Of all the line items in a Detroit pro-forma, property taxes cause the most surprises. Michigan's system has quirks that do not exist in Texas, Florida, or California. Misunderstanding them can turn a projected 9% cap rate into a 4% reality.
Proposal A and the taxable value cap
In 1994, Michigan voters passed Proposal A, which limits how fast a property's taxable value can grow -- the lesser of 5% or the rate of inflation -- as long as the owner does not change. This is why a long-term owner might pay taxes on a $40,000 taxable value while the home next door is assessed at $90,000.
The trap for investors: When a property transfers, the taxable value uncaps in the year following the sale. The new taxable value resets to the assessed value (roughly 50% of market value). If the prior owner had a capped taxable value half of the assessed value, the new buyer's tax bill doubles in year two.
Always underwrite using the uncapped taxable value, not the current bill. We factor this into every pro-forma we publish.
The NEZ abatement
Detroit's Neighborhood Enterprise Zone (NEZ) program freezes the taxable value at the pre-renovation level for up to 15 years on qualifying rehabs. This is powerful -- but several conditions apply:
- The property must be in a designated NEZ district (much of Detroit qualifies)
- The rehab must meet a minimum investment threshold
- You must apply before construction begins, not after
- The abatement stays with the property on sale
If you are buying a fully renovated home and the seller never filed for NEZ, the abatement is gone. If they did file, you inherit the remaining years of frozen taxes. Ask before closing.
How the millage rate stacks up
Detroit's total millage rate -- combining city, county, school district, and special authorities -- typically runs 68-72 mills. On a $100,000 assessed value ($50,000 taxable), that is roughly $3,400-$3,600 per year.
For comparison: Southfield runs ~50 mills. Grosse Pointe runs ~45 mills. But Detroit's lower purchase prices mean the absolute tax dollar per door is often lower, even with a higher rate. Run the math per unit, not per mill.
The summer/winter split
Michigan splits property taxes into a summer bill (due September) and winter bill (due February). The summer bill is typically 60-70% of the total. If you escrow through your lender, make sure they are set up to pay both bills. We have seen lenders miss the winter bill because their systems assume a single annual payment.
What to do before you buy
- Look up the current tax bill at the Wayne County Treasurer's website -- it is free and public
- Check if the property has an active NEZ certificate (the city's assessor office can confirm)
- Calculate the uncapped tax for year two: assessed value x total millage rate / 1,000
- Include summer and winter deadlines in your cash flow calendar
Taxes are the largest operating expense on most Detroit rentals. Getting this number right -- and keeping it low through NEZ applications -- is the difference between a property that cash-flows and one that does not.
Questions about a specific property's tax outlook? Contact us with the address -- we will look it up and include the uncapped estimate in our response.