Before I Purchased my first Apartment, I researched for years about the cost that go along with owning them. I stumbled upon a question that a lot of people ask me.

Do Apartment Owners pay property taxes? Yes, apartment owners pay property taxes. The amount is based on the assessed value of the building, if they go unpaid, the delinquent amount becomes a lien on the property. The cost is allocated to different municipal agencies within that local district.

Every year I pay property taxes wondering “What does this money go towards, exactly”. That question and more will be answered below.

Property Taxes

Apartment owners are required to pay property taxes; and if they go unpaid, the property can be seized by the band or the state. Property taxes are a fixed/variable cost that remains with the property owner for the time that you own the property. This applies to Apartment owners, home owners, condo owners and alike.

Property taxes vary by jurisdiction so, it’s important that apartment owners are aware of the laws within that county. The yearly amount paid is distributed to many different municipal sectors. Property taxes are allocated to the following:

• General Government services
• Recreation
• Law enforcement
• Roads/freeways
• Fire protection
• Garbage collection
• Law enforcement

How are Property taxes calculated?

Property taxes vary depending on the apartment complex total value. and the local jurisdiction. They are calculated based on the building and the land. Typically every 1-5 years an accessory will re-value the property using a method known as the mill levy.

Other fixed Cost Associated With Owning An Apartment

Mortgage

Banks charge a fixed amount based on negotiated terms by the apartment owner and the lender. This charge is the debt services the bank would be charging for servicing your loan to purchase the property. The majority of Apartment owner’s strategy for their business is similar manner.

Purchase a value-add property, increase the value and resale at a higher price than purchased. Because of this business plan the mortgages are structured with shorter terms. Interest only for 3-5 years and an immediate pay-off or refinance at the end of a 3 -7 year term.

Commercial apartment loans have different stipulations than residential home loans, but a lot of the foundation principals remain the same.

Insurance

Insurance is another fixed cost that goes along with owning an apartment building. If the property is owned outright, then insurance is not required. However, operating a business of that caliber without insurance puts you harms ways due to litigation.

When apartment owners are looking for insurance, they use the following as a guide to determine pricing.

1. Storms, fires and other types of natural hazards
2. Injures to tenants and visitors
3. Theft/vandalism
4. Loss of income from rentals
5. Litigious acts from disgruntle employees

Property management fee

This is another fee charged by a third-party management company to look over the property’s normal daily operations. The management fee ranges between 3-12 %, usually lower for apartment buildings due to economies of scale.

One of the properties I was thinking about purchasing as a partnership was 128 units. Because of the unit count, the third-party management company was willing to charge 3% of the total gross rent. In comparison to a three-unit property I own at 8% of the total gross. There is a dramatic difference between the two, in favor of the apartment owner.

Apartment Operating Expenses

Advertising

This expense fluctuates in cost depending on different factors. Most of the advertising is geared towards attracting and maintaining tenants. Ads for vacancy must be placed on real-estate rental websites, physical ads can be placed at local businesses, and schools are another area that provides a great tenant pool.

Often times the apartment name is changed as well to add a different atmosphere when the new owners acquire the property. As you can see, Advertisement cost come in a variety of forms. Apartments don’t remain at 100% occupancy for long, so advertising is a constant variable cost that’s re-occurring.

Payroll

Certain employees that work at the apartment on a hourly or salary basis must be added to the payroll. Rather than pay a plumber, Gardner, and handyman to perform miscellaneous jobs around the building. A maintenance man is hired and paid hourly to manage small repair problems around the complex.

This reduces the cost significantly compared to hiring an individual specialist to perform the same task.

Repairs and maintenance

The smaller residential multi-family we own, I have to deal with tenants, toilets and trash. The beautiful aspect about owning apartments, is that the third-party property management company takes care of the dirty work. So, repairs and maintenance include the standard maintenance of the building, landscaping, roofing, exterior paint, etc.

Also, the repairs related to wear and tear are included. To include appliances, plumbing, and pest control. Both costs are re-occurring and should be factored in during analysis.

Turnover

Whenever a tenant/renter leaves an apartment there is cosmetic work that needs to be done. This work could be minor in terms of requiring a fresh coat of paint, or major needing a complete remodel. Either way the cost should be factored in under the operating expenses category in your income statement.

Water/sewer

Water and sewer are another utility expense apartment owners must pay for. There are several ways to go about passing this bill through to the tenants. Rubs or sub-metering, prevents the property owner from having to foot the bill.

RUBS

Rubs also known as the ratio utility billing system, chargers each unit for water based on a calculated formula. Before implementing this system, the nearby properties must be evaluated, to make sure there charging for rubs as well. If you are the only apartment owner charging for rubs then renters may choose to live elsewhere.

Sub-metering

Sub-metering is more accurate in terms of exact usage of water for a specific unit. The best strategy would depend on the situation; sub-metering is very pricey and most apartment owners shy away from this method.

With both methods a third party would be hired for billing services, the strategies may not cover the entire water bill, but they can definitely reduce the overall expense.

Related questions

Do tenants pay for property taxes?

Tenants do not pay for property taxes directly. However, all of the cost accrued from the ownership of an apartment including advertising, remodeling, property management cost and property taxes. Are indirectly a pass through charge to the tenants through yearly rent increases.

Although you may not see the amount written on your lease agreement, we’re paying for it in a different manner.

Do renters pay school taxes?

School taxes are generally included in the property taxes, and renters are not required to pay property taxes. However, most landlords are requiring tenants to pay for renters’ insurance in there policy. It covers the renter if theft, vandalism, and property mishaps causes damage to their personal belongings.

Final Thoughts

Owning a property of any kind comes at a cost to the property owner. Some of the basic cost like gas, electricity, and water may fluctuate. While other cost like the mortgage cost, and insurance may relatively stay the same.

The cost of owning an apartment, far exceeds those of owning a residential home. But the upside of being an apartment owner are the ability to roll these costs over to the tenants.