was a good enough return and took his offer and our conversation was almost over. He began to work up the settlement and I began to pick his brain. Well it turns out that the county has produced some very important information which is used to determine property values.
One of those reports is a CAP RATE report for apartment transactions for the prior year. This report contains cap rates for sales that took place for the prior year catorgorized by the age of the complex. It can be used to determine value for your particular property and for those around you. Here is why I was surprised by the report: I was surprised because of how low the cap rates were! Or by how high the values were. For example there was a transaction on a building built in 1973 and it had a 7% cap rate. if you had a 20 unit building that was generating a 100K Net Operating Income you could in theory sell it for a prices of 100K/7%= $1,428,571.
If a unit was renting for about 675 per month with a 5% vacancy and the expenses averaged about 35% of revenue after the vacancy you generate a 100K net operating income.
For those of you who don’t know 7% is LOW. My first student loan interest rate was at 8%. I remember when FHA loans were are 8%. So for an older building to sell at a 7% Capitalization Rate is a really low number and a high value.
Say for example that 7% is a fluke and If you used a 8.5 rate the value would be 1,176,470 ! Which is still out of this world! I did not think that our market was that hot! Boy was I surprised!