How Rising Insurance and Property Taxes Cut Real Estate Values

Most real estate investors treat rising insurance and property taxes as a cash flow problem. A $50,000 increase feels like $50,000 less in your pocket each year. But on a property valued at a 6 cap rate, that same increase can wipe out roughly $800,000 in value.

During a recent episode of Your CPA’s Take on Real Estate, Daniel Roccanti shared valuable insights on the expenses investors most often underestimate when they underwrite a deal. The discussion highlighted the importance of building realistic holding costs into every acquisition, because those costs affect far more than annual cash flow.

Underwriting the Purchase Isn’t the Same as Underwriting Ownership

Most of the effort on a deal goes into the acquisition and financing. Far less goes into what the property will cost to own and operate year after year, and that’s where returns quietly slip away.

Property taxes and insurance are the obvious starting point. “In this day and age you have to assume those two are going up every year.”

Property taxes often jump after a sale

A buyer usually pays more than the previous owner did, which typically triggers a reassessment. Last year’s tax bill isn’t a reliable guide, even with a historical rate of increase applied. Plan for a bigger than normal jump in the first year after purchase.

Insurance is the hardest number to predict

Premiums depend on events no one controls. In Florida, a run of hurricanes can send them sharply higher, while a few quiet years might bring a slight decrease or, more likely, flat pricing. The safer approach is to underwrite for the rough year, not the average one, and ask, “what if we do get hit by three hurricanes.”

The $50,000 Expense That Costs $800,000 in Value

Take a property generating about $500,000 in net operating income (NOI). Its combined insurance and property tax bill rises by $50,000. Most owners would see that as a cash flow hit they can probably absorb. The effect on value is much larger.

As Daniel put it, “If this is a six cap rate that just lost 50,000 in NOI, you actually just lost $800,000 worth of value.”

Why cap rates multiply the damage

Income property is commonly valued by dividing NOI by the cap rate. At a 6 cap, every dollar of lost NOI reduces value by more than $16. This is also why many investors overstate their true cap rates: they aren’t accounting for rising costs.

Stress Test the Expenses Beyond Taxes and Insurance

Repairs and maintenance

The previous owner’s spending isn’t a reliable predictor of yours. They may have deferred maintenance that becomes your bill, or there may be efficiencies to gain. Older and distressed properties typically need more.

Capital expenditures

These are the big-ticket items. Identify what needs to happen immediately, then set timelines for the rest. Expect surprises too, because “everything in life throws you curveballs,” and something will likely come up sooner than planned.

Know What the Property Will Really Cost You

Before buying, every investor should be able to answer one question: “What is this property going to cost me to operate it going forward?”

That answer feeds directly into NOI, and NOI drives valuation. If your vacancy, expense and capital expenditure assumptions aren’t realistic, “then you really don’t actually know truly what the value of your investment is.”

To hear the full conversation, including the numbers Daniel checks to determine whether a property will actually cash flow, watch the full episode and subscribe to Your CPA’s Take on Real Estate.

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