How to Calculate Your Return on Property Appreciation – by Alex Craig

Every four years in Memphis, property values are reassessed for property tax purposes. This past 4 year period has seen in most all neighborhood’s, more appreciation then the previous 4 year reassessment period. Does that mean a property tax increase, likely yes, but not a big one as in theory according the county assessor website, property tax reappraisals are supposed to be revenue neutral. That is because of the Tennessee Truth in Taxation law requiring the local legislative bodies to adjust the tax rate to a “certified tax rate” that brings in the same amount of revenue as before reappraisal. Of course, after they lower the tax rate, the county commission (same as a city council), can raise it to bring in additional tax revenue to cover cost increases the city and county have incurred over the past 4 years. Sounds silly, but typical government bait and switch.  The good thing is these county commissioners have to get re-elected, thus we do not expect a large property tax increase that our standard 3% rental increase upon  lease renewal to the current tenant would not cover.

As I was typing this same email to our property management clients last night, the song by the Verve, “Bitter Sweet Symphony” came on, which I thought was appropriate for the property tax increase discussion. We all want our property values to go up as property appreciation is one of the 5 ways Real Estate pays you a return, where as typical investments pay you in 1 way, which would be cash on cash. But the bitter sweet part of that is your property taxes will increase, but no where near the return on cash that property appreciation will bring you. Let’s dig into the return on property appreciation. If you bought a home for $100,000, put 25% down and that property value increased 15% over the last 4 years, your return on that one return metric is not 15%, it is much higher as the increase in value would be calculated on your down payment. Thus that 15% increase is a cash on cash return of 60% because now your $25,000 down payment if you were to sell the home at the 15% increase market value, would give you $40,000 at close. I know there is a lot of factors in the middle that would reduce that 40% return such as sales commissions, closing cost, buyer requested repairs, etc. But keep in mind, during that 4 year period, you had cash flow too and the tenant paying down your mortgage. My example was meant to be a simple, quick look at the power of leverage and 1 of the 5 ways Real Estate pays you a return.