Most of us, look at our property taxes as a necessary evil. We have our annual moan of outrage at the property tax hike proposed by the city, then a sigh of relief when the proposed increase is cut in half. Forgot in the process is that property taxes are still rising, and in the process diminishing the average households spending power. What has offset that increase in the last 15 years or so, is a decline in lending rates, allowing us to believe we are better off than we are. With apologies to Scotia Bank however, I am in fact NOT richer than I think – but low interest rates have allowed me to believe I am. Nonetheless, there is a cost associated with rising property taxes. Looking at them from the cold eyes of a real estate investor might shed a different perspective on them.
Allow me to demonstrate using a simplistic example. I understand that there are a host of variables not considered below, but for the purpose of illustration, bear with me. Investment properties are evaluated based upon the income they are capable of generating. If today’s prevailing cap rate in any particular investment class is 6%, then the purchaser of your asset generating a net income of $100,000 would be willing to offer you $1,666,667. If however, your property taxes were to increase by $2,000, thus lowering your net income to $98,000, the value of your building (along with your net worth) would erode by the tune of $33,334 dollars. We have allowed ourselves to forget this uncomfortable truth because interest rates have continued to lower, and assets (including our homes) have continued to increase in value – on paper anyway. However, it would be useful to remember, that property taxes are very difficult to reverse. Interest rates on the other hand, can and will fluctuate.
Property taxes, (all taxes actually), are both a burden and obligation of those with more wealth to share with those with less. (If they were anything other than this, property taxes would be based upon services rendered, and not value) – and personally, I am comfortable with that notion. That does not mean however, that we should be unaware as to the true cost of an increase in our property taxes. A little less apathy would not be a bad thing. They are more than simply a minor nuisance, they are a direct hit on your net worth.
It is difficult to write about such issues without coming across like a whiner! So, for what it’s worth, I will say that the system we have, is not one that I would trade for any other. Apparently, lots of people around the world feel the same way. Emigration after all, has not been a problem in Canada recently!
Thanks for reading. Please share your thoughts below.