Detroit, Michigan …..I need help please

Hi Dennis,

That's a valid question, and I think you'll get as many different opinions on here as you will find number of investors…

Personally (as well as us as a firm) I like it, IF you are able to buy the right property in the right area, and make use of the generous Section 8 rental program.

Detroit really isn't all it's made out to be – it has a lot of very bad areas (like most major US cities) and the loss of population is certainly happening, although not all of them leave the metro area – they leave the City of Detroit, but might relocate to the more attractive suburbs. I wouldn't buy real estate (as a general rule) in the downtown area, and also some sections of the fringes of the city. However, many of the suburbs are great, and make for fantastic cash flow properties.

The Section 8 program, as earlier mentioned, pays better in Michigan (and has longer waiting lists) than anywhere else in the country, and we put relatively large number of investors into our properties there, and management is also of a better quality there than in other parts of the country, as many of the managers are used to working with out of state investors.

As for value, yes that is a concern in Detroit, but you will find that all across the Midwestern states, as well as many of the cheaper properties in places like Atlanta, Memphis, and even Florida. Taxes are also very high in Michigan, and must be taken into account. All taxes have to be paid one year in advance now, which will add a bit to the amount of funds you need to bring to be able to close.

However, you should also be aware that the State of Michigan is actively trying to attract "new" businesses (not just manufacturing) so house prices MAY NOT fall much further, if at all, as there are still a lot of very good areas of metro Detroit where you can invest – it's literally like a different world from what you might have seen and heard.
Feel free to get in touch – think I better now mention more about our business here, or the moderators will delete it!

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The south east is the New detroit , just check it out, all the auto manufactorers are or have moved south. No big union problems.

Largest Nissan plant in the world = Jackson MS —Largest Toyota plant under construction between Memphis and Tuepelo MS home of Elvis and thats saying something, I personally have visted both sites. the Toyota site is something to behold at least 5 miles by 5 miles under construction, Out in the middles of no where but it will create thousands of Jobs.

Alabama and GA have seen there share as well as the Carolina's. 

Upper mid west may attrack some new bizznesses but it won't be auto motive.

Detroit has over 50k houses that could be bull dozed under right now. Be very very careful in Mich. Ohio upper IND Like Fort Wayne. there is NO capital Growth there in the foreseable century in my mind. and has not had any since the 60's.

No one knows were the best places to invest are. However those rust belt towns are certainly ones to be very careful with.

If you can get good clean neighborhoods and want your 5 to 10% NET return year in year out they will do that.

Any one preaching 15 to 20% Net returns for year in year out is Puffing big time. You can do that if you buy at the price the folks that are selling you the properties buy at. But by the time the AU gets it the mark ups are 30 to 50% over true cost so there is not near the income potential and certianly no Capital potential.

Its going to take those that dive in to these markets thinking they are going to get this huge return  and then loose their money to figure that out

JLH

You may want to look at established businesses in Detroit that have been buying and selling property during this downturn and know everything there is to know about the city with regard to property returns.

An  investing strategy in Detroit i have been involved with is Rent To Buy as we call it. There I think it's called land contracts. You purchase the property for x amount – say $30k. A retail buyer ( on a waiting list) then pays you $50k for it using a deposit of x amount – say $10k, reducing your exposure to $25k. They then take over all outgoings, (maybe except insurance – you might want to ensure you have a property safe while the deed is in your name). They also agree to pay you rent or vendor finance payments, whatever you want to call it of x amount. Let's say $800per mth for the next 24, 36, 48 months, whatever you negotiate. At the end of the term they either own the house or pay you a balloon payment after renegotiating with a bank or lending institution.

For $100k you could control 4 properties with no outgoings, no management problems, no vacancies. The local Detroit company handles all the contracts, finds the buyer and collects the monthly income. If they, the retail buyer defaults, then the vendor finance option reverts to a rental contract and they can be evicted in 45 days ( or less). You then sell the option again and get another $10k deposit reducing your initial $25k exposure down to $15k

It's actually better for you as an investor if the retail buyer defaults.

Ian

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Dan,

send over your sample proforma lets see what constitues 15%. I am very conservative on my numbers in the detroit market I would use 50 to 60% of gross for expenses. One being cold weather 2 for vacancy. and the oft chance i get stuck with a water bill ( which has happened to me to the tune of 4k) and of course properties tax's can and are a real huge burden there Not to mention turning the houses over every year to 2 years max. We all now how transient these tenants are.. Just like texas. I had a con call today with an investor that owned 30 houses in texas and he could not wait to get ride of them the property tax's ate him alive and he never made a dime in texas.

Just real world experiences after doing some 250 loans in Detroit and foreclosing on 8 or 10 properties and ending up owning them, As a lender we definitely get the worse end of the stick when borrower walks. We got out of most of ours because we stopped lending there in 07. Before the big melt down and the credit crisis.

I think the stats stand on their own about Detroit there is huge negative population growth, unemployment, of which a good section of the unemployment are those that are terminally unemployed which does skew the numbers up ward.

In its day I liked it enough to do hundreds of loans so there was a day that we enjoyed it, that day has passed, as well as most big inner cities, Same thing with Chicago, Pittsburg, Philly, Fort Wayne, Cleveland.

The outlying suburbs are, as you say more stable and there is I am sure decent returns. Just hard pressed to see how your going to have price's come up substantially unless the Aussies or Brits create a shortage and drive up prices. Because it sure is not going to happen from US investors. US investor's still go into Detroit only for the price point. buying houses for 1 to  5k.
and trying to keep them rented and repaired. their price point it so low they risk the other factors, and if you get a bunch of them like you probably have you make a business out of it.

My point is that it can be very iffy for a out of state or foreign investor to Make ANY purchase in the US, and only have 1 or 2 properties. Even in good areas or areas we think are good there is going to be management issues.

And because these houses by and large are REO and usually vacant when they are purchased, Folks are buying these all on proforma financial data prepared by the person who is trying to sell it and is trying to make as much profit on the front end as possible, hey thats capitalizm and the american way. 

When ever I buy or sell Plex's for instance and those are almost always to experinced investors, people tend to buy single family then move up to multi. First thing they request is 2 years of tax returns and P and L's with actual expenses. And then run the numbers to figure out a cap rate that they are comfortable with then fashion there offer to purchase accordingly.

Whats happening here in the single family Niche is investors are buying properties that have no historical data as to that specfic property. so there is no way to know for certain what you can expect in vacancy factor and on going Maintance.

My comments about cold weather are that houses by and large will cost you more to maintain in a cold weather environment.
Also as such one needs to be careful what they buy if a house is poorly insutlated and has abnormally high UTL bills the tenants will not stay long. Thats why I would not buy a rental in cold weather area that is much bigger than 1500 sq ft. You buy a 2k sq ft home or bigger sounds great but expensive!!! to heat and cool. And tenants are on fixed budgets by and large so those are little things one needs to be aware of.

Morning Dan hope your having a good fall, My 49ers snuck one out there on your lions, Been a long time since we both had teams to cheer for.

No I do not pay utilities. My experince has been if houses are too large and your dealing with tenants on a budget ( which most are) the price to heat or cool the house is an issue.

Therefore the target sq ft size of rental for me is 1200 to 1500 sq ft… We like 4bds when we can get them. However I would not buy a really large 2500 sq foot or bigger home for rental just because its a good deal, More expensive in all facets to own and operate and your not going to get that much more in rent to make up for it again is my experince in Detroit Chicago and Indy.

Suh  is from Portland Ore were I live by the by he is a nasty dude, us Oregonians by and large are laid back earthy types.
Tag line for Portland is:   Keep Portland Weird         thats the prodominate bumper sticker.