Section 8 in Detroit, and taxes of $350 to $600 a month leave only $110 to $150 of cash flow
The problem: New investor in Grand Rapids, Michigan looking at Section 8 housing in Detroit. Non-homestead property taxes run $350 to $600 a month, $3,500 to $5,500 a year by his own estimate, and his rental calculator shows only $110 to $150 a month of cash flow after vacancy, repairs, and management. He underwrites with HUD fair market rent minus 10 percent and $1,500 a year for insurance, and he cannot get an exact post-sale tax number because Michigan taxable value uncaps after a sale.
The short answer: Because the tax bill in the listing is the seller's capped bill. In Michigan the taxable value uncaps the year after a sale, so a buyer underwrites a tax bill of $3,500 to $5,500 a year, and the rent that actually pays is the housing commission payment standard for that ZIP and bedroom count, not fair market rent.
The solve
Zachary, you are staring at three hundred fifty to six hundred dollars a month in taxes on a Detroit Section 8 house, and your calculator is giving you back a hundred ten to a hundred fifty dollars a month for all that risk. Your calculator is doing its job. It is telling you the price is wrong, and here is how I would prove that before you buy anything.
The tax number is the trap most out of state buyers step in. In Michigan the taxable value is capped while the seller owns the house, and it uncaps the year after you buy it, so the tax bill in the listing is the seller's bill. Your estimate of thirty five hundred to fifty five hundred a year is the right way to think, and I would underwrite the top of that range.
Second, rent off the number that actually pays you. You are using HUD fair market rent minus ten percent. For Section 8, the rent comes from the Detroit Housing Commission payment standard for that exact ZIP code and bedroom count, minus the utility allowance the tenant covers themselves. That figure can sit well below fair market rent, and it decides your deal before you ever pick a house.
Third, get a real landlord insurance quote on the actual address before you offer. Fifteen hundred a year is a placeholder, and Detroit Section 8 houses can price higher, with fewer carriers willing to write them.
Now work the deal backward. Payment standard rent, minus the uncapped taxes, minus real insurance, minus vacancy, repairs, and management, and what is left has to carry the loan and still leave you paid. Whatever price survives that math is your offer, even when it sits far under the asking price. In Detroit the discount is the tax bill, priced in. Run five real listings this way and the neighborhoods that still work will separate themselves from the ones the videos are selling.
What not to do
Do not underwrite a Michigan rental off the seller's current tax bill, and do not use fair market rent as the Section 8 rent. Both numbers flatter the deal and both change the day you own it.
Questions
What rent should a Detroit Section 8 deal be underwritten on?
The Detroit Housing Commission payment standard for the exact ZIP code and bedroom count, minus the utility allowance the tenant covers.
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