What Are Property Taxes?
Property taxes are annual taxes levied by local governments on real property (land and buildings) based on the property's assessed value. They are the primary funding source for local services including public schools, fire departments, police, roads, and municipal infrastructure. Property tax obligations run with the land -- meaning they follow the property regardless of who owns it -- and failure to pay can result in a tax lien and ultimately a tax sale.
For real estate investors, property taxes are one of the most significant ongoing expenses. They affect cash flow calculations for rental properties, holding cost estimates for flips, and maximum allowable offer calculations for wholesale deals. In high-tax states like Texas (which has no state income tax but compensates with property tax rates of 2-3%), annual property taxes on a $200,000 home can exceed $5,000.
How property taxes are calculated
Property taxes are calculated by multiplying the property's assessed value (also called taxable value) by the total tax rate. The tax rate is expressed as a dollar amount per $100 of assessed value or as a percentage. Multiple taxing entities stack their rates -- county, city, school district, and special districts (like flood control, hospital, or water districts) each impose their own rate, and you pay the combined total.
Example (Harris County, TX):
Assessed value: $200,000
Homestead exemption: -$100,000 (school district)
Taxable value: $100,000 (school) / $200,000 (others)
Combined rate: ~2.3%
Annual tax: ~$4,600
Property tax rates vary dramatically by location. Within the Houston metro area alone, rates can range from 1.8% to 3.5% depending on the specific combination of taxing jurisdictions. A property on one side of a school district boundary might have a significantly different tax bill than a nearly identical property a mile away. This is why comparing property taxes at the property level, not the county level, matters for investment analysis.
Tax assessments and protests
The county appraisal district assesses property values annually, typically using a combination of comparable sales, income analysis (for commercial properties), and cost approach methods. Property owners receive a notice of appraised value each spring and have the right to protest if they believe the assessment is too high. In Texas, protests must be filed by May 15 or within 30 days of receiving the appraisal notice, whichever is later.
Protesting property taxes is almost always worthwhile for investors. Appraisal districts tend to value properties aggressively because higher values generate more tax revenue. A successful protest can reduce your annual tax bill by hundreds or thousands of dollars. For rental properties, every dollar saved in taxes flows directly to net operating income and improves your cap rate.
Property taxes and investment analysis
Property taxes directly impact every investment analysis metric. For rental properties, taxes are included in the PITIH calculation (principal, interest, taxes, insurance, HOA) that determines your monthly cash obligation. For flips, taxes are a holding cost that accrues every month you own the property. For wholesale deals, the buyer's expected property tax burden affects what they're willing to pay, especially for buy-and-hold investors focused on cash flow.
When analyzing deals, always verify the actual tax amount rather than relying on the listed amount. Properties with homestead exemptions (which reduce the taxable value for owner-occupied homes) will see their taxes increase when an investor purchases them and the exemption is removed. A house showing a $3,500 annual tax bill with a homestead exemption might jump to $5,500 without it.
Delinquent property taxes
When property taxes go unpaid, the taxing authority places a tax lien on the property. After a period of delinquency (which varies by state), the property can be sold at a tax sale to recover the unpaid taxes. In Texas, the delinquency period is typically 2-3 years before a tax sale. Properties with delinquent taxes are often owned by distressed individuals who may be open to selling at below-market prices to avoid losing the property entirely.