Property Tax

Local governments charge property tax every year, based on the value they assess for each parcel of real estate. For most rentals it is one of the largest operating expenses, and it comes straight out of the cash flow in the numerator of cash on cash return.

The default deal uses $6,000 a year, 1.2% of the $500,000 price. Every extra $1,000 of tax drops cash on cash by about 0.7 points on this deal. Rates vary widely by state and county, so the same price and rent can produce very different returns across a state line.

Use the tax the property will owe after you buy, not the seller's current bill. Many jurisdictions reassess at sale, and a long-time owner may be paying far less than a new buyer will. Checking the local assessor's method before making an offer avoids a surprise that lasts for as long as you own it.

Further reading: Property Tax on Wikipedia.