Joe Downs explains the "pop-up effect" where property tax assessments jump based on purchase price, not the seller's old bill. A $10,000 tax increase can erase $166,000 in equity. In Texas, one deal jumped from $10k to $32k annually, destroying cash flow projections.
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Hello, Storage Mogul Nation! You have arrived at day 58 of the Storage 100 series. Again, I am Joe Downs with the Storage Moguls Mastermind, and property taxes is the topic today because they can silently kill your deal if you are not careful. Uh, they're often overlooked or underestimated, leading to huge surprises after closing. So today we're diving right into property taxes, the pop-up effect, And how to protect your investment. We'll cover how to calculate them correctly and what to watch out for in different states. So it's important information for anyone buying or selling self-storage facilities, folks. First, let's talk about the pop-up effect. It's a common pitfall in property tax assessment. This happens when the assessor reassesses the property based on your purchase price. The seller's tax bill based on an old valuation will be much lower than yours. Your new tax bill will pop up to reflect the current market value. Understanding this is key to accurately projecting your operating expenses. So how do you calculate your new tax bill accurately? Never rely on the seller's tax bill, that's for sure, or the broker's pro forma. These figures won't reflect the new assessment based on your purchase price. So your formula is simple. It's purchase price multiplied by the millage rate. So you call the county assessor directly to get the current millage rate and understand how their assessment process works. This proactive step prevents nasty surprises and ensures your financial projections are sound. All right. Now let's discuss a unique challenge in certain states. So in nondisclosure states, the sale, the sale price of the property isn't public record, which creates a different kind of tax challenge. So in states like Texas, Utah, and Missouri, for instance, they don't automatically share your purchase price with the assessor. So the assessor still has to try to guess your purchase price, but I guess the assessor has to then guess your purchase price because they don't know it, but they still have to do something. So they have to assess. And unfortunately, oftentimes they assess high or they guess too high. And that means you could be assessed at a higher value than you actually paid. Now, you can fight these assessments, but it requires effort and preparation. So you always want to budget for the worst-case scenario, especially in those states. And be prepared for another surprise, the supplemental bill. The supplemental bill is another tax surprise that can hit you after closing. This bill arrives about 6 months after you close on the property, let's say, and it covers the difference between the old assessed value and the new assessed value. And the bill's retroactive to your closing date, so it could be a significant amount. Imagine a $10,000 bill showing up out of nowhere. It can happen. This is why accurate tax projections and understanding how properties tax are so critical. So how do we fight these tax assessments then? Well, property taxes can feel like an unavoidable burden, but you actually have a powerful tool to fight back. You don't have to just accept what the assessor says. You can appeal. And this is where a tax consultant comes in and they work on a contingency fee. Meaning they only get paid if they successfully reduce your tax bill. Typically, they'll keep 30 to 50% of the savings they achieve for you. And if they don't win, then you pay absolutely nothing. So there's no risk to you. Always appeal your property taxes. It's a no-brainer. All right, now let's look at the tax increases, how they really hit your bottom line. 'Cause the tax increase doesn't just impact your cash flow, it significantly erodes your property's value. Remember, every dollar in taxes is a dollar less in your net operating income. So let's say you have a 6% cap rate. A $10,000 tax increase means a $166,000 loss in value in your property. This isn't just about less money in your pocket each month. It's about a direct hit to your equity and the overall worth of your investment. So taxes don't just hurt your cash flow. They actively destroy your equity. This next example really drives home how quickly this can become a problem. So this— in this real-world example, sometimes we call it the Texas Surprise, and it illustrates the danger of not understanding tax application. The seller's property taxes were only $8,000 a year, which looks great on paper. The buyer's pro forma, based on this, projected taxes at around $10,000 a year. But the actual tax bill after the sale jumped to a staggering $32,000. It's a massive increase, completely wiped out by the projected cash flow for the new owner. And it shows how quickly a seemingly good deal can turn sour if you don't account for potential tax changes. This is why you can't guess when it comes to taxes, which brings me to my next point. It's often said only 2 things certain in life, death and taxes. And while you can't avoid them, you absolutely can and must calculate them accurately. Don't ever guess when it comes to property taxes. This isn't a minor detail. It's a critical component of your financial projections. Accurate tax calculations are fundamental to understanding your true cash flow and property value. So always do your homework and get precise figures. Okay. As usual, we covered a lot today and it was an important one, not an exciting one. Nobody likes it, but we got to deal with it. So, but I hope you're seeing the critical importance of understanding what we're covering here and certainly today, fighting your property taxes. So hit that like button if you found this information valuable and subscribe to the channel so you don't miss out on future insights because next up tomorrow, we'll be diving into day 59. Where we're going to discuss insurance, the other silent killer. And lastly, please share this video with someone who needs to hear this message about taxes. They'll thank you later.
