Considering a Rental Property

[SoCal Spartan]

Hey everyone,

I've been looking into some rental properties in Detroit for some time now and may have found one that I am interested in. It is owned and for sale by a property management company who tells me there is currently a tenant renting for $787.50/mo. The list price for the property is $25000.

I would be a long-distance owner, so management would be necessary. Their fees are:

- Management: 7% of collected rent

- Up front: $200 for occupied property
OR
- Commission: First months rent after re-rented after vacancy (not sure if this would apply to an already rented property)

- Lease renewal: $100
- Admin: 10% to all expenses paid for by them on behalf of the property

Does this seem like a good deal? What should I look for when considering a property management company and a potential rental property?

Thanks!

[Fishingmn]

Personally, I would never buy property sight unseen.

The numbers look decent but why are they selling it just to do the property management if the numbers are good? Have you done due diligence on it like hire an attorney or title company to look at title or checked Craigslist or Hotpads to see if that rental amount is consistent with other similar, close by properties?

[Johnny Aloha]

Does this seem like a good deal?

Hard to tell, but looks interesting.  Might be great or it might be a rip off.  If I were you I'd network with local investors (including ARS) to get knowledgable opinions.

[Bobberth]

Do you know anything about Detroit?  There are some good areas and some REALLY bad areas.  Are you sure this isn't in one of the bad areas?  Are you POSITIVE you know it's an ok area?

My gut says, "Why is the management company willing to sell a property that will bring in $9400/year in rent for $25k? What do they know that I don't?" I don't know Detroit but I'm very suspicious about this 'opportunity'.  But I am this suspicious about all turn-key operators so take this for what you want.

[daverobev]

Do you know anything about Detroit?  There are some good areas and some REALLY bad areas.  Are you sure this isn't in one of the bad areas?  Are you POSITIVE you know it's an ok area?

My gut says, "Why is the management company willing to sell a property that will bring in $9400/year in rent for $25k? What do they know that I don't?" I don't know Detroit but I'm very suspicious about this 'opportunity'.  But I am this suspicious about all turn-key operators so take this for what you want.

Agreed. Nobody in their right mind would sell that property. If it's too good to be true...

[escolegrove]

bobbeth and I are in totally agreement.

Real estate is our number 1 basket for cashflow to provide for an early retirement. On the other hand we invest in class A properties. We follow the south west model. We invest in nicer properties with lower vacancy and repair costs.

Personally the area you are going into is probably horrible. Plus there have been a lot of issues where people can't replace the tenant for the same price that they are in te place for. There are also higher damages and houses stay vacant in between tenants. I am betting that is an all cash deal.

Personally we put the same amount down $25k-45k but are buying in areas with great appreciation in price and rents. We are in it for the long term.

[SoCal Spartan]

Thank you for the replies, everyone!

Fishingmn - I definitely plan to do my homework on the property and the area. I just contacted the company today to get some basic details and wanted to get the knowledgeable opinions of the forum here on what info I have at the moment. Will definitely get the title checked out and see what properties are valued at in the same area. Also, no plans to buy sight unseen, will check it out in person if it still seems like a good investment after doing some research.

Johnny Aloha - Thanks, I'll see if I can get in touch with some local investors. Anyone here know of anyone who has invested in Detroit properties?

Bobberth - I am somewhat familiar with Detroit. I grew up in Michigan and lived there until about 4 years ago. I didn't visit Detroit too often however, so I'll definitely do more research on the neighborhood to get a better idea of what I'd be getting into.

escolegrove - Thanks for the info. I'd assume it's not the greatest area as there aren't many of those left in Detroit. But I feel like a lot of people who aren't familiar with Michigan or Detroit are quick to write it off as a bad investment. I'm not saying this will be a great deal, but I'm definitely planning to get more info and do some homework to figure out whether it is or not.

The company has about 40 or so properties for sale at the moment, mostly ranging from $20000-$45000. The agent I was emailing with today told me the current tenant's lease is set to expire November 30, 2014 and that they have been renting since 2012. She also claims the property has been continuously rented since 2005 -- but I'm not believing that.

I'll likely spend the time between now and Nov. 30 researching and getting as much info as I can. Then, when the lease renewal comes round, I'll see if the same tenant renews again and make a decision at that time.

[Mr Mark]

Yeah,  Detroit.  Been here on and off for 5 years and still a neophyte!

The areas are 'hyper-local' - perhaps similar to many big NE American cities, you can have big expensive houses in nice neighborhoods, right next to burned out wastelands that run block after block...

yes you can get 25k houses that rent 700.  But beware that base assumption. 25k. Sure, but an HVAC system that goes, a busted pipe, vacancy that is then gotten into by scrappers (the scurge of Detroit, parasites that will rip a house naked through 5k of dry wall to get a pound of copper. They'll even rip out copper from connected pipes and let the place flood. And make a note to come back after youve fixed it..) Risk. On a standard suburban midwest foreclosure you might have 20% repair costs. With these properties it could be 200%. Putting new dry wall and paint on a 25k house is just as costly as on a 150k house, but is a bit more impactful on equity.

the local investors aren't dumb. And remember metro Detroit (including suburbs) is 6 million people +. Detroit proper is only 650k population. FYI, there are a lot of investors here already! 

And it seems there is a nice side gig fleecing out of town investors!

I'm not saying there are not such deals around - I'm trying to land a few myself - but ...common sense. If it's on mls and has numbers like that, there will be issues. Because as others have pointed out, if it was that good a deal, you think they need to find people in SoCal to get someone with money?

Also, is it on a 'quit claim' title? Check the small print. You could be looking at 1k to 5 k+ to get a real free and clear title. You can buy the house and then be hit with liens and stuff you didnt know was there.


So, caveat emptor.

[arebelspy]

How'd this turn out? 

If you're still considering now (a few weeks later), give us some cross streets.

The area is going to be key to determine if this is a "run fast" or "research more".