Property taxes are on the rise across the country as local governments are feeling the effects of the economic downturn. According to an article in the Wall Street Journal, property taxes account for around 40 percent of municipal governments' funding. Falling property values coupled with higher material costs have caused local governments to feel the pinch; they are now preparing to pass that on to homeowners.
The article it pointed out a few cities which are working to raise property taxes. One of the largest cities was Memphis, Tennessee. The mayor of Memphis is proposing a 17 percent increase in property taxes, according to the article. This was one of the larger proposed increases, but if this measure actually gets passed, it will surely have a huge impact on homeowners and investors in Memphis.
Property taxes are one of the harder expenses for real estate investors to swallow because they typically own several properties and can feel as if they are paying more than their fair share. The taxes go towards things such as roads and schools, which can help bring in quality tenants, but the immediate benefit to investors is less than it is for the typical homeowner. Investors usually can pass on property taxes to their tenants through the rent, but when property taxes are raised, investors are many times forced to eat the difference, especially if they are locked into a fixed-term lease. One of the benefits of typical commercial property leases are that landlords are able to pass on any increases in expenses directly to the tenants.
Residential landlords might want to think about taking a page out of the commercial investor’s book and put a clause in their contracts which allow for a bump in the rent if property taxes are raised. After all it is only fair for the tenants to pay for the added expense since they are the ones directly benefiting from the services provided by property tax revenues.