Property Tax

Property tax is the annual levy a local government charges on real estate, usually a percentage of assessed value. It is the largest fixed operating expense on most rentals and the first line in every expense list. Because it does not move with rent, it sets the floor of the expense ratio.

The default house pays $3,600, 1.2% of price, which is a third of its $10,230 in expenses. Effective rates run from about 0.3% in Hawaii to over 2% in New Jersey, Illinois and parts of Texas. At 2.4% the same house pays $7,200, NOI drops to $14,670, and the value at 6.5% falls by $55,000 with no change in rent.

The number that matters is the bill after the sale, not the seller's. Many counties reassess on transfer, so a long-held property with a low assessment can see taxes jump 30% or more the year after closing. Underwrite with the rate applied to your purchase price. The Wikipedia article explains assessment, millage rates and the exemptions that some owners lose when a property becomes a rental.

Further reading: Property Tax on Wikipedia.