Detroit Properties generating 20% return?

Hi Nathan

What Lvr are you getting for Foreign National's in Detroit ?

We are getting upto 90% lvr for Australian's in the UK at 5% fixed for 5 years.

Same purchase process as in most of the Australian States and in most cased tenants and professional property management in place. Healthy Depreciation and Capital Allowance claims.

In France we are getting 19.6% cash back on the purchase price at Settlement and 9 Year Guaranteed Index linked Rental Leaseback's.

Amazed how many investors are going for the UK given the low entry price and competitive funding arrangements.

Cheers

Yours in Finance

So clients can't gear against their US Investment in Detoit ?

All depends but the latest project prices start at circa $46K.

Cheers

Yours in Finance

Hey there your spruiking big time, Love that word.

And your giving in my humble opinion absolute fantasy pro forma numbers.

Any one who buys any property in the US thinking that a Freshly renovated home rented on SECTION 8 is not going to have an on going repair cost from year one is one of 2 things completely misleading the audiance and investors on purpose and or just does not know what the reality is.

In addition you have not accounted for any vacancy or Letting fee's… There are some properties that will stay occuppied for years but the average is 2 years max. And Section 8 leases by law are only 1 year terms the tenant can move and will move….And unless your SUPER Property manager your not going to have one Section 8 tenant move and another move in and never miss any rent just not reality.

And what happens when the condenser unit is stolen were is that factored in And or if the house gets hit for all its copper and appliance's as is so comman in virtually all markets.. We have 300 plus Section 8's in our portfolio and each year they have to be re certified there is rarely a re cert that happens for under 1200 to 1500 dollars. Also in Detroit and I have experinced this many times if the tenant does not pay the water bill its added to the tax bill and becomes a lien on the property, I have been stuck with water bills in Detroit  far in excess of 1k, and I purchased a Hud home that had a 4k bill on it.

The bottom line fact is 7 to 10% returns on US rentals are realistic in these markets if you factor in reality over an extended period of time. There is no way the pro forma you presented here will be acheivable for the average out of area investors 99% of the time.

I was in Atlanta suburbs last week looking at some of my recent purchases for our US investors really nice neighborhoods of homes that sold 5 years ago for 150 to 200k and low and behold No condenser units. Copper cut out of the heating unit. applilances gone etc etc. This is reality when houses are vacant for any manner of time. In a market like Detroit this is magnified
Same with any of the Bigger cities period.

So need to deal with reality here no house or PM is bullit proof your going to get things broken and stolen its not if its just when. No matter how hard you try, And heck my PM our are employee partners and it happens to us. Its out of OUR POCKET not the investor so thats why we have a much bigger handle on reality not rental fantasies as goes on on this site.

Nathan thanks for the reply:

Actually I have a ton of experince in Detroit and that is why we left.  I did well over 200 hard money loans to local wholesalers and their California clients. Its the Califorina client who has been down this road before, thats why US wholesalers are targeting the foriegn market  Where do you think all these properties are coming from at least 50% of the foreclosures come from Landlords that gave up because they could not feed them anymore.

Nick Virtucci at IHG group out of Irvine his property manager was Doug ( forgot his last name) at Debeers ( which I sure you know who they are) Scott McDonald at Tradewinds did a bunch of deals with him. There is an African American fellow at Detroit invest that we did deals with all as a lender, Most of the investors came from Radio shows in LA. Like Mike Harri's this is your life in real estate ( old Name was Real estate round table). Jay McBee down in San Deigo ( but he never liked Detroit) Rock and Roll Real Estate show in the Bay Area)  Just to name a few. These Wholesalers whould hook up with the radio show's that would feed them buyers I made the hard money loan to buy and provide the rehab plus the Wholesalers profit all in that one loan. I would hold the wholesalers profit or give them a little when my hardmoney loan closed then pay them the rest upon the refi of the retail client.

Ok Fast forward to today, sound familar only differnce is Hard money and the rate and term refi are pretty much dead, a little of that goes on but not what I was used to we were doing 40 to 60 loans a month. Now its cash and carry but same scenerios.
One thing that is good about now is prices are way lower and rents are the same basically. So the cash flow is far better. than in the past. For those that can actually buy wholesale.

my experince comes in taking the properties back through foreclosure when the owner from LA could not keep up with the cash drain. And viewing all of these wholesale HUD 1's where I saw the line items when I made the original loans. Unlike the west coast , east coast closing agents show both seller and buyers side of the HUD so you get to see all the dirty little charges that Wayne county puts on the properties.
 
I still see them today, its not uncomman and its normal practice for a US wholesaler to mark up the properties anywhere from10 to 30k or more depending on the deal they got. You cannot provide all this service without making a substantial profit on the sale of the asset to this new client and hey its America thats what we do here in the Real Estate flipping business. When I am selling my new construction here in Oregon I try to make 50k a house sometime I do better sometimes worse but thats the goal. And thats in the 250 to 400k price range.

Do you provide the HUD 1 to your buyer of when you bought it from HUD or a local asset manager. And then give a detailed description of repairs that are verified through a 442 with reciepts to back it up. and the apprasier doing the 442 is not someone you have picked. And thereby disclose your exact profit on each home that is bought from you?????

Not to split hairs but I have done well over 2000 loans in 12 states in this asset class there are very few individuals in the US that know this asset class any better than I do. Our focus is back here in Oregon and Washington with a little work in Indy. This asset class has become cash and carry very very difficult to get loans.

Nick and crew decamped to Indianapolis where he is currently hooked up with Armando Montolongo and his students and I did maybe 10 or 15 loans last year for Armando's folks. Heck these guys charge 7 to 40k ( and 40K is not a typo) just for the privlage of being one of Armondo's students plus the profit on the house which is 15 to 20k. Now these guys really got it going on. Thats why Armondo can pay for info mercials he is just coping Robert Allen et al.

So to me anyone who claims a property will stay 100% occuppied over a 5 year period is Puffing. Anyone who claims that a section 8 tenant will not leave a landlord in Detroit stuck for a water bill at some point is glossing over these issues. And anyone who claims that the yearly Section 8 inspections will not cost you 1 to 2k per is just not giving all the facts. Or are you saying you are going to personally pay for any of this maintenance and or water bills or thefts. So that your clients returns are as you advertise. 

PM companies that do not charge letting fee's are in danger of not making it in my mind. As in this era a lot of leasing agents bring in the tenants ( they are starving Real Estate agents who would never have looked at leasing a house a few years ago) and they are paid a fee up front someone has to pay that. If your paying it great your just adding it into the mark up of the house. Then there is the maintenance calls and the mark up that PM's should make on those so they can stay in business.

I just think its a disservice to this audiance who is largely a first time investor who is from what I have been told and told by people on this site pulling equity out of their personal residence at a 7% interest rate to invest in the US thinking they are going to make 8 to 15% on the spread like its guaranteed money.

Not saying if someone invested with you personally they would lose their investment. However many of these folks are going to thats a given and they will be stuck with debt on their personal residence that they will have to pay off over the years and then lament what the heck was I doing thinking I could buy a rental house in the US and consistantly and monthly recieve 15 to 20% interest income. Not to mention the cost it takes for them to get all set up.

To me this is Deju Vu all over again only insert Aussie's for Californians. Remember Californians in 2000 to 2008. They bought a house for 200k and now its worth 800k. I know I was born and raised in the Bay Area and owned many homes there that I made huge gains on .  So you had the exact same sentiment that is going on and metric's with Aussies.

Huge equity increase at home currency strenght and the Hype of buying real estate in the US for the price of a car. I saw the same type adds and hype in the mid 2000's all over CA.

Honestly – I'm SO tired of hearing how wonderful Detroit property is.

First of all suggesting that over a five year period a rental house, even if it's "fully rehabbed", will have zero repairs and maintenance is ridiculous.

Of course something will happen that will need repairs. These are rentals – in DETROIT for God's sake. And probably Section 8 renters as well. And even if somehow the house escapes without needing repairs, a prudent owner will set aside an amount each month into a reserve fund. I own all of my properties in the suburbs and I do that. It's even more important to do that in Detroit.

This doesn't even consider the lunacy of spending $10-30k rehabbing a crappy house in Detroit and then putting a renter into it. Why not just flush the money down the toilet? All you're doing to the person that buys the house is guaranteeing a high rehab bill when the property turns over to bring it back into the same condition as when they bought it.

Not a good strategy.

Second, to suggest that a house over a five year period will have zero vacancy expense is also ridiculous – and misleading.

I mean, how does that work? Seriously?

I've owned suburban rental houses now for seven years. I've had section 8 tenants and I've had non-section 8 tenants. And my record tenant stay is four years. Not bad in my book. So my question is, what's your formula for getting all your Section 8s to stay for the five years you're projecting?

And there is no way you're going to convince me that you can turn properties so fast that you don't miss out on any rent.

Third – because of #1 and #2 the ROI estimate that you project does not reflect reality.

If you simply add $50-100 per month for repairs and maintenance and/or a reserve fund, and then accurately assess annual vacancies and add that in as a reserve as well every month, then the ROI for detroit rentals drops down into the 9-11% per year range.

Which is FAR below what the riskiness of the investment demands.

And that doesn't include these developments:

• the best property manager I know just pulled completely out of detroit. Because he was tired of having his rent collectors shot at. He personally was sick and tired of having to wear his kevlar vest every time he even had to briefly visit one of the properties he managed in the city. Because of this increased danger over the last 12 months, many property managers are increasing their rate in detroit from 10% per month to 15-20% per month. That's going to be a huge hit to the cash flow of those houses.

• the section 8 program is changing drastically – and not for the better. I used to be a fan, but I have stopped taking section 8 tenants 9 months ago. And so have just about every single one of my colleagues here in metro detroit. The only people that still seem hot on taking them are the people selling turn key properties to people from out of the area. I won't have them in my properties, so I won't sell a suburban property with one.

The fact is, properties in the suburbs make much better rentals over the long term than properties in Detroit. Suburban properties cost 15-20% more, but they generate 50% more cash flow.

You buy in SIGNIFICANTLY nicer areas
You buy SIGNIFICANTLY nicer houses
You can charge higher rents
Tenants stay longer
You have less vacancy time
You have less damage when tenants move

The result? More cash flow. Isn't that the name of the game?

As you might expect, I have a dog in this fight, as I sell SUBURBAN Turn Key properties in Metro Detroit. But instead of just being a salesman, I (and my partners) also own 19 properties ourselves in the areas we are recommending. So we're putting our money where our mouth is.

I created a free 6 Step Guide to Buying Turn Key Rentals in Metro Detroit to counter some of this misinformation.

If you'd like a copy, head over to Suburban Turn Key and grab a copy. Beware – I don't pull any punches. Owning in Detroit is not pretty.

Drop me a line if you'd like to discuss.

Dennis Fassett
Suburban Turn Key
+1-248-971-0764
[email protected]

Nathan I still own a few homes that I am letting go for tax's they are on Pinehurst st. I rehabbed them 2 times they got destroyed twice by the nice tenants. So that was 100k down the toilet…..   Good news is I can take that hit and keep going whats an Aussie going to do when they borrowed against their personal residence to invest in these very Dangerous investments.

Like I said I think a local person there can and will do good running these properties staying right on top of them excetra, Thats what we do,  In our markets.

We stay in each and every deal I keep ownership of the asset and my client is my partner I put my money where our reputation is we divulge what we make on each deal and we stay in till the end. Kind of like a triple net lease but not a triple net, I am the only one in the US that sets up the transactions this way, We pay for any vacancy we pay for maintenance, But we also do not give pie in the sky inducements of 20% returns.

makes a big difference my mate when your selling a property and you close and you get your flip fee which of course you deserve to make. but at the end of the day  your not paying one dime out of your pocket 2 years from now when things are not quite going as planned for the off shore investor.  Thats the difference we own them till the end along with our parnter investor. our program is white hot in the states for its safety, Aussies are not keen on it because its too foreign a concept and B/C like I posted before they are looking for that huge return number and are willing to risk the down side in hopes of big APR's.

My interest in this forum is just to bring the other side of the equation to the thought process. That :::::

1. There is no such thing as an arm chair investment in the States in low end rentals.

2. 20% Yeilds in these markets are not reality over time.

Like Dennis below has stated your first post is just so off base as to be laughable to a anyone with any experince at all in this asset class, and of course I have no doubt you will get some calls from those that for whatever reason will beleive your statements like they are fact B/C this is what they want to beleive.  Heck if they are only going to make 7 to 10% why buy US rentals at all, I think we all know there is absolutly no potential in the homes your selling for capital growth you have admitted that.

So at that I will sign off of this thread and let you the forum viewers decide if your right or Dennis is right.

My money is on Dennis for his candor even in his hometown and market.

Nathan,

I think the issue is when you make these blanket statements the Aussies want to beleive it in the worse way, The Aussie just do not realize unless they have seen it first hand what the sociodemographics of these areas are like they think of home and letting a unit to some nice Aussie and things are great all except their return which is why they are looking to the states.  and guys like me who have been in the trenches for years have owned more houses than most, been through 3 recessions, know that the statements you make are just not acurate. vis a vi the claims of return and vacancy and repairs.

I made over 2,000 loans in the last 15 years to your fellow wholesalers and their clients, I have seen the carnage that comes to families when these investments do not work out. I still get the e mails and calls from past clients B/C their guy is out of business their rehabber screwed them their property manager is a crook etc.  Just the nature of the beast.

I got an e mail last month from Scott McDonald there in Detroit he had a client that bought 6 houses in Memphis ( not from Him) and they are all vacant and trashed and he wanted me to refer him to a rehabber and PM.

Just because I do not own rentals in Detroit does not mean I do not know the cost involved,  The costs are the cost no matter were you are tenants are tenants, No one is super Property Manager or rehabber we all make bonehead moves and or have a tenant we cannot control.

Thats the issue Everyone in our bizzness just sells the sizzle or most do.

My point is lets be real. Be over cautious with these Aussies do not puff things talk about real reserves and the real issues that can come up in these asset class and these demographics of where your working.

This kind of reminds me of the Old Wade Cook get rich buying stocks. If half the people followed his model there would be no money left in the world as everyone is making 20 to 30% There just has to be loser's to balance out the winners.

Basically I have no dog in this Aussie investor fight.  Just trying to give them some reality at the end of the day I do not want to see a bunch of nice people get wiped out like happened to so many americans in the last few years.

Be it sub prime borrowers or investors that were sold these same bill of goods back in 04 05 06 07 who have finally given up pooring money into these houses.  And I was a huge enabler of the investors I made many loans that I should not have made looking back…. The first time investor just got slaughtered here in the states.