[Calc Review] Help me analyze this duplex in Michigan - are these numbers correct?

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@William TaylorMichigan has some of the most complicated property taxes in the USA. Here’s what to know. State Equalized Value versus Taxable Value Back in 1994 Michigan passed the Headlee Amendment: (http://www.legislature.mi.gov/(S(k5m2va1uyfgwtbyjf4nqb1bx))/mileg.aspx?page=LoadVirtualDoc&BookmarkID=6536) that capped annual increases to the Taxable Value of a property to the lower of 5% or Michigan's Cost of Living increase. This was done to protect senior citizens on fixed incomes from being forced to sell their homes due to unaffordable property tax increases. Since the passing of this amendment, all properties in Michigan have two property tax values associated with them: State Equalized Value (SEV): supposedly equal to 50% of the market value of a property, not based on recent sales price.Taxable Value: the SEV annually capped as long as there is not a transfer of ownership. City Assessors are charged with determining how much property values have changed each year. Since they can't do each property individually, they use comparable sales to make broad generalizations to determine percent changes. Then these are applied to all properties in that area of the city. Property owners get an annual update on their SEV & Taxable Values with their city property tax bill, typically sent in December. So now, the city assessor tracks the SEV, but homeowners are taxed based upon the capped Taxable Value. These two numbers diverge over time as the SEV increases with property value, but the Taxable Value is capped. The Taxable Value is uncapped and equated to the SEV upon a sale or other transfer of property ownership, with limited exceptions. Homestead versus Non-Homestead Millage Rates Counties & cities in Michigan are allowed to set their own millage rates, with one restriction – a primary residence (Homestead) is exempt from up to 18 mills of school taxes on their Homestead property. A property qualifies as Homestead for this exemption if an eligible owner files a Principal Residence Exemption (PRE): https://www.michigan.gov/taxes/0,4676,7-238-43535_43539-210891--,00.html#:~:text=Section%20211.7cc%20and%20211.7,purposes%20up%20to%2018%20mills. Many investors have gotten an ugly surprise when they bought a property that was a primary residence of the seller for the last 20 years. The removal of the Taxable Value cap and the switch to Non-Homestead millage rates can double, even triple, the property taxes. By the way, the cutoff date is June 1 of each year for these changes. City & County Tax Bills Most Michigan properties receive TWO annual tax bills - one from the city and one from the county. Many banks handling tax escrow accounts for mortgages have mistakenly thought there was one tax due twice/year or totally missed one of the taxes. Investors should research the SEV and the Non-Homestead property tax millage rates to project what the property taxes will be after adjustment. You can use this tool to estimate future property taxes: https://treas-secure.state.mi.us/ptestimator/ptestimator.asp

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@William Taylor where did you get the tax info from?How well do you understand how the taxes may change with the uncapping of the Taxable Value?Where did you take into account the landlord paid utilities?Your specific variable expense assumptions are wrong, BUT you stumbled into them being correct overall.Also, you are approaching this correctly - entering in the numbers to generate a purchase price that meets your metrics:)

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I like to use the appreciation since the year 2000. Here are my thoughts: - last dozen years have been outstanding. Using anything less than 12 years is only using the near best appreciation years ever. - using year 2000 includes one significant property value decline. - neighborhoodscout includes the year 2000 in their free info I would use 3% (it has 2.9% since 2022) long term appreciation. My underwriting since 2022 has used 0% appreciation near term (5 years). I want my underwriting to be conservative. https://www.neighborhoodscout.com/mi/ypsilanti/real-estate Good luck

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Hi William, I ran some numbers using our tool, and I’ve included my thoughts below, along with two scenarios: one based on your exact assumptions and another with adjusted figures that I believe could make the deal work better. Observations on Your Numbers Utilities: Based on your calculations, it seems you’ve assumed the tenants will cover all utilities. This might be typical in your market, but it’s worth confirming to avoid unexpected costs. Home Appreciation: You’ve estimated a 2% annual appreciation rate, which I feel is quite conservative. Personally, I wouldn’t invest in a market where appreciation averages only 2%. I aim for at least 4% to 5% as a benchmark. I recommend researching the average appreciation over the past 10 years in your target area to get a clearer picture. As you know, in real estate, ROI comes from multiple sources: Home Appreciation: Reno Appreciation: Value added through renovations or improvements (usually just in the first year). Initial Equity: The discount you achieve when buying below market value. Principal Paydown: Cash Flow: Tax Benefits: Savings from depreciation and interest deductions. For a deal to make sense, at least three of these components—home appreciation, cash flow, and principal paydown—need to be strong. Appreciation, in particular, is crucial, while cash flow acts as the fuel to keep the property sustainable. Your Scenario with 2% Home Appreciation Here’s how the deal looks using your assumptions: Year 1 Analysis Cash Flow: -$1,123 Initial Equity: $51,000 (assuming a $249k purchase on a $300k market value as per your report). Home Appreciation: $6,000 (2% of $300k). Principal Paydown: $2,441 Total Gain: $58,317 ROI: 360.32% (on $16,185 upfront investment: 3.5% down payment of $8,715 + 3% closing costs of $7,470). Year 2 Analysis Cash Flow: -$752 Home Appreciation: $6,120 Principal Paydown: $2,617 Total Gain: $7,985 ROI: 49.34%. Year 3 Analysis Cash Flow: -$375 Home Appreciation: $6,242 Principal Paydown: $2,806 Total Gain: $8,674 ROI: 53.59%. Year 4 Analysis Cash Flow: $9 Home Appreciation: $6,367 Principal Paydown: $3,009 Total Gain: $9,386 ROI: 57.99%. Based on these numbers, you’d have negative cash flow for the first three years and only break even in Year 4, assuming a 2.5% annual rent increase. Adjusted Scenario see second picture: Landlord Covers Gas and Water In the second scenario, I assumed the landlord would pay for gas and water at $300/month while maintaining the same 2% home appreciation rate. For this deal to work under those conditions, the purchase price would need to be closer to $179k. With your original assumptions 249k, the deal is marginally acceptable but not great, given the negative cash flow in the early years. If you need to cover utilities, the numbers tighten significantly, making a lower purchase price essential. Let me know if you have any further questions or want to explore these numbers in more detail—I’d be happy to help!

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Got it. I just don't think you can expect a property to cash flow when you're putting 3.5% down. It's unrealistic. And if you base an offer price on that, you'll likely have an extremely difficult time getting any traction. Most investors are putting 30% down on a duplex. I'd run your numbers based on that to understand what a realistic offer would be to most people and then see if you can be competitive. If not, you're likely wasting your time.

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Your numbers look OK-ish to me.Some things that jump out... how are you planning to buy this with so little down? A $240k loan amount on a $249k purchase price seems crazy and I'd never expect to produce any net positive cash flow doing this.How are you calculating your property taxes? I see people doing this wrong in Michigan constantly. And it can fluctuate a lot. If you don't know how to do this properly it can be detrimental. No management costs? Are you self-managing?

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Good to know Dan, I appreciate your contribution. I'll readjust my numbers on this one for 3%.

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Hi Addy, thank you for collaborating on this one with me! Your report shows that it would need a bit of a lower purchase price, and I like the numbers you used in comparison (for ex. higher Capex vs rent/maintenance). This is great info. Thank you for taking the time to do a deep dive. 2% home appreciation was also a fairly low estimate, it looks like in that area it is actually around 5-6%. Good catch there.

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@Drew Sygit Wow, you weren't joking. This is fantastic information. It sounds like there are a lot of techniqualities to this I will be studying on.

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Makes perfect sense. Thank you for the feedback Travis.