How to Analyze Property Taxes for Detroit Rental Property ROI

Published February 20, 2022. Updated August 10, 2023. 

Property taxes are a part of the ownership of any property, including rental properties. These taxes can vary widely from place to place, even across a state. When considering a potential new investment property, investors must research property taxes and analyze the impact on potential returns (ROI). 

When evaluating a property in a neighborhood, what should you know about the taxes and answering the question, "How much can I rent my house for?" The right insights and analysis can help!

Our Detroit property management experts have put together some insights here. Keep ready to learn more about property taxes and how they impact investment properties.

What are Property Taxes?

Property tax is an amount paid to the government in the area where you own an investment property. The money from property taxes goes to the upkeep of the town or the municipality where that home is located. That means even if you don't live in Detroit but own rental properties here, the property taxes you pay on these properties go to the city of Detroit.

The area, the home's size, the construction, and the size of the lot also affect the tax rate. In addition, rates can vary as the Metro Detroit market changes or the city grows.  

You're probably familiar with your personal property taxes and how those costs impact your monthly budget or mortgage payments. Likewise, it's important to factor in the tax costs for an investment property when analyzing potential returns.

Remember: Since you own the property, renters don't pay the property tax. These costs are part of your ongoing expenses and can be part of your mortgage payment. However, when setting the rental rate to cover property expenses, our property managers recommend including your tax expenses in the rent you charge renters. 

Why Do Taxes Change?

You've probably noticed that the property taxes for your home change from year to year. The same holds true for rental properties.

There are a few reasons that the taxes in a given area might change. For example, when a city needs additional funds to recover from tough financial times, tax rates can rise. At other times, revitalization programs can bring tax increases when new businesses and investors move into a community to bring it back to life.

If you are worried that the taxes might go up in an area you are investing in, experienced property management companies can help you analyze trends and potential impacts on new development or a declining area. 

Taxes might also rise in cases where extensive work has been done to the home, and it is now worth more money. For example, if you bought a property at a low cost (and low tax rate) and then renovated it for a rental property, you could see a tax increase on your next bill when the city completes property assessments. 

Are High Property Taxes a Bad Thing?

High property taxes, though they can feel overbearing before a thorough analysis, are not necessarily a bad thing.

With higher property taxes, rental property owners often find homes in well-respected communities with excellent city services and quality renters. While taxes that are too high aren't always justified, a healthy tax rate can indicate a worthwhile location for your next investment property. 

On the opposite end of the spectrum, low property taxes might reduce your ongoing expenses. However, low tax rates often come with poorly maintained communities in locations that renters don't desire.

It can be challenging to find a good property and good tenants to pay the rent in areas where the tax rate isn't high enough to support a thriving community. 

When evaluating tax rates, think about the area where the property is located and look into how tax revenue contributes to local amenities and services for residents. This can help you choose properties that can generate enough interest from prospective tenants and rental income to offset high property taxes.

How To Find Information About Taxes

Real estate investors can find property tax information through online city, county, or state resources.

Additionally, working with a company that delivers professional property management services (like our team here at Own It Detroit) can help you understand how the tax rate for a potential property can help or minimize your potential returns.

For example, in very good areas where the property values are higher, the property taxes are likely to be higher. A property manager can help you analyze potential rental rates that can offset high tax expenses to support a worthwhile investment.

With a rental property in a better area, a property owner can often charge higher rental rates and find better residents who stay with you longer and become long-term tenants. 

Tax History and Future Plans

If you are considering investing in any rental property, contact the city government agency that manages the potential neighborhood to learn about current tax rates, historical rates, and any upcoming changes that could impact your bottom line. 

New bonds or tax increases aren't always a bad thing, especially in a community on the rise. However, gathering as much information as possible and working with property management specialists to analyze long-term impacts on your returns is crucial. 

A Detroit Property Management Company Helps Analyze Taxes and ROI

A great rental property, even one with high property taxes, can be a benefit when building your portfolio and finding excellent renters. However, overpaying for property taxes can take a toll on your bottom line. Taking the time to learn about property taxes before investing is a smart way to evaluate potential returns and avoid purchasing a property that never pays off! 

The best property management company Detroit offers can help you find the research you need and run the numbers. Reach out to Own it Detroit today to speak with one of our seasoned real estate investing professionals! Our full-service property management team helps investors build significant portfolios and manage rentals for long-term success.

Get more expert insights into what you need in an ideal rental property! Download a free copy of "The Biography of the Perfect Investment Property."