How to Underwrite a Texas Rental Property for True Cost (Not the Seller's Tax Bill)

The standard Texas rental property underwriting mistake — the one that destroys Year 2 cash flow and forces distressed liquidations — is using the seller's current property tax bill as your projected holding cost. This is wrong for a specific statutory reason: if the seller lived in the property as their primary residence, Texas Tax Code Section 23.23 has been capping their annual assessed value increases at 10%. That cap disappears the January 1 after you close. The county appraisal district then reassesses at full uncapped market value. The resulting tax increase — often 30% to 80% of the seller's current bill — was never in your underwriting.

This is the step-by-step framework for calculating what you'll actually pay, not what the seller paid.

Step 1: Identify Whether the Seller Has a Homestead Exemption

The first thing you look up is the property's current exemption status at the county Central Appraisal District (CAD) portal. Every county in Texas maintains a searchable database at the CAD's website (e.g., HarrisCAD.org, DCAD.org, BCAD.org for Bexar County). Look up the property by address.

You are looking for two values:

• Appraised Market Value — what the CAD believes the property is worth at full market value
• Assessed (Taxable) Value — what the owner is actually taxed on

If the seller has a homestead exemption and the property has been appreciating, these two values will diverge. A seller who bought in 2015 during a period of rapid appreciation may have an appraised market value of $380,000 with an assessed taxable value of $220,000 — because the 10% cap has been accumulating over nine years of appreciation.

The uncapped market value is your starting point, not the assessed taxable value.

Step 2: Calculate Your Post-Acquisition Tax Liability

Once you identify the full uncapped market value, apply the total effective tax rate for that property's jurisdiction. This is not the county rate — it is the combined rate including county, school district, municipal, and any special taxing district (MUD, PID, emergency services district) levies for that specific address.

The CAD portal shows the individual tax rates for each taxing unit that applies to the property. Add them to find the true effective rate.

Worked Example — Garland, TX Property:

That $174/month increase eliminates cash flow on most Garland deals underwritten at $250–$400/month net before tax adjustment. And this is before MUD costs.

Step 3: Look Up the MUD and PID Tax Rates

If the property is in a suburban development — which is where most out-of-state investors buy in DFW and Houston — there is a high probability it sits within a Municipal Utility District. MUD taxes are not listed separately in Zillow, Redfin, or most listing data. They are folded into the property tax bill alongside county and school district levies and collected via mortgage escrow.

How to look up the MUD rate for a specific property:

1. On the CAD portal, find the property's taxing unit breakdown — every levy line should be listed separately. Look for a line item that says "MUD No. ___" or "Municipal Utility District ___"
2. Note the tax rate (typically expressed as $X per $100 of assessed value)
3. If the CAD portal doesn't show it clearly, look up the property's address on the Texas Comptroller's Local Taxing Units database (comptroller.texas.gov/taxes/property-tax/rates/)
4. Cross-reference with the Texas Commission on Environmental Quality (TCEQ) MUD database to find the district's current bond status

MUD Tax Impact — DFW New Development Example:

Note that MUD rates decline as the district's infrastructure bonds are repaid — a 1.20% rate in a new development may drop to 0.80% over 10 years and 0.40% in a mature district. If you're buying in a new community, ask when the district was formed and how much of the bond principal has been paid down. This tells you whether the rate has decades of decline ahead or is already near bottom.

PID assessments are different — they are fixed dollar amounts (not rates) that do not decline. A $1,500/year PID assessment stays $1,500/year for the 20–30 year assessment period. If you see a PID on the tax roll, model it as a permanent cost.

Step 4: Build the True Effective Tax Rate

Add every levy line from the CAD breakdown:

Consumer mortgage calculators typically use the median county rate (e.g., "Harris County: 2.09%"). In this example, the true effective rate is 3.17% — a 52% understatement. On a $300,000 property, the difference is $3,240/year in unmodeled costs.

Step 5: Model the 20% Circuit Breaker (and Its Expiration)

The Texas Legislature's 20% non-homestead circuit breaker — enacted via SB 2, effective 2024 — caps annual assessed value increases at 20% for non-homestead properties valued at $5 million or under. This provides partial protection if your property is significantly below its market value when you acquire it.

However:

• The circuit breaker expires December 31, 2026. Its renewal is pending legislative action and is not guaranteed.
• The cap applies to the increase in assessed value, not to the initial reassessment when the homestead strips. If a property goes from $192,000 capped to $285,000 uncapped in a single step, the circuit breaker does not prevent that initial jump — it only caps subsequent annual increases after the first year.
• Even with the circuit breaker, a 20% year-over-year increase is severe for leveraged investors. On a $285,000 taxable value with a 2.25% rate, a 20% cap means your tax bill can increase from $6,413 to $7,696 in a single year.

Model both scenarios: with the circuit breaker and without (i.e., full market value reassessment each year).

Step 6: Calculate True NOI With Texas Adjustments

Here is the correct underwriting sequence, using the Garland example:

The seller's model shows a 2.85% cap rate. Your true cap rate is 1.98%. Before debt service, the Garland deal barely works at those numbers — and this is before modeling the potential Glide Path on flood insurance (if applicable) or the cost of property tax protest in Year 1.

Step 7: Run the Property Tax Protest in Year 1

If you don't protest in your first year of ownership after the homestead strips, you lock in the highest possible baseline. Texas appraisal districts accept protests based on:

• Comparable sales — find 3-5 recent sales in your neighborhood with similar square footage, age, and condition that support a lower market value
• Unequal appraisal — if similar properties in the neighborhood have lower CAD values than yours (common in rapidly appreciating markets), you can protest on uniformity grounds

File by May 15 of the year following acquisition (or 30 days after the Notice of Appraised Value is mailed, whichever is later). The informal hearing happens before the Appraisal Review Board (ARB) and takes 15–20 minutes. Most investors who protest with comparables get some reduction. Even a 10% reduction from $285,000 to $256,500 saves $644/year at a 2.25% rate — worth the hour of preparation.

The Texas Investment Property Guide covers the complete protest process from filing through ARB hearing and arbitration, including the specific evidentiary standards and how to build a comparable sales argument for investment properties.

Who This Framework Is For

• Investors currently analyzing Texas properties on Zillow or Redfin using listing data that doesn't show MUD taxes or uncapped market values
• Anyone under contract on a property where the seller's tax bill seems "reasonable" but the property has been homesteaded for more than three years
• Remote investors modeling cash flow for a buy-and-hold decision and need the full 10-year holding cost picture — not the Year 1 number

Who This Framework Is NOT For

• Investors buying new-construction from a builder, where no homestead cap has accumulated — the builder's price is the market value and there is no cap to strip
• Investors buying in markets with low effective tax rates (El Paso runs 1.8–2.0%) where the delta is narrower, though MUD verification is still required

Frequently Asked Questions

How do I find a property's full uncapped market value vs. its capped assessed value?

Look up the property at the county Central Appraisal District (CAD) portal. Every Texas county has one (e.g., HarrisCAD.org, DCAD.org, BexarCAD.org). The property record will show both the CAD's appraised market value and the assessed taxable value (which reflects exemptions and caps). The difference between these two numbers is your exposure.

Does the 20% non-homestead circuit breaker protect me from the initial homestead strip?

No. The circuit breaker caps annual increases in assessed value — but the initial reassessment after the homestead strips is not treated as an increase from the capped value. It is treated as a correction to market value. The cap then applies to subsequent annual increases from that new baseline. This is why the first-year tax hit after acquiring a heavily capped property is often severe even with the circuit breaker in place.

How do I know if a property is in a MUD?

Check the county CAD portal's taxing unit breakdown for the property. Each taxing unit that levies against the property should be listed separately, including any MUD. You can also search the Texas Commission on Environmental Quality (TCEQ) MUD database by county. If the property is in a new master-planned development in the suburbs of Houston or DFW, assume a MUD is present and verify the rate before making an offer.

What is a fair MUD tax rate to budget for a new-development property?

In new DFW and Houston master-planned communities, initial MUD tax rates commonly range from 0.80% to 1.40% per $100 of assessed value. On a $300,000 property, budget $2,400–$4,200/year. As the district matures and bonds are repaid, rates can decline to 0.40%–0.60% over 15–25 years, but new developments with fresh infrastructure bonds will carry the higher rates for the first decade.

Should I protest my property tax in the first year after acquiring a Texas rental?

Yes, in virtually every case where a homestead was previously on the property and the CAD's assessed value jumped to full market value. Filing a protest costs nothing and takes one informal hearing. The first-year assessed value becomes the baseline for all future year's caps and protests — locking in a lower baseline saves money every subsequent year. File by May 15.

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