Kansas City multifamily investment guide

A metro that spans two states usually gives you two rent regulation regimes to check, which is the situation we described in Chattanooga. Kansas City gives you something with a larger number attached: two different assessment ratios on the identical asset.

Take Missouri first, and take the classification question before the rate, because that is the order in which these things actually go wrong. Section 137.016 of the Revised Statutes of Missouri defines residential property as "all real property improved by a structure which is used or intended to be used for residential living by human occupants," subject to a carve-out: "residential property shall not include other similar facilities used primarily for transient housing," where transient housing means rooms whose rental receipts are subject to state sales tax. The test is residential use, and the exclusion is hotels. An apartment building is residential property.

Two later subsections of the same statute confirm the direction in a way that is easy to misread. Subsections 2 and 3 let a taxing district adjust its operating levy to recoup revenue lost "as the result of changing the classification of structures intended to be used for residential living by human occupants which contain five or more dwelling units." A recoup mechanism exists because districts lost money on that reclassification, which tells you the change moved larger apartment buildings to the lower ratio, not away from it.

The rates then come from Section 137.115, which provides that the subclasses "shall be assessed at the following percentages of true value: (a) For real property in subclass (1), nineteen percent; (b) For real property in subclass (2), twelve percent; and (c) For real property in subclass (3), thirty-two percent." Subclass (1) is residential, subclass (3) is commercial.

Now cross the line. The Kansas Constitution, at Article 11, Section 1, classifies real property into subclasses and leaves nothing to inference for our purposes. Class 1, subclass (1) is "Real property used for residential purposes including multi-family residential real property and real property necessary to accommodate a residential community of mobile or manufactured homes," assessed at 11.5 percent. Subclass (6), "Real property used for commercial and industrial purposes," is assessed at 25 percent.

So the same apartment building, at the same true value, sits on a 19 percent assessment base in Jackson County, Missouri and an 11.5 percent base in Johnson County, Kansas. The Kansas base is roughly 60 percent of the Missouri one, a difference of about forty percent, across a boundary that a resident crosses on the way to work without noticing.⁴⁵

• Missouri defines residential property by use, excluding transient housing.
• Missouri assesses residential at 19 percent and commercial at 32 percent of true value.
• The Kansas Constitution names multi-family residential real property expressly, at 11.5 percent.
• Kansas assesses commercial and industrial at 25 percent.

The same building at the same value carries a 19 percent assessment base in Missouri and 11.5 percent in Kansas. Nothing on the ground marks the line.

Bi-state and two-county metros usually have a dominant half. In Chattanooga, Tennessee carries the metro and the Georgia counties are a fringe. In Indianapolis, Marion and Hamilton counties diverged so far on growth, income and permitting that they are effectively separate propositions. Kansas City is the opposite case, and it is worth noticing because it is unusual.

Jackson County, Missouri holds 732,994 people and Johnson County, Kansas 636,906. Census business data puts total employment at 360,017 in Jackson and 352,238 in Johnson, and employer establishments at 18,212 and 18,999 respectively, so the Kansas county actually hosts more businesses. Population growth since April 2020 was 2.2 percent in Jackson and 4.4 percent in Johnson.¹²

The permitting rates are nearly identical, which we did not expect. Jackson authorized 4,036 residential permits against 344,038 units, about 1.17 percent of stock. Johnson authorized 3,237 against 268,845 units, about 1.20 percent. Both are moderate, and neither half is being flooded.²

Where they differ is wealth rather than momentum. Johnson County median household income is $109,208 against $68,577 in Jackson, about 59 percent higher. Poverty runs 6.0 percent against 14.3. Adults with a bachelor’s degree or higher: 57.6 percent against 34.0. Median home value is $391,200 against $230,500.²

The tenure split follows the money in the usual direction. Jackson is 59.1 percent owner-occupied, so 40.9 percent of households rent. Johnson is 68.5 percent owner-occupied, leaving 31.5 percent renting. The deeper renter pool is on the Missouri side, and so is the higher assessment ratio, which is an awkward pairing for a buyer who wants both.²

• Jackson 732,994 people and 360,017 jobs; Johnson 636,906 people and 352,238 jobs.¹
• Permitting is 1.17 and 1.20 percent of stock respectively.²
• Johnson County median income is about 59 percent higher.²
• The deeper renter pool sits on the higher assessment ratio.

We would transact here, and the diligence has an unusual shape: the most valuable work is establishing exactly which taxing regime a parcel sits under before comparing anything to anything. A rent comparable drawn from the wrong side of the state line carries a different expense structure underneath it, and a per-unit tax assumption carried across that line will be wrong in a direction that flatters the deal. Our method is set out in how we evaluate a market, and the full ranked list is on the markets index.

• Which state and which county is the parcel in, and has the classification been confirmed with the assessor?
• Is the asset assessed as residential, at 19 percent in Missouri or 11.5 percent in Kansas, rather than as commercial?
• What are the actual levy rates in this taxing district, since the ratio alone does not determine the bill?
• Did the rent and sale comparables come from the same state as the subject property?
• What are the last three years of actual tax bills, rather than an assumed effective rate?
• On the Missouri side, is there any history of reclassification of the property, given the recoup provisions?
• What rent growth is assumed, given the metro grew employment 0.7 percent and unemployment ticked up?¹²
• What share of the projected return comes from operations rather than the exit?

A per-unit tax assumption carried across this state line will be wrong, and it will be wrong in the direction that makes the deal look better.