I will follow a case of reviewing properties around $100,000 in Detroit from start to finish. The budget is $100,000. The purchase price was similar to the area median.

The median sale price in Detroit is $99,450. It has increased by 15.64 percent compared to last year. Rent is recorded at around $1,200 per month. The annual rental income is $14,400. Just calculating the total yield gives a return of 14.5 percent. Looking at the numbers alone, this is one of the highest yields in the country.

Checking with the 1 percent rule, this property unusually passes the criteria. For a $99,450 property to pass, the rent needs to be above $994 per month, and the actual rent of $1,200 exceeds this threshold. The rent compared to the purchase price is among the higher rates nationwide. However, when property taxes and vacancy rates are added, the actual cap rate is halved, which is the key point of this case.

We cannot stop here. Next is property tax. The median effective property tax rate in Detroit is 1.86 percent, which is much higher than the Michigan state average of 1.05 percent. For a $99,450 home, the annual property tax is around $1,850. This means nearly 13 percent of rental income goes towards property taxes.

Next is the vacancy rate. If we do not account for the vacancy rate, it is easy to be misled into thinking that this total yield will be realized as is. That was the case when I first reviewed this property. In reality, when we add in vacancy periods, insurance costs, maintenance fees, and management fees, the net operating income decreases significantly. Using the 50 percent rule as a rough estimate, the net operating income would be around $7,200 annually, and the cap rate would drop to about 7.2 percent. While this is half of the total yield, it is still not a low cap rate.

From a total yield perspective, Detroit is noted for having a high cap rate, but the price appreciation varies greatly by area and is difficult to predict. The increase in assets due to loan principal repayment is small in absolute terms because the purchase price is low, but in terms of the ratio to the cash invested, it is often not bad. Ultimately, it seems to be a market more suited for a cash flow-focused strategy centered around cap rates.

When we move to cash-on-cash returns, the story changes again. The purchase price itself is low, so the down payment burden is also small. Even if you put in 20 percent, it would be around $20,000. At this level of cash investment, even a slight change in loan terms can significantly affect the cash-on-cash return.

Detroit has significant variations by area. Even within the same city, property taxes and rental demand can vary greatly by zip code. When viewing properties, it is better to check the data for the specific area rather than the citywide average. Investors coming from out of state may overlook vacancy rates and management burdens by only looking at the low purchase price, so caution is needed.

We also need to consider depreciation tax benefits. In Detroit, where the purchase price is low, the absolute amount of depreciation is small, but in terms of the ratio to the purchase price, the tax savings effect can be relatively significant.

If this property had actually gone to closing, the next step would have been management. In markets with low purchase prices, securing reliable local management personnel often plays a more crucial role in reducing vacancy periods than calculating cap rates.

The city of Detroit operates a rental housing registration system, so if you want to use it for rental purposes, there may be registration fees and regular inspection procedures. If you reflect these administrative procedures and costs in your net operating income calculations, you can obtain numbers that are closer to the actual yield.

When coming to invest in Detroit from out of state, it is also easy to overlook that Michigan's rental income tax reporting and landlord registration procedures may differ from those in your previous residence. For investors managing remotely, it is safer to understand these administrative procedures in advance through a local accountant or management company.

Taxes and rental conditions can vary by property. This article is not investment or legal advice. Please consult with a professional before making any actual contracts.