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The Investment Property Paradox

Here's the investment property paradox in a nutshell:


But how can that be???

The formula doesn't seem to make sense, but in fact, real estate investors have to deal with it all the time.

It all begins with the Municipal Property Assessment Corp., better known as "MPAC".  They are responsible for assigning a dollar value to your property based on comparables, age, structure, area, etc...  This assessed value is then used by your local municipality to determine  how much property taxes you will pay.

As an investor, one of your goals is to maximize the value of your investment.  So one would think that a high valuation by MPAC would be third party verification that you are moving in the right direction.  HOWEVER, you would be mistaken. 

A high valuation by MPAC means that your property taxes are going up.  As an expense on the income statement, property taxes affects the overall profitablity and VALUE of your investment.  So in fact, the true market value and profitablity of your investment property goes down when your property's assessed value goes up.

The prudent investor wants the lowest possible property assessment in order to pay the lowest possible amount of property taxes, thereby maximizing the profitablity and value of their investment.

The moral of the story is to do whatever you can to keep your assessed value, and thus your taxes, low.  When it comes time to reassess, make sure to build a case supporting a lower valuation and present it to MPAC.  Supporting evidence could include comparables in the area, a third party appraisal, an inspection to point out the deficiencies, etc...

Here is the formula prudent investment property owners should be working towards:

LESS = MORE (in your pocket).

Author: Paul Kondakos, LL.B, MBA, BA - Professional Real Estate Investor


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