Duplex opportunity in MI

[Cameron Miller]

Duplex opportunity

I am from michigan and take home about 4k per month after taxes, 401k,insurance etc as a RN which ive been for 2 years. I have been wanting to buy a house for the past 5 years and never pulled the trigger. I currently rent and am very frugal , no debt, drive a used car, have a roth ira etc

I have an opportunity to get a 1980 4 bed 4 bath ranch duplex ,full basement , one car garage per side,, new roof, original mechanicals duplex from a family member off market in a solid B to B+ area/country setting 1.5 miles outside of east side of city of 150k people. This side of town is mainly B to A- neighborhood. The duplex is on a road of duplex and single family all in the 220-320k range.

Purchase price is about 280k

I would put 20% down so loan for 224k

Taxes are about 5k / year

Insurance is 2800 / yr escrow or 2500 in full

Mortgage rate 7% credit score 760+

Mortgage is $ 2150 ish. +/- 50$

Current rents are 1000 per side which they say is low because it's paid off for my family member

They say market rent is easily 1200 per side

I would likely inherit a tenant on one side at 1000/mo , older retired single guy

So if I house hacking and pay 1200 and raise their side to 1200 it's would cash flow about 150$ not including maintenance so. Basically for the first 2-4 years barely any profit , to squeeze more cashflow would have to pay down mortgage ,refinance 5 years later. be super frugal , raise rent slowly and hopefully not loose this tenant by raising their rent. Part of me wants to do this so bad but the numbers in this market are so tight and it only makes the 1% rule after my down payment. Basically any cashflow is for maintenance for about 5 years .

Any thoughts from experienced landlords? If I could put down more money obviously that would decrease mortgage but I need some left over for closing etc

[Drew Sygit]

@Cameron Miller Sounds like a potential nice deal, but also potential red flags!

You are too trusting and while your relatives may mean well, but who will pay for their mistaken info?

1) The property taxes will probably double:(
Read below copy & paste info:

Michigan 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:

1. State Equalized Value (SEV): supposedly equal to 50% of the market value of a property, not based on recent sales price.
2. 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

2) Who cares what, "they say market rent is..."!
- Go find out yourself! Use Zillow, Rent-O-Meter, etc.

3) When is the lease for the tenant up?
- You can't raise the rent until it ends.

4) Have you walked the property & the units? 
- When is the last time the units were updated?
- How much deferred maintenance is there?

5) Be sure to get your own home inpsector and have sewer camera'd to avoid expensive surprises.