Every Detroit investment pro-forma opens with a cap rate. But a cap rate is just the output of four inputs -- and if any of those inputs is wrong, the cap rate is fiction.
Here is the order we read a spreadsheet.
Number 1: Gross rent (the hardest to verify)
This is the number most likely to be inflated. Sellers and wholesalers often quote "market rent" based on the best-performing comp in the ZIP code, not the actual rent the specific block supports.
How to verify: Pull active rental listings on the same street or within a quarter-mile. Not the ZIP code average -- the actual block. If three homes on the block are listed at $950-$1,050, a pro-forma showing $1,400 is fantasy. Detroit rents can vary block by block.
Number 2: Vacancy and collections loss
A 5% vacancy assumption is aggressive for a C-class neighborhood. 8-10% is more realistic. And in Detroit's rental market, collections loss -- rent that is billed but never collected -- matters as much as vacancy. Budget at least one month of gross rent per unit per year in combined vacancy and collections loss.
Rule of thumb: If the pro-forma assumes 100% occupancy at market rent for 12 months, subtract 10% from the gross revenue line before you calculate anything else.
Number 3: Maintenance and CapEx reserves
The most common underwriting mistake we see: budgeting $500/year for maintenance on a 1940s-built home.
Realistic numbers for a Detroit single-family rental:
- Annual maintenance (turnover repairs, HVAC service, plumbing): $1,200-$2,000
- CapEx reserve (roof, furnace, water heater replacement amortized): $1,000-$1,500 per year
If the home has original mechanicals or a roof over 15 years old, add another $1,000/year to reserves. A new roof is $6,000-$9,000 in Detroit -- and it is not optional.
Number 4: Property management fee
Even if you plan to self-manage, underwrite as if you are paying a manager. Two reasons:
- You may decide to hire one later, and the deal still needs to work
- Your time has value -- if the property does not cash-flow with professional management, it is not an investment, it is a job
Detroit market rate: 8-10% of collected rent, plus a leasing fee (half to one full month's rent for placement).
The cap rate, finally
Only after verifying all four inputs do you calculate:
NOI = Gross Rent - Vacancy/Collections - Taxes - Insurance - Maintenance - CapEx Reserve - Management
Cap Rate = NOI / Purchase Price
A $90,000 home renting at $1,100/month with verified expenses should land somewhere in the 6.5-8.5% cap rate range depending on condition and neighborhood. If the pro-forma shows 12%+, one of the four inputs is wrong.
Every property on our site includes a verified pro-forma with assumptions you can audit. View available listings or request a custom analysis.