The astute real estate investor that locates a neighborhood that they believe is about to “take off” may find that the tax authorities have a property tax equalization factor in place. This is there to bring the assessed values more in line with surrounding areas.
How Is a Property Tax Equalization Factor Calculated?
It’s a simple calculation, in that there will be some assigned multiplier factor to apply to the properties. Assuming an area that the tax authorities believe is under-assessed in relation to surrounding areas, they might apply an equalization factor multiplier of 1.25 or a 25% increase. Here’s how that works. You’ll need the two numbers: And now you can calculate it: 1.25 x $225,000 = $281,250 $281,250 is the new value of the property so that it’s more in line with those around it.
Components That Impact the Value of Real Estate
There are certain components that contribute to and influence the value of real estate, in this case, a single-family home. These are roughly in order of their importance in the decision-making process of a buyer, but that varies somewhat by the buyer.
Location
We’ve all heard it: “location, location, location.” It sticks around as a slogan because it is true. Where a home is located is arguably the most important factor in the home purchase decision. After all, if you love a gourmet kitchen and you live in Texas, you’re not going to buy a home in Philadelphia just because it has the most amazing kitchen you’ve ever seen. Other factors are involved in location as well:
SchoolsCultureShopping and entertainmentProximity to employmentClimateOther amenities
Neighborhood Characteristics
This could be considered a subset of location, but it’s more than that. People want to drive through a neighborhood to see how their neighbors keep their homes and yards, how quiet or active it is and the amenities offered, like sidewalks, streetlights, etc.
Home Size and Characteristics
A new family may be happy with a two-bedroom home on the small side, especially if it’s their first. A larger family may want one much larger, perhaps with a room for a home office as well. Large families likely want more bathrooms. Older people usually want only single-story homes with less stairs to climb.
Features and Amenities
A gourmet kitchen, a large garage with workshop space—some people get really excited about the yard, outdoor decks, pools, hot tubs, etc. Whatever it is, homebuyers and renters want features and amenities, and that may factor into what they’ll pay for a property.
Price
This one moves around in the order because it’s much more critical for some than others. Of course, everyone has a range, and they’ll compare the price with how well the home meets their requirements in the areas above.
Investor Valuation Considerations
All of these factors matter for homebuyers, renters, and real estate investors. If you’re a real estate investor, you’ll likely need to consider a few more factors when it comes to valuing a property. If you’re looking to buy a new rental property, or already own one and are gearing up for a new tenant, consider these two things:
Prevailing Rents
If you’re going to buy a home as a rental property, you definitely want to know if you can charge enough in rent to pay the mortgage, recoup your expenses, and then still have a positive cash flow every month. A careful analysis of the rental market and competitive homes, and some phone calls, can do the trick.
Age of the Home and Expected Maintenance
On the day a property is purchased, the numbers may all be figured out and the cash flow should be right. However, things change over time. Homes age and rents can’t always go up. You as a real estate investor must evaluate how much money will be spent in the future for minor and major repairs and possibly equipment replacement.
