Author Topic: Property in Detroit  (Read 9720 times)

SoCal Spartan

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Property in Detroit
« on: October 18, 2013, 03:38:12 PM »
I spent most of my life living in Michigan up until about 3 years ago when I relocated to Los Angeles. I didn't spend much time in Detroit while there and don't know as much as I'd like about specific neighborhoods, but at this point the city has completely collapsed and there are amazing deals to be had on real estate. For the same price as a rundown shack in a bad part of town here in LA, you could buy an entire city block in Detroit. While I don't think it will ever return to the glory it once was, I do believe it can only improve from where it is now -- and significantly so.

Has anyone looked into or even invested in properties in Detroit? I'm not particularly interested in the $1,000 homes to be had, more so in the $25,000 - $50,000 range homes that can still be found in some of the well-kept, lower crime neighborhoods (Historic Indian Village, Historic Sherwood Forest, Boston Edison District, etc.) in relatively good condition.

With there being a likely chance of moving back to Michigan within 5 years or so, my thinking is to buy one of these properties within the next year, modernize and upgrade the interior and rent it out -- eventually being able to live in it or continue to use it as rental income for a total investment of under $100,000.

While the very bottom might have been last year around this time, I still think it would be nearly impossible to take a loss in the long run with property investment in Detroit. Am I missing something?

Another Reader

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Re: Property in Detroit
« Reply #1 on: October 18, 2013, 04:12:05 PM »
Tenant quality and property management.  Anyone that can buy probably will buy, which depletes the quality tenant pool.  And I imagine it might be difficult to find a good property manager where the tenants aren't very good.  Also, I would bet there are a lot of pro-tenant laws in Detroit that would make it much more difficult to evict non-paying or destructive tenants.

In your shoes, I would take a vacation to Detroit and do some "boots on the ground" research.  Talk to other investors and landlords, plus property managers and real estate agents that specialize in working with investors.  Check out some of those cheap houses, along with the surrounding neighborhoods.  Call the for rent signs in the areas you like and talk to the people on the other end of the line.  You will pick up a good education, and maybe end up with a couple of properties once you know the market.

Johnny Aloha

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Re: Property in Detroit
« Reply #2 on: October 18, 2013, 04:14:34 PM »
There are some investors who buy in Detroit, as the prices are low and rents are high (relatively). 

Many investors, once educated on REI rules of thumb and how to evaluate a property and a market, consider Detroit extremely risky and do not invest there.

If you know the area and are willing to accept some (or major) risk, I'm sure you could find some decent rentals.  But for an unfamiliar, long distance investor like me, I wouldn't think twice about Detroit.

elaine amj

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Re: Property in Detroit
« Reply #3 on: October 18, 2013, 09:42:02 PM »
The rental market has been depressed for years....at least out where we own a rental property. We own a small, older property in a low cost subdivision near Grosse Pointe. (so out of the core). Average rental prices have dropped and the value of the house has also continued to drop (despite our buying when it was a "too good to pass up deal"). Anyway, we are not pro real estate investors so probably our own fault not making the best choice. We'd like to unload it...but we prefer to ride this wave out to see if prices will eventually pick up again.

We have a tenant who has been there several years now. She has had major financial downturns starting about 3 years ago and hubby started letting her pay just half the rent. There has been months she has missed.  In the last year, she has been battling cancer so we decided we want to help her out and she just pays us whatever she can manage whenever she can manage.  At least the place is doing someone some good!

KingCoin

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Re: Property in Detroit
« Reply #4 on: October 21, 2013, 09:51:14 AM »
I do believe it can only improve from where it is now -- and significantly so.

Why? Seems like the population is still falling.

eventually being able to live in it or continue to use it as rental income for a total investment of under $100,000.

There are tons of growing and vital areas (Dallas for instance) where properties can be had for under $100,000. The question is, what risk premium do you demand for owning in Detroit? If you can get a 9.5% yield and Dallas and a 14% yield in Detroit, which do you choose and why?

I still think it would be nearly impossible to take a loss in the long run with property investment in Detroit.

Why? What happens when your well-kept, lower crime neighborhood becomes poorly-kept and high crime area? It seems very possible to take a loss. There are ghost towns all over the US where the large majority of housing stock remains empty and largely worthless. Detroit isn't exactly a gold rush mining town, but there's no fundamental law that says it has to come back. Even if things start to turn around, the huge amounts of cheap and underutilized housing stock could keep a damper on prices for decades to come.

That's not to say it's a bad idea, I'd just be cautious about your assumptions and fully research your alternatives before wading into probably the most challenging real estate markets in the country.
« Last Edit: October 21, 2013, 10:03:55 AM by KingCoin »

NYD3030

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Re: Property in Detroit
« Reply #5 on: October 22, 2013, 09:58:25 AM »
I also grew up in Michigan, and I have spent a decent amount of time in Detroit.  I share your optimism about the city's future; there really is a massive rebound taking place that people outside of Michigan know nothing about.  Perhaps they'll eventually catch up, perhaps not, but I would not be nearly so pessimistic about the future of Detroit as you see above.  And I'd be more pessimistic about the future of Dallas, as Detroit is well positioned geographically to absorb the people fleeing places like Dallas and Phoenix as our planet continues to warm and water gets scarce.

The $500 houses, and the $10,000 houses, and the $70,000 mansions, are in places where finding a tenant who isn't going to destroy the home will be a challenge.  Luckily you seem to know this!

Understand you are placing a bet.  If Detroit continues to bounce back, owning a nice property in Midtown is going to be like owning the equivalent in Lincoln Park, Chicago - ie, a license to print money.  The neighborhoods you identified will be an excellent "second wave" option, if Detroit continues to bounce back they will probably be next in line for gentrification.
« Last Edit: October 22, 2013, 10:19:56 AM by NYD3030 »

capital

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Re: Property in Detroit
« Reply #6 on: October 22, 2013, 08:01:36 PM »
Climate change is likely to have a big effect on the world, but it's not going to be that big or that soon that cities will be abandoned en masse anytime soon, except maybe for Miami. The big water consumers in the West is agriculture, as opposed to cities; it's far likelier that fields in the desert would be left fallow than cities left to rot. And Midwestern winters are just as big of an energy consumer as desert summers, though they'll get milder.
http://www.epa.gov/climatechange/science/future.html

And there are a lot of Midwestern cities in a lot better shape than Detroit: Chicago for one, and there are a lot of neighborhoods in Chicago that are in plenty bad shape themselves that would likely gentrify far sooner than much of Detroit. And then there are cities like Pittsburgh and Columbus and Madison that are doing well and have plenty of room to grow themselves.

Betting on a single (expensive-to-maintain-from-a-distance) property is an awfully tricky way to make a bet on a macro-trend like global warming. From my point of view, it looks like the Pacific Northwest is likely to do the best as climate change sets in, with low-cost electricity, lots of water, and a mild climate.

arebelspy

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Re: Property in Detroit
« Reply #7 on: October 23, 2013, 11:54:23 AM »
While I don't think it will ever return to the glory it once was, I do believe it can only improve from where it is now -- and significantly so.
...
While the very bottom might have been last year around this time, I still think it would be nearly impossible to take a loss in the long run with property investment in Detroit. Am I missing something?

I'm guessing you aren't familiar with the investing phrase about catching a falling knife.

There's a reason prices are what they are there.
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SoCal Spartan

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Re: Property in Detroit
« Reply #8 on: October 24, 2013, 10:23:37 PM »
Thanks for the input and advice everyone!

As I mentioned, I was born and raised in Michigan and it is likely I'll move back -- permanently or at least long-term sometime in the not too distant future. This makes it a more appealing area than say Dallas to invest in property.

Another caveat I didn't mention is that most of my family lives in Michigan and there is the possibility my parents could be 'tenants' should I decide to purchase a property. This would eliminate the risk of destruction, late or non-payment and all the other concerns of renting to someone I wouldn't know.

I'll continue to research and take a look around various neighborhoods in person the next time I am back as Another Reader suggested. I have to admit I'm not sure how the cross-country purchase and property management would realistically work out, but if I find something I believe is a great opportunity, I'll have to find a way.

arebelspy

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Re: Property in Detroit
« Reply #9 on: October 27, 2013, 03:56:05 PM »
Another caveat I didn't mention is that most of my family lives in Michigan and there is the possibility my parents could be 'tenants' should I decide to purchase a property. This would eliminate the risk of destruction, late or non-payment and all the other concerns of renting to someone I wouldn't know.

Unless you're purposefully giving charity to family, avoid this at all costs.  Google for horror stories about renting to family.  A great way to lose lots of money and ruin relationships.
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KingCoin

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Re: Property in Detroit
« Reply #10 on: October 27, 2013, 07:50:25 PM »
Another caveat I didn't mention is that most of my family lives in Michigan and there is the possibility my parents could be 'tenants' should I decide to purchase a property. This would eliminate the risk of destruction, late or non-payment and all the other concerns of renting to someone I wouldn't know.

Unless you're purposefully giving charity to family, avoid this at all costs.  Google for horror stories about renting to family.  A great way to lose lots of money and ruin relationships.

And it begs the question, if your parents are extremely credit worthy, and Detroit real estate is on the upswing, what are they doing renting instead of owning?

arebelspy

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Re: Property in Detroit
« Reply #11 on: November 11, 2013, 04:20:43 PM »
So it looks like I may be investing in some SFRs  in Detroit (or at least the suburbs right north of it, Warren for those of you familiar with the area).

I spent quite a bit of time recently talking with a friend-of-a-friend who is a full time real estate investor there.  Boots on the ground with people you can trust goes a long way towards making an investment feel a lot more comfortable.

SoCal Spartan, did you end up pulling the trigger on anything?

Anyone else investing in Detroit right now?
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Johnny Aloha

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Re: Property in Detroit
« Reply #12 on: November 12, 2013, 05:25:58 PM »
This morning NPR had a story about Dan Gilbert buying skyscrapers and attracting businesses to downtown (Google, Amazon, Twitter to name a few).  The city still has some significant issues, but maybe we shouldn't write off Detroit after all...

arebelspy

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Re: Property in Detroit
« Reply #13 on: November 12, 2013, 07:06:39 PM »
This morning NPR had a story about Dan Gilbert buying skyscrapers and attracting businesses to downtown (Google, Amazon, Twitter to name a few).  The city still has some significant issues, but maybe we shouldn't write off Detroit after all...

The city itself is in it pretty rough, but the suburbs north of it have their own tax base and are doing quite a bit better (lots of flight to those areas from the city).

Good cash flow (easily above the 2% rule), obviously not a ton of appreciation potential.  I'm working a 0% appreciation (i.e. negative real appreciation) in my numbers.

Definitely on the risky side of real estate investments.  :P
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capital

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Re: Property in Detroit
« Reply #14 on: November 16, 2013, 12:17:16 PM »
This morning NPR had a story about Dan Gilbert buying skyscrapers and attracting businesses to downtown (Google, Amazon, Twitter to name a few).  The city still has some significant issues, but maybe we shouldn't write off Detroit after all...
Detroit doesn't really have a basis to attract big tech offices in the form of a strong research university or preexisting tech cluster, and it looks like a lot of those offices are advertising/sales offices to interface with Detroit's existing automotive cluster. That's not to say that Detroit's downtown doesn't have a decent chance to recover from a nadir, as there's still wealth in the region and urban living is on the upswing everywhere in the US, but an improved downtown won't fix the outer neighborhoods with $10,000  And a downtown can't function at scale without good mass transit and policing, both of which are in short supply in Detroit. A population loss  of over 1 million takes a lot to recover from.

ChronoGN

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Re: Property in Detroit
« Reply #15 on: November 27, 2013, 07:53:48 AM »
You might be better off investing in the suburbs of Detroit. I just bought a house last year in Livonia for $89k. There are still good deals in the suburbs if you look around.

My reasoning for buying a house in the Suburbs is that, all the good paying jobs are in the suburbs. Except for GM, all the automotive companies and suppliers are in the suburbs (Ford in Dearborn, Chrysler in Auburn Hills, Denso in Southfield, etc). There are huge turnover at these automotive firms so, they will likely rent. Professionals are better tenants also.

arebelspy

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Re: Property in Detroit
« Reply #16 on: November 27, 2013, 11:18:34 AM »
I'm closing on one in Warren, MI today, actually.
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Johnny Aloha

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Re: Property in Detroit
« Reply #17 on: December 02, 2013, 11:30:34 AM »
I'm closing on one in Warren, MI today, actually.

Congrats!

Care to share the numbers?

Another Reader

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Re: Property in Detroit
« Reply #18 on: December 02, 2013, 01:15:53 PM »
Will be very interested in your Michigan property management experience, Arebelspy.  And the numbers, of course.

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Re: Property in Detroit
« Reply #19 on: December 02, 2013, 04:53:11 PM »
I am from MI and considered Ivesting in, and living in Detroit at different times.  I have decided my interest is nostalgia - not business, so I am not going to do it.  But I would love to hear how you do!

arebelspy

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Re: Property in Detroit
« Reply #20 on: December 02, 2013, 11:12:56 PM »
Sure, I'm an open book.

27k, last rehabbed in 2007, same tenant the last 6 years.  Will need minor stuff when current tenant moves (paint and carpet, the standard stuff).  Rented for $600, which is about 150 under market, but we're going to try to get the rent to about halfway between them (around $675) and keep the current tenant, older guy on social security.  At least going to keep him through the Spring, even if at the same $600.  Vacant properties there in the winter = very high heating bills for me, pass.

Not something I'd be trying willy-nilly, but the property manager is a friend of a friend (who I've now built a relationship with) who owns 60+ there in the burbs north of Detroit and runs his own PM company, and I'm placing quite a bit of trust in him and feel fairly comfortable with it.

Overall it's a cash flow play, I'm planning negative real appreciation in my numbers, but the higher cash flow it will hopefully help balance out some of the stuff I'm working on purchasing at lower cap rates (4-6%) that will (hopefully) appreciate more.  We'll see if this idea of trying to build a "balanced" portfolio pans out or not.
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Another Reader

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Re: Property in Detroit
« Reply #21 on: December 03, 2013, 05:38:04 AM »
What are you buying on 4-6 percent cap rates for appreciation???

You want to raise your rent 12.5 percent when your tenant will get a 2 percent increase in Social Security, as will a lot of other people in Warren, MI.  Your tenant will likely be moving, and complaining bitterly to everyone he knows about his out of state landlord.  You will incur vacancy and have to paint, replace the carpet, and do minor repairs.  In your shoes, I would be more patient.  First year I would raise the rent $20 a month, and $20 to $25 a month every year after that.  At $27k, no doubt all cash, you can afford to take the long view.  When this tenant ages out in a few years, I would do the work and go to market rent.

This property can go to zero, and you will still make a tidy return, if you are a good steward.  Piss everyone off, and you will have vacancy and operating costs that will substantially undermine your cash flow.

arebelspy

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Re: Property in Detroit
« Reply #22 on: December 05, 2013, 08:12:53 AM »
What are you buying on 4-6 percent cap rates for appreciation???

I'm looking at properties in certain areas of Texas (Houston, Dallas/FW).

You want to raise your rent 12.5 percent when your tenant will get a 2 percent increase in Social Security, as will a lot of other people in Warren, MI.  Your tenant will likely be moving, and complaining bitterly to everyone he knows about his out of state landlord.  You will incur vacancy and have to paint, replace the carpet, and do minor repairs.  In your shoes, I would be more patient.  First year I would raise the rent $20 a month, and $20 to $25 a month every year after that.  At $27k, no doubt all cash, you can afford to take the long view.  When this tenant ages out in a few years, I would do the work and go to market rent.

This property can go to zero, and you will still make a tidy return, if you are a good steward.  Piss everyone off, and you will have vacancy and operating costs that will substantially undermine your cash flow.

I agree.  We're easing up the rent and working with what he can afford.  He's quite happy we aren't kicking him out, he thought he was going to have to move right away.
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Re: Property in Detroit
« Reply #23 on: December 05, 2013, 10:39:26 AM »
Sounds like a promising deal. I like your idea of mixing lower cap rate properties with potential appreciation with higher cap/lower appreciation. Kind of a mutual fund approach to REI.

Another Reader

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Re: Property in Detroit
« Reply #24 on: December 05, 2013, 11:18:18 AM »
Not sure I would bet on Texas appreciation at those cap rates.   Maybe in Austin, which is Silicon Valley South.  The Texas economy in general is too cyclical and they have not outgrown the idea of building suburbs further and further out (the drive until you can afford to buy thinking).  What price range are you considering?  Single family or multi-units?

Detroit sounds sort of interesting.  Never been there, wouldn't hurt to put my boots on some Michigan dirt. 

arebelspy

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Re: Property in Detroit
« Reply #25 on: December 05, 2013, 08:07:18 PM »
Not sure I would bet on Texas appreciation at those cap rates.   Maybe in Austin, which is Silicon Valley South.  The Texas economy in general is too cyclical and they have not outgrown the idea of building suburbs further and further out (the drive until you can afford to buy thinking).  What price range are you considering?  Single family or multi-units?

Yeah, I don't mean appreciation in terms of huge amounts over inflation, and expecting a property's value to skyrocket.. I mean a solid investment that appreciates with inflation and works as an inflation hedge.

I think parts of Texas can do this based on their jobs/economy.

I'm not trying to pick out the next hot neighborhood and hope for some double digit appreciation.  Something solid, with a 6% cap and appreciation just above inflation is what I'm targeting.

I agree with you that it probably will not see crazy appreciation, but I think places that will are either places that are a gamble (i.e. you're taking a shot on a neighborhood somewhere hoping it will see that - and it's a gamble that may not play off), or places that have way low cap rates - sub 4%.  Not something I'm interested in.

Trying to find a balance.

Always appreciate your thoughts on real estate Another Reader.  Thanks.  :)
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Re: Property in Detroit
« Reply #26 on: December 05, 2013, 08:41:30 PM »
A 6 percent free and clear cap rate combined with an interest rate in the low 5's (slightly positive leverage) and three or 4 percent appreciation means at least a 10 percent yield overall.  That's a decent way to make a living, especially with the tax shelter.  I'm just not sure how long the job growth can be sustained and how diverse the economy really is in Texas.  It's not all oil any longer, but oil is still a big piece of the economic pie down there.

Some of the pooled multi family investments from a few years ago down there have been major flops, especially in the class B and C properties.  Job growth actually pulled the better tenants out of these properties and made them homeowners or at least moved them up to class A properties or sfr rentals.  The law of unintended consequences at work.

At your age, you should have one or two more real estate cycles to go through before you complete your portfolio.  I know you say you are going to "retire," but guys like you add and prune to the end, well after they quit the day job.  I wouldn't be at all surprised to see you leverage and cash flow yourself to an 8 figure real estate portfolio.

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Re: Property in Detroit
« Reply #27 on: December 05, 2013, 08:48:36 PM »
I hope not, but it wouldn't surprise me either.  :)
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Re: Property in Detroit
« Reply #28 on: December 06, 2013, 07:30:10 AM »
Arebelspy, you are doing what Joshua Kennon advises younger folks to do.  Find the financial engine that throws off cash.  It could be a high paying job or a cash flowing business.  Take the excess over your living expenses and invest.  The investing will eventually make you wealthy.

In your case, you and your wife are teachers.  Together you probably make less than a lot of single earners with highly paid jobs or successful business owners.  However, you started very young, minimized your expenses, and leveraged into a lot of cash-flowing real estate at an opportune time (part brains and desire, part being in the right place at the right time).  That made up for the smaller financial engine of employment.  If you continue along this path, your income from your investments will exceed your salaries in the not too distant future.  You could have two financial engines throwing off investable cash.  Instead, you will retire early.  That will slow the growth of your wealth, but you will continue to manage it efficiently and invest so it will grow.

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Re: Property in Detroit
« Reply #29 on: December 06, 2013, 01:16:06 PM »
  With the City government being allow to proceed with bankruptcy.  Do people feel inside the city limits is a greater risk now?  I am concerned they will have to push up taxes as part of the final settlement deal.

arebelspy

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Re: Property in Detroit
« Reply #30 on: December 06, 2013, 06:28:41 PM »
  With the City government being allow to proceed with bankruptcy.  Do people feel inside the city limits is a greater risk now?  I am concerned they will have to push up taxes as part of the final settlement deal.

I think the city is a major risk even without the BK issue, due to the social issues there affecting what would be your tenants.  I'm not sure how much worse the BK makes it, though obviously it does make it somewhat worse.
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Chiron

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Re: Property in Detroit
« Reply #31 on: December 06, 2013, 07:49:37 PM »
I'm also getting into the Detroit metro market because of the high cap rates.  Similar situation to Arebelspy, since I have a friend living in the area who is the boots on the ground and I'm using his network for repairs, management, etc.  The city itself is way too risky for me to touch but if they emerge from the BK ok, it could be a good thing if managed correctly (anyone familiar with recent city government in Detroit is now laughing).