Detroit advert shows 17.6%. I get about 4% for a faraway buyer. What did I miss?

Question

I work in risk for a living and got curious about the cheap Detroit rentals that get marketed to buyers abroad. So I took one real advert and worked through it the way I would any other stress test.

The house: brick three-bedroom in 48205, asking $85,000 cash, rented at $1,250 a month with a housing agency paying the full rent.

On paper that is $15,000 a year, or 17.6% of the price.

Here is what I get for a buyer who lives far away and needs a manager, for one normal year:

Rent collected, one empty month: $13,750
Manager at 10%: minus $1,375
Property tax after it resets on sale: minus $3,190
Insurance: minus $3,000
Repairs: minus $2,500
City rental fee: minus $150
Kept: $3,535, about 4% on $88,000 all in

A good year gets to about 7%. A bad year (tenant leaves, three empty months, one big repair) loses about $4,200.

Two things stood out. The rent itself looks honest, since it is below the government benchmark for that postal code. And the advert only allows a viewing after an offer is accepted, sold as is.

For those of you who own in Detroit from a distance: which of my lines is too harsh, and which is too kind? I'm most unsure about insurance and the tax reset.

Jay Hinrichs · Answer

my take on all this is:

Median home price in the city of Detroit is 275,000. half sell for less half sell for more making it one of the most affordable big cities in the US.

simple logic dictates that if you buy a property for basically 1/3 of the median price point your buying in the worse neighborhood in the city the worse schools the highest crime and the toughest tenant base. Can it work sure can you get creamed sure.. If folks just look at rentals as looooong term investments its location location location. Not price price price.. IMHO so when folks are losing on rentals in the lower priced markets they do it to themselves..

Locals who are right on top of these type of props and the insane amount of management it takes can make it work.. But those that are not local take on inordinate financial risk in these price points..

Drew Sygit · Answer

@Nicholas L. agree that if an investor buys a random rental in the City of Detroit - they have a high likelihood of failure.

• We've seen it hundreds of time when they contact us to try to turn their mistake into a profitable investment.
• Can't use ZIP codes as guidance, gotta know the 178 Detroit Neighborhoods - an even many of them you have to eventually go block-by-block.

We've seen it hundreds of time when they contact us to try to turn their mistake into a profitable investment.

Can't use ZIP codes as guidance, gotta know the 178 Detroit Neighborhoods - an even many of them you have to eventually go block-by-block.

@Jay Hinrichs it can work at $85k currently if you know where to buy AND use the right PMC with super-screening..

• A big national firm doesn't seem to be able to handle Class C rentals as every owner that comes from them has the same complaints.
• We're actually dealing with several investors contacting us looking for $70k & under S8 rentals😞 Trying to figure out what "guru" they're all following.

A big national firm doesn't seem to be able to handle Class C rentals as every owner that comes from them has the same complaints.

We're actually dealing with several investors contacting us looking for $70k & under S8 rentals😞 Trying to figure out what "guru" they're all following.

Nicholas L. · Answer

@Jay Zee

is this a real post? If you buy a random property in Detroit in a neighborhood you've never been to you will not make any return - you will lose money in a brutal fashion. repairs, vacancy and capex will keep you negative indefinitely.

but let me know if I'm missing something...

Ashish Acharya · Answer

Jay, I actually like that you worked through the numbers beyond the advertised 17.6% gross yield. That's where a lot of these out-of-state deals start looking very different. I'd definitely dig deeper into the property tax and insurance assumptions before getting comfortable with the roughly $3,535 you're left with. I wouldn't assume the tax number after a sale without checking the property's actual assessment history and how the transfer will affect it.

I'd also build a little more cushion into the model for vacancy, larger repairs, CapEx, and the occasional expense that doesn't show up in the seller's numbers.

From the tax side, I'd also look at the property's purchase basis, depreciation, and other deductible expenses when calculating the after-tax return. The tax benefit shouldn't be used to make a weak deal work, but it should be part of the overall return calculation.

At $85K, the price is interesting, but I'd want the deal to work on conservative operating numbers first. If it still looks good after realistic expenses, taxes, reserves, and management, then the tax benefits can make the overall return more attractive. Your 7% “good year” versus $4,200 “bad year” comparison is probably more useful than the headline 17.6% yield. That's the range I'd want to understand before buying.

Feel free to DM me, I’d be happy to send over a few resources that might be helpful.

Drew Sygit · Answer

Metro Detroit is our home turf.

Pretty good evaluation, but a few errors:

1) Insurance: will be substantially less than your number - closer to $1200-$1500

2) Repairs: with proper tenant screening will be closer to 10%, not the 20% you've used.

3) Certificate of Compliance: the $150 covers 3 years, so is only $50/year

4) Rent: S8 currently pays $1400+ for a 3-bed, so seller has been lazy asking for rent increases.

These changes, following your formula, lead to:

Gross Rents: $1400 x 11 = $15,400

Manager at 10%: minus $1540Property tax after it resets on sale: minus $3,190Insurance: minus $1,500Repairs: minus $1,250City rental fee: minus $50

Kept: $7,870 => 9.26% on $88,000 all in

NOTE: treat good S8 tenants well and they stay longer than cash-paying tenants.

Jay Zee · Answer

Thanks everyone, this was really helpful. Between a bigger repair reserve, leasing costs and closing costs, I’m comfortable that the 17.6% in the advert is closer to 3% for someone buying from far away. That answers my question, so I’ll leave it there. Appreciate you all taking the time to check my numbers

Arman Ahmed · Answer

Your risk-model math is spot on, Jay, and you hit the nail on the head regarding turnkey pro formas omitting the reality of tax resets, realistic capex, and true vacancy. Detroit property tax re-assessments on sale kill those advertised gross cap rates fast, though your $3,000 insurance estimate is likely a bit high unless you're carrying comprehensive loss coverage in a tough zip. That 4% to 7% net yield reality is exactly why many out-of-state investors end up pivoting toward other Midwest markets, where tax reassessments aren't as aggressive, insurance costs run lower, and sub-$125k B/C class properties consistently net true double-digit cash flow even with full third-party management accounted for. If you ever want to cross-reference your underwriting model against a few sample deals in those markets to compare the net numbers, feel free to reach out anytime!

Simon W. · Answer

This is the right way to look at those ads — rebuild the spreadsheet yourself.

The yield on the flyer almost never includes a real vacancy factor, a turnover/leasing cost, insurance at today's quote, or a CapEx reserve for roof, furnace, and plumbing. Remote buyers also miss property management and the trip costs when something needs eyes on site. Stack those and 17% turning into low-single-digits is pretty common.

I'd also ask for trailing twelve months of actual rent collected and expenses, not a pro forma. If they can't produce bank activity or a simple P&L for that unit, the advert number is a marketing number, not an operating one.

James Jones · Answer

Your math is honest — the advert showed gross, you ran net. That 17.6% was never real.

Here's my screen: I buy Memphis single-family under $100K and nothing touches my portfolio if it misses the 1% rule. At $85K I'd need ~$1,250 in rent just to be in the conversation — you're right at the line.

The Section 8 angle is what would move this for me. My 3BR+ Section 8 rents run $1,395–$1,950 — the voucher, not market rent, is what makes the Midwest math work. Section 8 inspectors check the panel, GFCI outlets, and paint, so budget for those.

Your blind spot: capex. $2,500/year on an $85K Detroit brick is light — run $4K and see if you still like it. Line-item the rehab before you close (roof $6.5K, HVAC $5K, LVP $5.5K is my template), and if the walkthrough can't hit the number, renegotiate or walk.

Jimmy Lieu · Answer

Welcome, Jay, and thanks for putting real numbers on one actual advert. That is a useful way to look at it.

Your lines read like a realistic stress test to me. The ones I'd add are a leasing or re-tenanting cost whenever the unit turns, a capex reserve for roof, furnace and plumbing on older brick (your repairs line covers upkeep, not the big stuff), and buyer closing costs. Insurance on older stock in tougher postal codes often surprises people, so I'd get a real quote before trusting any seller's figure. I can't speak to the tax reset from firsthand experience, so I'd confirm it with the local assessor.

For comparison, in Columbus I'm still finding deals that hit the 1% rule and cash flow after expenses, though that depends heavily on condition and area, and it is never guaranteed.

I enjoy networking with investors working through this, so feel free to connect and I'll see where I can help.

Detroit advert shows 17.6%. I get about 4% for a faraway buyer. What did I miss?

Detroit advert shows 17.6%. I get about 4% for a faraway buyer. What did I miss?

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