Concept

Property Taxes

What it is

Property taxes are the county’s annual bill on every owner of record. They show up on flips as a holding cost — you owe them prorated for every day you own the property. They show up on rentals as a permanent line item that never goes away. Either way, they come out before you see any profit.

The best way I’ve heard it explained is the Doritos bag. You get $1,500 in rent, you get pumped, and then you open the bag. You got to pay property management, maintenance, CapEx, taxes, insurance, vacancy. So you don’t get the whole bag of chips. You only get some of them. Property taxes are one of the chips you give back every single time.

Why it matters

On a six-month flip, that tax bill is cutting into your margin whether the project moves fast or drags. On a rental, it’s the second line item after insurance on your pro forma — it doesn’t flex with occupancy, it doesn’t go away in a bad month, it just keeps coming.

The one thing that catches new investors is buying on a seller’s current tax bill when the seller has been there for 20 years and hasn’t been reassessed. Counties reassess on sale. That bill can jump significantly after you close. You’re running your numbers on a fictional cost. Pull the actual assessor record and project what it resets to post-sale before you underwrite, not after.

Also worth knowing: tax rates aren’t uniform inside a metro. A property two miles away might carry a millage rate that kills the math on an otherwise good-looking deal. That’s information you can get for free before you make an offer. Get it.

One more thing from the 70% rule discussion — somebody’s property taxes are more than somebody else’s. That’s one of the reasons the 70% rule is blunt-force math. My holding cost might be different than yours. Under basic conditions you get numbers close to the 70% rule, but under different conditions — different tax rate, different hold time — you don’t.

How it shows up

In the holding costs line on a flip alongside insurance, utilities, and loan interest. On a rental pro forma alongside insurance as the two fixed costs the 1 percent rule has to beat. Also at closing as a proration — depending on where the seller is in their tax year, you’ll either get a credit or owe a debit.

For delinquent properties, the tax record is a deal source. Owners who can’t pay the county are often motivated before the property ever shows up anywhere else.

holding costs, cap rate, 1 percent rule, insurance, refinance, wealth engines