Detroit Operating Costs: What Your Pro Forma Is Probably Missing

[Mark Fedorov]

If you're underwriting Detroit from out of state, these are the numbers most people get wrong:

Insurance: $1,500–$3,000+/year for landlord insurance on a standard SFH. Detroit's older housing stock, urban risk profile, and crime rates push premiums well above national averages. Vacant periods and certain zip codes push even higher. Get quotes before you close.

Property taxes: ~$4,000–$4,500/year on a $100K home at non-homestead rates (~85 mills on $50K taxable value). This is the #1 cost most new Detroit investors underestimate. And remember, you don't get the Principal Residence Exemption that knocks ~18 mills off an owner-occupant's bill.

Maintenance: Budget 10–15% of gross rent, not the 5% your guru's spreadsheet template suggests. Roofs, plumbing, electrical, and foundation issues are common.

Vacancy: Budget 8–10% citywide. Rougher neighborhoods can run higher. Winter vacancy is harder to fill.

Management: 8–10% of collected rent if you use a PM. Factor this in from day one, even if you plan to self-manage initially.

A Detroit SFH that looks like a 15% cash-on-cash return with rosy assumptions becomes 6–9% with realistic ones. That's still solid by national standards, but only if you model honestly.

[Drew Sygit]

Two comments:

1) Don't confuse the City of Detroit with the suburbs of Detroit!
- Each city has its own millage rates and insurance rates, both lower than the City of Detroit.

2) Don't treat all City of Detroit Neighborhoods that same!
- Detroit has Class A thru D Neighborhoods & Properties, be sure to understand what you are considering buying.

Our key metrics for each Property Class:

Class A Properties:
Tenant Pool: Majority of FICO scores 680+, no convictions/evictions in last 7 years.
Tenant Default: 0-5% probability of eviction or early lease termination.
Section 8: Class A rents are too high and won’t be approved.
Vacancies: 5-10%, depending on market conditions.
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.

Class B Properties:
Tenant Pool: Majority of FICO scores 620-680, some blemishes, no convictions/evictions in last 5 years.
Tenant Default: 5-10% probability of eviction or early lease termination.
Vacancies: 10-15%, depending on market conditions.
Cashflow vs Appreciation: Typically, 1-3 years for positive cashflow, balanced amounts of relative rent & value appreciation.
Section 8: Class B rents are usually too high for the Section 8 program.

Class C Properties:
Tenant Pool: Majority of FICO scores 560-620, many blemishes, but should have no convictions/evictions in last 3 years. Verifying recent 2-years of rental history very important! Same for 2-years of job/income stability.
Tenant Default: 10-20% probability of eviction or early lease termination.
Section 8: Class C rents usually meet program requirements, proper screening still recommended.
Vacancies: 10-20%, depending on market conditions and tenant screening.
Cashflow vs Appreciation: Should cashflow immediately, at the lower end of relative rent & value appreciation.

Class D Properties:
Tenant Pool: Majority of FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, but should have no convictions/evictions in last 12 months. Verifying last 2-years of rental history and income/employment extremely important to find the “best of the worst”.
Tenant Default: 20-30% probability of eviction or early lease termination.

Section 8: Class D rents meet program requirements, often challenges to pass Section 8 inspection.
Vacancies: 20%+, depending on market conditions and tenant screening.
Cashflow vs Appreciation: Typically, all cashflow with little, maybe even negative, relative rent & value appreciation.

Where did we get our FICO credit score information from?

Check out this chart:

FICO Score	Pct of Population	Default Probability
800 or more	13.00%	1.00%
750-799	27.00%	1.00%
700-749	18.00%	4.40%
650-699	15.00%	8.90%
600-649	12.00%	15.80%
550-599	8.00%	22.50%
500-549	5.00%	28.40%
Less than 499	2.00%	41.00%

Source: Fair Isaac Company

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.

Metro Detroit has 132 cities, the City of Detroit 183 Neighborhoods