When figuring out the capitalization rate for an income property - do you include the property taxes as an operating expense?

Asked by Joseph Martinez III, Chicago, IL Wed Aug 1, 2012

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12
John Potter, , Cook County, IL
Fri Aug 3, 2012
Tax write offs have nothing to do with understanding the value of your property. the problem is to solve for Net Operating Income and understanding what revenue and expenses are components to solve for that number.
1 vote
Marcus Neces…, Agent, Bentonville, AR
Wed Aug 1, 2012
Great answers here. Investors use cap rates to compare return of capital. It would only be prudent to include all expenses
1 vote
Brady Miller, Agent, Chicago, IL
Wed Aug 1, 2012
Absolutely -- taxes are an expense like any other.
1 vote
Bill J Delig…, Agent, Naperville, IL
Wed Aug 1, 2012
Taxes, Insurance, Borrowing Costs, Maintenance Costs - These are all Real Expenses and should be included.
1 vote
Matt Laricy, Agent, Chicago, IL
Wed Aug 1, 2012
100% yes. Its one of the expenses.
1 vote
Philip Sencer, Agent, Chicago, IL
Wed Aug 1, 2012
Of course you do. All recurring expenses are included.
1 vote
Joe Schiller, Agent, Chicago, IL
Wed Aug 1, 2012
if your running a winning program I would go to Google and read the rules.. this is not something that a opinion in Trulia is for.. the deal with real estate is accuracy and very little emotion..take the time and read why and why not this model works..
1 vote
Dirk Gould, Agent, Chicago, IL
Wed Aug 1, 2012
I do include property taxes as an operating expense and I build in a 10% cushion just in case the taxes increase.
1 vote
Jesse McGrath, Agent, Chicago, IL
Wed Aug 1, 2012
If you include property taxes as an operating expense then you should also include the tax write-off for it as well. Otherwise don't include it.
1 vote
Randy Schule…, Agent, Saint Charles, IL
Sat Aug 4, 2012
Joseph,

You should include the real estate taxes as an expense in the CAP Rate. If you have an interest in evaluating some commercial opportunities contact me at 224-805-2616. I've personally owned commercial multi-tenant property that generated a great cash flow and I'd be privileged to assist in your search.
0 votes
John Potter, , Cook County, IL
Fri Aug 3, 2012
Yes most certainly. The idea is to look at tax comps and understand if the subject pays a fair tax reconcile and use that number in your pro forma. Taxes could be higher than what current taxes are and most likely are since most taxing bodies still want more money. Therefore, even though assessed values decrease, after the math is done your rate increases.

Taxes should be about 20% of EFGI. Yet for some reason these assessors think more is okay and okay to them is from 40-50% that really squeezes income! I have seen some properties paying upwards of 80 to 90% and sometimes over 100% of the efgi. How taking from the rich works to further more hiring and the building of equity for more development just is inconceivable. Yet those taxing bodies seem to think income producing property just makes so much money and they are entitled to more more more. Since the taxing bodies must grow and after all as Obama says it is the government that builds business!

If I am off base then please someone speak up and correct my perceptions of how the facts affect our economy! Since I see this over and over and over.

So yes include the taxes in the expenses. It is one of the basic ones, such as Insurance, CAM, Repairs, Utilities and should include reserves. Do not forget to estimate your market vacancy factor, not the subject the market for your EFGI.
0 votes
Agnes Tabor, Agent, Naples, FL
Fri Aug 3, 2012
No matter how you spin it, it is an expense.
0 votes
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