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PENSCO Blog

PENSCO Blog

Fresh alternative asset insights and the latest news on real estate and private equity investing.

Keeping Watch on Detroit’s Real Estate Recovery

  |  By Chris Shanahan, CISP®

Sometimes less is more when it comes to real estate -– at least that’s the case right now in Detroit, which is lowering property tax assessments for 75% of the city’s homeowners.

Early last year, Detroit Mayor Mike Duggan said the Motor City would start reassessing property values to better align market values -- which had plunged during the recession -- with property tax assessments, which were over-valued but were being used to help prop up the city’s floundering coffers.

As a result of this reassessment, Duggan announced this year that more than half of Detroit’s homeowners will see their property tax assessments drop by 10%.  In some cases, property tax assessments will fall by as much as 20%.

Tax assessments are used to fund everything from public schools to police protection, so lower tax assessments can lead to a decrease in public services, a drop in quality of life and, ultimately, declining real estate values. While the city’s overall property tax revenue will take a hit, Mayor Duggan said reduced property tax assessments are encouraging people to pay their taxes and they are bringing in revenue above what the city had budgeted.

Last year, I blogged about Detroit’s real estate renaissance and how some of the most powerful names in technology, like Twitter and Google, have set up shop in the city. This is spurring demand for real estate projects, like the construction of a new 66,000-square-foot Quicken Loans Technology Center. At the same time, hundreds of new rental apartments are being built in Detroit to accommodate an anticipated influx of workers.

The success of this tax reassessment program could help spur additional investor demand for Detroit real estate. Property taxes are one of the biggest costs associated with owning a property, so more accurate values could spur real estate activity as the tax burden will be less likely to drive away potential new investors or buyers.

If you use your IRA to invest in buy-to-rent properties, property taxes are paid out of the IRA's cash balance. A drop in tax assessments mean the amount of IRA cash going to pay property taxes in Detroit would be lower than in a lot of other areas, potentially decreasing your IRA's cash outflow and boosting your return on investment. Detroit is betting that by keeping tax assessments more in line with market values, an increasing number of homeowners will pay their taxes and new residents will move to the city.

But remember – all real estate is local. What works for Detroit will not necessarily work in other markets. Property taxes are an important way for municipalities to pay for public services, so seeing drastic property assessment declines like those in Detroit are not typical. If you are considering holding real estate in your IRA be sure to keep an eye on property taxes so you can figure out not only how they might affect the return on your investment, but also how they could have an impact on property values in the neighborhood you are eyeing.

This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.