Property Tax

Property tax is the annual tax a local government levies on real estate, usually as a percent of assessed value. It is the first and often largest operating expense a gross rent multiplier ignores. Effective rates in the US range from under 0.5% of value to over 2%, which is enough to separate two properties with identical GRMs by a point and a half of cap rate.

On a $300,000 property, a 0.6% tax rate is $1,800 a year and a 2.2% rate is $6,600. Both properties can rent for $2,500 and show a GRM of 10. The low-tax property has an NOI around $20,000 and the high-tax one around $15,200, cap rates of about 6.7% and 5.1%.

Property tax also resets at sale in many counties, so the seller's bill can understate the buyer's. GRM never sees any of this, which is why it works for comparing properties in one tax jurisdiction and fails across them. When a listing's GRM looks good, the tax bill after reassessment is the first number to check.

Further reading: Property Tax on Wikipedia.