Property Tax

Property tax is a yearly charge levied by local government against the assessed value of a property. It is usually the largest fixed operating expense on a rental and comes straight out of NOI, so it has a direct effect on the cap rate and on what a property is worth.

The example property pays $6,000 a year, more than a third of its $16,708 of operating expenses. A $1,000 increase in the tax bill lowers NOI by $1,000 and, at a 7% target cap rate, lowers value by about $14,300.

Many jurisdictions reassess at sale, so the seller's current tax bill may understate what a new owner will pay. Underwrite the tax at the rate the county would apply to your purchase price, not the one on last year's bill. That single adjustment often changes the cap rate by a quarter point or more on long-held properties.