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

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

William TaylorPro Member
Member since 2022 · 15 posts · 2 votes

Posting this duplex that I found here in the heart of Eastern Michigan, I've been frequently trying to run numbers on duplexes and investment property listings as an up and coming agent and investor to try and gain whether a deal is good or bad. For this example it looks like I would need to buy it for much less than asking price if the numbers stand right, can an experienced rental/flip investor look and see if these are sound? If I purchased this property for $179k instead (much below asking price), it would net out about $350 in monthly cashflow. What do you guys think? 

Also looking further - it looks like it would negatively cashflow until the last few years. Is this accurate? 

Zillow link - https://www.zillow.com/homedetails/418-Olive-St-Ypsilanti-MI...

View report

*This link comes directly from our calculators, based on information input by the member who posted.

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Drew SygitBusiness Member
Property Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
1y

@William Taylor

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

[email protected]248-209-6824
Logical Property Management4.9458 Reviews
WebsiteView Page
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  • Travis Biziorek
    Investor · Arroyo Grande, CA · Member since 2014 · 1k+ posts · 1k+ votes
    1y

    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?

    1Reply
  • Drew SygitBusiness Member
    Property Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
    1y

    @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:)

    [email protected]248-209-6824
    Logical Property Management4.9458 Reviews
    WebsiteView Page
    2Reply
  • William TaylorPro Member
    OP
    Member since 2022 · 15 posts · 2 votes
    1y
    Quote from @Travis Biziorek:

    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?


    Hey Travis, appreciate you for taking the time to look at my report. For this report I used an FHA loan for example, so 3.5% of the purchase price. I figured lowest money out of pocket was the best way to go, and in this case FHA would provide the lowest downpayment. Let me know if this is the correct way of thinking.

    Management would be self-managed, as in this example it would be a client's first rental buy and hold. Ideally the owner would handle everything and would have no need for a property management company with only this single duplex in their portfolio. 

    For property taxes I took the sale price of the property times 1.5%, then divided that by 12 months. Is there a more accurate way of assessing this? 

    Once again, very greatly appreciate your contribution and time looking at my report. Just trying to gain a sense of hot or cold. 

    0Reply
  • William TaylorPro Member
    OP
    Member since 2022 · 15 posts · 2 votes
    1y
    Quote from @Drew Sygit:

    @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:)


     Hi Drew, nice to see you here! Thank you for taking the time to look at my report. 

    I'm not too familiar with the taxes being interchanging via the uncapping of the taxable value. I will do more further research on this topic to identify for accurate numbers for the report. 

    The landlord paid utilities are via the listing agent's description, although they are not exact. Gas/water bill average for the total sqft was taken into account. 

    Thank you for the input Drew. Going to stay hard at work into making these a bit more accurate. 

    0Reply
  • Travis Biziorek
    Investor · Arroyo Grande, CA · Member since 2014 · 1k+ posts · 1k+ votes
    1y
    Quote from @William Taylor:
    Quote from @Travis Biziorek:

    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?


    Hey Travis, appreciate you for taking the time to look at my report. For this report I used an FHA loan for example, so 3.5% of the purchase price. I figured lowest money out of pocket was the best way to go, and in this case FHA would provide the lowest downpayment. Let me know if this is the correct way of thinking.

    Management would be self-managed, as in this example it would be a client's first rental buy and hold. Ideally the owner would handle everything and would have no need for a property management company with only this single duplex in their portfolio. 

    For property taxes I took the sale price of the property times 1.5%, then divided that by 12 months. Is there a more accurate way of assessing this? 

    Once again, very greatly appreciate your contribution and time looking at my report. Just trying to gain a sense of hot or cold. 


    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.

    1Reply
  • William TaylorPro Member
    OP
    Member since 2022 · 15 posts · 2 votes
    1y
    Quote from @Travis Biziorek:
    Quote from @William Taylor:
    Quote from @Travis Biziorek:

    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?


    Hey Travis, appreciate you for taking the time to look at my report. For this report I used an FHA loan for example, so 3.5% of the purchase price. I figured lowest money out of pocket was the best way to go, and in this case FHA would provide the lowest downpayment. Let me know if this is the correct way of thinking.

    Management would be self-managed, as in this example it would be a client's first rental buy and hold. Ideally the owner would handle everything and would have no need for a property management company with only this single duplex in their portfolio. 

    For property taxes I took the sale price of the property times 1.5%, then divided that by 12 months. Is there a more accurate way of assessing this? 

    Once again, very greatly appreciate your contribution and time looking at my report. Just trying to gain a sense of hot or cold. 


    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.


     Makes perfect sense. Thank you for the feedback Travis. 

    0Reply
  • Drew SygitBusiness Member
    Property Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
    1y

    @William Taylor

    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

    [email protected]248-209-6824
    Logical Property Management4.9458 Reviews
    WebsiteView Page
    3Reply
    • William TaylorPro Member
      OP
      Member since 2022 · 15 posts · 2 votes
      1y

      @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. 

      0Reply
  • Addy Chupa
    Developer · Member since 2024 · 21 posts · 9 votes
    1y


    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

    1. 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.
    2. 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!

    1Reply
  • William TaylorPro Member
    OP
    Member since 2022 · 15 posts · 2 votes
    1y
    Quote from @Addy Chupa:


    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

    1. 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.
    2. 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!


    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.

    0Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    1y
    Quote from @William Taylor:
    Quote from @Addy Chupa:


    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

    1. 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.
    2. 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!


    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.

     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

    1Reply
  • William TaylorPro Member
    OP
    Member since 2022 · 15 posts · 2 votes
    1y
    Quote from @Dan H.:
    Quote from @William Taylor:
    Quote from @Addy Chupa:


    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

    1. 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.
    2. 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!


    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.


     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 2000) 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


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

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