Rental investing guide
How Property Taxes Affect Rental Cash Flow
Property taxes are one of the most persistent costs in a rental property model. A small rate change can materially alter annual income and monthly cash flow.
The basic calculation
Multiply the property's modeled value by the effective tax rate to estimate annual property taxes. A $400,000 property at a 1.5% effective rate implies approximately $6,000 per year, or $500 per month. Verify the actual tax record because city and county averages can hide large differences.
Taxes affect more than cap rate
Taxes reduce net operating income, so they reduce both net rental yield and cap rate. They also reduce monthly cash flow after debt service. A higher rent-to-price ratio may not translate into better cash flow if taxes, insurance, or maintenance are substantially higher.
Model reassessment and escrow risk
A purchase can trigger a new assessment or a change in the lender's escrow payment. Ask how the local jurisdiction reassesses property and whether the current bill reflects the likely post-purchase value. Keep a reserve for changes.
Use a conservative range
Run the calculator at the current effective rate, a higher stress-case rate, and the exact tax bill if available. Pair this with a current insurance quote and a maintenance reserve. The goal is to avoid accepting a deal that only works under a fragile assumption.
Put the numbers into practice
Choose a local benchmark and test the assumptions with our free calculator.
Open the calculator