Like many who live outside Michigan, when I first considered Detroit as a potential market to invest, I had concerns. The headlines for several years have been highlighting the downward spiral of the car industry, and my initial reaction was that I should “stay out.” The same can be said for many into real estate investing who also shared the “stay out” of Michigan mentality. Upon further review however, I discovered those that told me to stay away were people who had never invested in Michigan. What I found was that when meeting people who were successfully investing IN Michigan the story was quite different.
Is Detroit going through some very tough times? Yes. And that is precisely why there is an opportunity. For example, when the construction industry was booming, heavy equipment such as excavators, loaders and the like could only be purchased at retail prices. When the construction market collapsed, suddenly you could buy those same pieces of heavy equipment for pennies on the dollar. That was an opportunity for those who had the means to take advantage and buy while the market was down. As for what a piece of excavation equipment can do – it’s utility – it’s value to earn income – never changed. The only thing that changed was the cost to own them was less for the smart investors. The same can be said for these properties – their utility – their value to earn income from rents – is solid specifically because the purchase prices are ridiculously low. Why are the prices lower than market value? Because we bought them from banks in trouble, who needed to get them off their books regardless of their loss. Investors are snatching up the properties in droves.
There is a demand for quality rental properties. The demand comes from the influx of individuals who have lost their homes to foreclosure; others who have relocated to the area but may not know where they want to live; and individuals who do not have adequate credit to qualify for mortgages in today’s tight lending environment. This is a market to buy and hold onto the property.
Headline followers say that it may take “a really really long time to see any sort of return.” The key has to be to purchase a property with positive cash flow, which these properties have, and to buy it when its entry price is at an all time low, which these are. Why this model works is you are buying a property that gives you returns NOW. You don’t have to wait years for a return; only a couple weeks until the next rent payment is due. Unlike California, Florida, Nevada, Arizona and other markets, there was never a housing boom in Detroit. It didn’t experience the rise and has remained rather stable over the years.
Prices could very well go up when the credit market loosens up and home owners are able to secure their own financing. Meanwhile you as an investor don’t need to rely on that, and if you choose to be the bank, can most likely sell your property for a nice profit and carry the note on as a seller finance. There is a buzz about town as various philanthropic organizations pool their resources to help “restore southeast Michigan to a position of leadership in the new global economy.” There is energy and excitement surrounding the Riverfront, Eastern Market, Tech Town, Aviation Bakery, Indian Village, the DIA, Campus Martius, Automation Alley, and the list goes on and on.
“Urban Bulldozing” is a common topic these days in Detroit. This is an initiative whereby the city is looking to take out several thousand homes in blighted areas. This is a great idea simply from the supply & demand perspective. Every home taken down is one less available, and automatically increases the value of every other home. This means that there is new money going into the area… revitalization is underway. Here are a couple of pictures I snapped of this development this week. Home sales prices for this new development will range from $122,000 to $225,000.
The place to go to get an idea of the types of properties and rents would is the “Michigan Housing Locator” which is run by the Michigan State Housing Authority. There you can enter an address and radius and it will show you all available properties, and their rents, and if they do or do not accept Section 8. This is also where the property should be listed to access all housing authorities’ prospective tenants.
So in conclusion, the two strongest strategies are 1) Seller finance or 2) When the lease expires either raise rents to fair market value or replace with a Section 8 tenant at fair market value rents. The easy answer to “Why Detroit” is this… the numbers simply work there. The rent you get relative to the low price you pay nets you high positive cash flow, and you own a property that the greatest number of people in the nation can afford on any single day, in good times or bad.