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Commercial Property Capitalization Rate

June 3rd, 2010

When buying or selling properties, it is important to find the value of the property, whether it is a house or a commercial property. As with any attempt to find a property value, you must take into consideration many things, such as the condition of the home or building, and the location. If it is a commercial property, you will want to know the businesses capitalization rate.  Because your home typically does not have an income source, the figure known as the capitalization rate is a necessary component of the property’s valuation.

What is the capitalization rate or cap rate?

The cap rate is a ratio used to determine the value of an income-producing property. Basically, the cap rate is the net operating income divided by the sales price or the property’s value, in terms of a percentage. Appraisers, investors, and lenders use the cap rate to estimate the purchase price of different types of income properties. The cap rate can be determined by evaluating the financial data of similar properties that have sold recently.

The cap rate calculation incorporates a property’s selling price, non-rental income, gross rental income, operating expenses and vacancy amount. A property tax assessment can help.

In any commercial property transaction, the seller will try to get the highest price for the property or the lowest cap rate. The buyer on the other hand wants the property at the lowest possible price, which gives the property the highest cap rate. The cap rate will vary from city to city and location to location depending of a number of factors: crime rate, desirability of location, and the general area’s condition. You will find lower cap rates in newer more desirable locations, and higher cap rates in less desirable areas to compensate for increased risk.

When you get a cap rate from an appraiser or lender it is important to know if the rate was determined by recent sales of like properties, or if it was constructed. Given enough financial data appraisers can construct a cap rate figure by using; NOI (Net Operating Income) divided by market value. NOI can be found by subtracting vacancy amount and operating expenses from a property’s gross income. Operating expenses include advertising, insurance, property taxes, maintenance, and property management, to name a few.

If you use the right software, you can actually come up with the cap rate on your own. Today’s software also allows you to come up with “what ifs” by plugging in your own values. This will help you narrow your search, if you are a buyer, and will save you time and money. You do not need a calculator and the data analysis will give you figures based on the last ten years of market data.

Calculating Your Commercial Property Tax

May 18th, 2010

The tax code is the size of a large phone book and is definitely a dry read. Additionally, it’s confusing. Calculating your commercial property tax can be difficult, but after reading this you will have a good grasp on how to calculate your commercial property tax.

The basic calculation is the taxable value multiplied by the tax rate. Now let’s take a look at how taxes are calculated and how tax rates are determined.

How are my taxes calculated?

Your property is taxed by the taxing entities, cities, schools, counties and special tax districts. They calculate the amount you owe, and then send you the bill. In order to calculate the taxes correctly, you will need to know the value of the property in question. The Dallas Central Appraisal District determines the value of your property. The value they come up with is used by the taxing entities to determine the tax you owe. Each entity multiplies the taxable value by their tax rate.

How are tax rates determined?

For each entity to determine their tax rate they first determine how many, and what services they will provide in the coming year and how much revenue is needed to provide those services. The taxing entity then takes the revenue or income needed and divides it by the taxable value to calculate the tax rate that is adopted by the taxing unit’s governing body. This is how the taxing entities establish the tax rate needed to raise enough tax dollars to fund their budget. “Truth in Taxation” laws determine how much this tax can be.

A great resource for more information on calculating your commercial taxes is the Dallas Central Appraisal District. You may want to Google them and use their free tax estimator software as well.

When are my taxes due?

The due date will vary from one entity to another, but most will send a bill out around October 1, and give you until January 31 to pay it. Taxes become delinquent on February 1. However, if an entity sends its bill after January 10, the bill becomes delinquent the first day of the next month.

There you have it in a nutshell. If you have further questions, you may want to contact either the Dallas Central Appraisers District directly or call an appraiser in your area. I recommend calling the appraiser that did your last appraisal.

Good luck and happy calculating.

Property taxes in Texas–What are they, and how do I lower them?

April 21st, 2010

Property Taxes 101:

For those of you who are not current homeowners or have ever owned your own home, consider this your “Taxes 101″ online course. If you have owned a home before, enjoy this brief refresher on ways to lower your property taxes in Texas.

Before we look into ways to lower your property taxes, let’s see what happens to those hard-earned dollars that have to be paid, whether you have a mortgage or not. Each dollar follows this basic path.

1. Whether you pay your taxes separately, or have them escrowed and paid within your mortgage payment, you pay those funds to the local tax collector.

2. The tax collector’s job is to distribute the funds to local governments, schools and cities.

3. Your local government then spends the funds on: roads, hospitals, schools, fire and police departments, and other programs that are needed.

There are several ways you can pay those taxes. Many people pay them monthly on their own, or may choose to pay them twice a year when they come due. Others choose to pay them through their mortgage with an escrow account.

One of the pitfalls of not having an escrow account is the temptation to spend that extra money you have been saving rather than pay the amount at the end of the year. Many find themselves in hot water because of that common practice and may be better served to have that payment “rolled into” their monthly mortgage payment. It is also common to pay one’s homeowners insurance with an escrow account.

It is common, particularly with first-time home buyers, to forget to factor in taxes and insurance with their monthly mortgage payments. You can find yourself stretched thin when you start paying that extra several hundred dollars a month.

So what can you do about it?

One of the ways to lower your property taxes in Texas is to qualify for any one of the different exemptions available. If your home is valued at $75,000, for example, but you have a $10,000 exemption, you are only taxed on the new value, $65,000 ($75k – $10k exemption).

Two common exemptions are a disability homestead and the over 65 homestead exemption. There are also homeowners with a disabilities exemption, not to be confused with the disability homestead exemption. If you cannot work due to physical or mental disability, you may qualify for this exemption.

There are a number of exemptions you may qualify for, but you have to do your research and apply for them on your own. Just because your military spouse dies in combat does not automatically give you the exemption; you have to apply for it. Check with your local tax professional who is familiar with real estate tax exemptions, as these can really make a difference to your bottom line.