Detroit - What are your thoughts / questions / fears about investing in the City of Detroit?

[Dan Gheesling]

When you hear about Detroit Real Estate most people get scared and picture burned down buildings, blight, etc. Myself included.

One of my initial fears was that I wouldn't get my money back out, and that the renters wouldn't pay on time or at all based on what I read in the news/online/etc.

Whether you invest in Detroit or not, what are the biggest questions/problems/concerns do you have about investing in Detroit?

To be completely transparent I am working on creating an online resource for investors just to learn about the city (not be a sales page, or sell properties etc) for those who are interested.

Thank you for your honest thoughts and questions, it will really be a huge help into really understanding the questions people have so I know to spend time sharing that information opposed to others.

If there is anything I can do to help in return for you answering this post honestly do not hesitate to ask!

[Mike H.]

Here would be some of my fears when I hear someone mention areas that have the same types of issues as detroit.

1) Where is the population going? The fear would be that if people are going to continue to move out of detroit to other areas of the country, the law of supply and demand will create a problem for me. Too many houses and not enough renters/buyers could mean the property values drop.

2) Along those same lines. Where are the jobs going? Are they coming in or going away? Of what little I know of that area, my fear would be that jobs would be leaving the area. And if he jobs are going, then the population growth would be going (see #1 fear above).

3) The city/area financial troubles.  The city's financial troubles and bankruptcy are in the news all the time. That begs the question as to whether the property taxes will have tobe raised thru the roof to cover the costs of services and the like.  if they do raise taxes, then not only do my profits go down but the values of the properties tend to go down too.

4) Lastly, landlord laws. This one is not really a detroit question but more of a city question. The landlord laws I tend to have heard about in larger cities tend to significantly favor the tenant. Here in chicago, an eviction can take upwards of 4 to 5 months and sometimes more. Thats a huge risk.  But that would be one lesser concern that I would be concerned about in investing in any large city.

Those are just a couple of thoughts I had on Detroit and some of he concerns I'd have if I to consider investing there......

[Peter Grosso]

@Mike H. All of those fears would be correct for the last 20 years, they seems to have hit bottom and are turning around. Very slowly in most areas outside of downtown, but turning around.    

I would say to anyone who wants to invest in Detroit that this is not a market for the faint of heart.    It has tremendous upside and a chance of a complete loss.    There are a lot of bad actors and a lot of bad areas, but I believe ten years from now the city won't be the punch line on BP that it is right now.  

[Dan Gheesling]

@Mike H. hey Mike thanks for taking the time to answer honestly. I really appreciate it and it is a tremendous help. 

Do you invest in the city of Chicago? I wonder how comparable things are to Detroit from a number standpoint.

[Dan Gheesling]

@Peter Grosso In terms of investing, what do you mean by faint of heart?

[Peter Grosso]

It is very possible to have a lot of volatility in you income.    I don't treat my Detroit investments like a standard buy and hold investment.    Good Renters know they are a hot commodity, even the best blocks are at risk of break ins when the house is vacant.    I however has seen a great turnaround in the areas that I own.

[Peter Grosso]

I treat Detroit like an oversold stock, I bought Detroit with the belief that the city's actual value will be much higher a decade from now.  Still cheap comparatively speaking, but up from todays market. 

[Account Closed]

Dan, 

My results have been fairly good, but I got in at/near the bottom and bought a few good Detroit Metro properties for 10-20 cents on the dollar what they sold for 10yrs ago. So naturally, my ROIs are >average, but there are greater than average costs of ownership... Detroit Metro taxes are fairly high (hire a tax appeals firm to lower them), insurance is higher than average in most places (call 10+ insurance providers to get quotes b/c the results vary quite a bit), and as you'll find through the forums, you must exercise extreme caution hiring property managers, contractors, etc (read many posts of investors getting ripped off).

If done correctly, you can do very well. If you take a day off, and don't verify things are done accurately or you get scammed by a shady PM or contractor, consider it a costly educational experience. I'm not trying to put down Big D as a whole, but it seems to be at/near the top on the investor headaches list, but as with all things, with risk comes reward.

DM me if you have other specific questions. 

Matt

[Jonathan Pliszka]

Thanks for posting, @Dan Gheesling 

 I've spent some time in the Detroit area for work and I must say, Detroit has some beautiful suburbs. The piedmontese beef burger at Red Coat Tavern in Royal Oak remains one of my favorite burgers of all time. Aside from the obvious, my biggest concern about Detroit is that anyone with money will be on their way out. I believe that as baby boomers retire, they'll migrate South in masses. Their kids, who all went to Ann Arbor and East Lansing for school, have already moved to Chicago, New York, etc for their employment opportunities. Between the brutal winters, aging population and existing migration, I just see the entire metro area dealing with a huge oversupply. Cheers!

[Mike York]

Hi @Dan Gheesling 

I work with some REI and wholesalers in the Detroit area and I hear a lot of "it depends on the location" There are places that are still a great place to invest, others, you roll the dice. I hope @Peter Grosso is correct with the direction Detroit is going :)

[Mike H.]

I don't invest in the city at all.
I live about an hour south of Chicago (45 miles). I'm not really close enough to be considered a suburb of chicago. Really just a suburb thats south of chicago if that makes sense.

A lot of smaller towns by me where populations run between 10,000 to 20,000 but the towns all run into one other so the metro area of the area is a little bigger than it might appear.

When I first started investing though I was all over the place. Anywhere that the numbers were good. So I do have a couple properties in southern cook county which is close to being a south suburb of chicago.  Not the south side of chicago - which is beyond sketchy. But not exactly leave it to beaver suburbs either.

Areas like Lansing, Richton park, Lynwood, etc. The estimated appraisal prices there for my target property (3bdr, 1.5 to 2 bath, 1,500 to 1800 sq ft home) run between 110k to 130k right now. 

But I got in at a good time and only owe between 70k to 80k for those houses.  Rents are pretty good at 1350 to 1450. These are 3 or 4 bdrm, 1.5 or 2 bath homes between 1400 to 1800 sq ft.  The taxes are the real killer here though. Taxes are between 4k to 5,500.

I've got a house in Will County (one county south of Cook) that is assessed for 100k and the taxes are over 4k...... How's that for crazy? 

Thats why I included that fear of the city as possible point of contention for an investor. Property tax rates are a very underappreciated factor when looking at areas to invest in. I recently bought 3 houses in a new area down by me where the tax rate is just over 6%. Thats a game changer in terms of cash flow. 

And the fact that the city is going through what I believe is the largest bankruptcy of any municipality in history has to create some cause for concern for how the city may decide to raise the revenues it needs in the future.

If you go from paying 2k in taxes to 4k in taxes, thats an additional  165 bucks a month?
Thats like tacking on an additional $30k to your mortgage balances!

[Mike York]

I can agree with you @Mike H. about the taxes.  Chicago (and around) can have crazy taxes.  I know a guy that lives in the nw burbs that pays closer to 10k a year.  

[Bao Nguyen]

@Mike H. Very good point about property taxes eating into the profits.  Property taxes are fixed, and no matter how experienced or efficient you are as an investor, you can't lower this cost.  For B&H investors, looking at the city's financial state can give clues on whether prop taxes might go up or not.  This is another reason why when I calculate a purchase, $300/mo CF is the minimum I'll deal with - for unexpected costs such as prop. tax hikes.  Besides, it's just not worth the time and headache to own/manage a rental for less than $300/mo.  

[Cierra Seay]

@Dan Gheesling

Let me know if you need any help with the site at all.  It's a great idea and I think it will help with the apprehensiveness. I grew up in the city and I'm very familiar with what's going on. 

@Jonathan Pliszka 

 Over the past 4-5 years all 3 automotive companies have been on a hiring spree hiring thousands of blue collar and white collar workers since the industry is back on an upswing. Dan Gilbert and Quicken Loans also employ thousands of people and Blue Cross Blue Shield is another huge employer. The one thing colleges are doing to keep the population is scholarship incentives for people who take jobs in the city. I just met with an investor who's originally not from the area went to college in upper Michigan but came here for a job with an ad firm who does marketing for Ford based on a scholarship incentive. This young man is living in the University District in Detroit has never had any problems and we just put in offer in on his first investment property in Detroit. 

@Mike H. 

The new mayor is attacking the inflated tax assessment problem. 

http://archive.freep.com/article/20140127/NEWS01/301270081/Duggan-property-tax-assessments

I hate to see that members of BP have been scammed by real estate scam artist in Detroit because it gives the honest hard working people in the area a bad name. With that being said sometimes you just have to see for yourself. I recently met with a BP member that was here from California and he said it was nothing like the way the media portrayed it and me and him are working on getting him some properties in the area. For every bad post about Detroit there's probably 3 good ones about it's surrounding areas as well as some good areas in the actual city.

[Laura Williams]

@Dan Gheesling  the reasons I wouldn't invest in Detroit would be my concern with population growth, crime, vacant homes, the extreme cold weather/quality of life issues, and lack of jobs. I'm sure there's a lot of investors making tons of money there and the city may turn around and become wonderful. But my impression of it being a desirable city for investing is not high for the reasons I mentioned above. 

Hope this helps :) good luck with your new site 

[Jerry M.]

@Mike H. 

Damn them taxes are high. Glad NC is not that high.

[Bill Gulley]

Actually, due to the unique and rare opportunities in Detroit, I have given consideration to investing in Detroit. I don't know the market, the city, the current economic drivers of those staying there. I'm not sure how long it will be before the city is back in the black, how services will be continued or how current issues will shake out. What all the means is opportunity, when others run away, I'm inclined to move in. But, dealing long distance is something that really rubs me the wrong way. I mean really, I might make more chasing opportunities in Iraq or Turkey or Mexico, about the same difference, it takes a good manager on site, a local attorney to take out the trash, taxes may be an issue but gee, returns should be considered if you're getting outside your own neighborhood.

Now, I did think about Detroit, so much in fact that I had a dream about the Motor City, which ultimately led be to decide to stay in my own backyard,

My revelations in the middle of the night gave me a more realistic view of investing outside my realm of better understandings. I'll share those revelations with you;

It all came to me in during a REM sleep period. It all began by a PM from @Joel Owens who appeared wearing pajamas with a wide satin black belt and sporting a large black afro.  He looked a lot like a larger over weight Bruce Lee with a fro. He was telling me he had an apartment building, 42 units downtown and swore I'd get a 42% cap rate due to a distressed sale situation, so naturally I paid a bit of attention to his rap.

Well, we went to the complex, a very nice building on a wide street, Joel was promising me the sun never set on the neighborhood although I heard gun fire in the back. Heck, 42% cap rates, I can ignore gun fire!

Well, we cut the deal, Joel is very convincing when more than 50 miles away from home and he locked me up in a deal. We celebrated with cherry kool aid, Joel's favorite drink and the went across the street to the closing agent to close the deal.

After closing I began waking back to my newly acquired property, feeling pretty good after Joel's assurances and getting 50 K cash back at closing as he had the deal settled by some guru's system.....anyway, I stepped on to the street and someone tackled me pushing me back on the sidewalk, the were yelling, "MAN, IT"S SHAFT, HE's A BAD..." there was a pause and some chick says "Watch your mouth!" then I see some caddie convertible is racing by flying over the street where I would have been run over!!

Took a deep breath and began again waking to my complex.

Got across this 12 lane street and all of a sudden there was a crowd of white folk all sporting huge fros in different colors and the broke our break dancing to Marvin Gay's "Lets Get IT On" yes, I know it's a slow song, but the dancers are a lot older now!

So, I get half way up the stoop of my new building, the door opens and it's Gladys Knight, she says Oh Baby, Keep Me , I find out she's my property manager and she's been waiting for me. (Joel, man, you are too good)

So, anyway, Gladys and I are trying to talk and Mary Wells comes out asking Gladys to sign  a new lease. Mary goes back in and before the door closes, Lee Iacocca walks out saying at the rent level he's paying he expects a parking space big enough for his K Car, Gladys assures him she will take care of it and offer to get him a taxi.

So, all this time, everyone has boom boxes blaring out the windows and these colorful white folk are still dancing on the sidewalks. My first order as the new owner is to get these people out of here! Gladys calls the cops.

Well, all these cop cars come screaming around the corner, like an O.J. chase but much faster taking up all 12 lanes. That caddie still in the lead, yes, it's Shaft wearing his big hat flapping in the wind. All the cop cars hit the breaks in the front of my place and jump out on the call from Gladys.

Dang, it's Smokey Robinson with stars on a his cop uniform asking me what the issue is. I just tell him, I just bought this place and I expect quiet for my tenants, they have rights you know! He does this high shrill scream and here comes the Supremes with billy clubs!

They got all the break dancing white folk to sit down on the sidewalk and join arms, now they are all singing Berry Gordy tunes.

Smokey gets the city paddy wagon there, dang, the driver is Stevie Wonder! You know, they got 29 of those street dancers in that stretched VW bug!

By now, the noise level went down and things got a bit softer, I open the door to see my new building and Lionel Richie is kicking the mail boxes yelling about knowing he has more fan mail and is accusing Gladys of stealing his fan mail! I get him calmed down and we do the dap hand shake, it's cool man, the cops are still outside. Then some kid comes in behind me wanting to put up a poster for some Madame  Norie concert, wait, that's no kid, it's Little Richard wearing high heel shoes! 

The phone rings, Gladys says it's Glen Campbell wanting to check the phone lines, what the heck is he doing in this town? Sure, let the lineman from Kansas come on over.

I've had enough as a landlord in Detroit, I go outside and Will Bernard rides up on a rickshaw, with Brandon on the back! We chat and Brandon heard that my building was for sale, he saw a an old listing that Joel posted in the back of an S&H Green stamp book he got  checking out at an airport bar. Will wants to finance the place for Brandon. Seems like a deal, I'm willing, at this point to pay Brandon to take it, but he wants an inspection and I agree. I suggest the Pips to do the inspection knowing Gladys has some pull, but Will insists on getting  Martha Reeves and the Vandellas, Will wins again, okay, fine.

Shorty Long woke me up about that time, made the trip necessary and let him sing his tune and got back to bed, I didn't want to miss the sale so I got right back to sleep.

Got back into it and Brandon and I decided to celebrate, celebrate, listen to the music, ya know,  so we went to the bar next door to the complex. We had the Temptations to the right,  The Cats to the left. Bobbie Darin was tending bar, he and the drinks were rather falt, but whatever, The floor show started and it was the Jackson 5, some kid was wearing a glove on one hand and holding an ink pen in the other.

Being on top of my game, I had Bobbie, the bar tender, get me a purchase contract and got that kid to give Brandon the pen.  We moved to a table for more privacy, and Diana Ross shows up asking if we needed another drink, I said no, but knowing her I introduce Brandon. I could tell, he was impressed, she whispered in his ear (his wife wasn't there) and I asked later what she said, he said that she said Everything Was Good baby, Jon Holdman did the inspection, just do it!

Well that was good enough for Brandon so we did the deal, I had the place for about 12 hours and I cleared just over $50K after rents were pro rated as I figured it. A hundred grand in 12 hours!  We went to the closing agent, back across the 12 lane street, in big cities, title/closing plants are open 24/7 you know. We did the deal and walked out. Again, Shaft flies by with 4 ladies in the car, but just cruising by, no dancers, and no cops. Just the Commodores jamming with a boom box carried by Tom Clay. 

Shorty Long woke me up, just a memory now.

Gotta love the 60s and 70s!

Doing business in Motown is different, I doubt I'll be back unless I get on my meds, but I love the history and the people. Go for it, let's get it on! :)    

'

[David Roberts]

I don't know if it's a seasonal thing right now but it seems like existing home values are slipping.  I don't follow real estate markets anywhere else in the country, just in my city and the surrounding ones (where I'm interested in expanding for now).  Economic data has suggested a slide in existing homes, and a continued surge in new homes.

In the long term, are the days of price appreciation of existing homes over?  Will homes ever start being treated like cars?  Depreciating item? It's an interesting thought.  I'd like to think not, but a home can be replaced, the land cannot.

[Jay Hinrichs]

@Bill Gulley 

Bill I did 200 plus HML there pre 08 melt down. and now a days the only way I would look at Detroit is to buy the 1k houses and sell for 2k to some one who thinks they can make a run at it... I had 21 foreclosures there and they were nightmares.. tenants don't pay water bills and it is a super lien.. I had one with a 4k water bill by the time I got it back. Unlike the South the tenants there are pretty mean folks in my experinces and they know they are in a market with an over abundance of homes.. ONe day I would see rents crashing there.. Once the locals figure out they are In control not the owners..

[Account Closed]

I thought it was all hype when they promised swinging, swaying, records playing and dancing in the streets.  Good to hear from boots on the ground.

[David Roberts]

saying folks know there is an over abundance of homes there is giving them alot of credit.  The is this mentality in Detroit that has gotten alot of press that water should be a 'right"... So people don't pay.  Then they scream and get media coverage when their water is turned off.   I'm waiting for the heat and electric "right"  argument next.  Many of the homes have back taxes owed also. 

I'm only 35 but maybe I'll see a revival in Detroit in my life.  Who knows. 

[Bill Gulley]

David, Nothing in this country is free, not even the air you breath much less the water, one way or another, you'll pay for everything that touches your life, and when that ends, your estate will pay some more!

I doubt Detroit will ever see the days past, they had their hay day, different times playing different chimes. Very few cities keep a heritage, New York, New Orleans, San Francisco, San Antonio, Boston, Philly, St. Louis, Chicago. My opinion. History puts cities on the map, I doubt the history of Detroit can be repeated, it will survive and be transformed, but what made Detroit unique, I think is gone. At 35, you probably don't know half the names I mentioned above, but that's okay, things change. :)   

[Account Closed]

@Dan Gheesling 

[Alvin Neal]

@Bill Gulley  I agree about the Heritage comment. The auto industry will never be the same and the Motown Era is gone. Detroit at one time was the Richest city in the country, it was number one in home ownership and had the best school system in the country. 

Once called the envy of the world now it is the litterbox of the media. there will be a transformation and a New Detroit will emerge but it will be smaller and the areas of focus will be up under Grand Blvd the original city proper before it began expanding. No other major city has dealt with the number of issues that Detroit has faced in the preceeding years.

If you go and study the model cities program that was initiated here in 1966. The four major cities that received the funding was Detroit, Camden, Newark and Oakland. From this list as you can see not one benefited. 

[Alvin Neal]

http://dailyreckoning.com/detroits-socialist-nightmare-is-americas-future/

[Alvin Neal]

How Socialism Came to America...
and Destroyed Detroit

In 1961, the last Republican mayor of Detroit, Louis C. Miriani, lost his re-election bid. He probably would have lost to anyone who ran against him because he was known to be a crook. He later served 10 years in prison for tax evasion.

The man who defeated him, Jerome Cavanagh, was a Democrat. He ushered in a new kind of politics in Detroit. Cavanagh, who was white, got elected by promising to give Detroit's African American population the civil rights they deserved. But he didn't stop there. Seeing the political advantage to serving this community's interests, he did all he could to bring government benefits and government spending to Detroit's black community.

Cavanagh brought socialism to Detroit.

Mayor Cavanagh was the only elected official to serve on President Johnson's Model Cities task force. The program was modeled after Soviet efforts to rebuild whole urban areas in Eastern Europe. At the time, this centralized approach to urban development was proclaimed as an advantage to the Soviet system, something that could give them an edge in the Cold War.

Detroit received widespread acclaim for its leadership in the program, which attempted to turn a nine-square-mile section of the city (with 134,000 inhabitants) into a "Model City." To help finance the effort, Cavanagh pushed a new income tax through the state legislature and a "commuter tax" on city workers. He promised the mostly poor and black residents of the Model City area that the rich would pay for all of these benefits. He bought their votes with taxes they didn't have to pay.

It was classic American socialism.

More than $400 million was spent on the program – and that was back when quarters still had actual silver in them. The feds and Democratic city mayors were soon telling people where to live, what to build, and what businesses to open or close. In return, the people received cash, training, education, and health care.

But they didn't like being told what to do... or how to live. Not surprisingly, the Model Cities program was a disaster for Detroit. Within five years, it had helped trigger a complete breakdown of civil order and the city's population began to rapidly decline.

On July 23, 1967, police attempted to break up a notorious "blind pig" in the heart of the new Model City. Blind pigs were after-hours clubs that featured gambling and prostitution. They were part of the black culture of Detroit, with many having been in operation since the Prohibition period. The community tolerated these establishments – but the political leadership didn't want any blind pigs in the new Model City area.

On this particular night, at this particular club, the community was celebrating the return of two Vietnam War veterans. More than 80 people had packed into the club. The police decided to arrest everyone present, including the two war vets. This outraged the entire neighborhood, which began to riot. The scene turned into the worst race riot of the 1960s.

As my friend Doug Casey likes to say about the War on Poverty, "The poor lost." The violence killed more than 40 people and left more than 5,000 people homeless. One of the first stores to be looted was a black-owned pharmacy. The largest black-owned clothing store in the city was also burned to the ground. Cavanagh did nothing to stop the riots. (He claimed a large police presence would make matters worse.) Five days later, President Johnson sent in two divisions of paratroopers to put down the insurrection.

The situation destabilized the entire city. Most of the people who could afford to leave did. Over the next 18 months, 140,000 upper- and middle-class residents – almost all of them white – left the city.

And so, you might ask... after five years of centralized planning, higher taxes, and a fleeing population, what did the government decide to do with its grand experiment? You'll never guess...

Seeing it had accomplished nothing but failure... The government expanded the Model City program with 1974's Community Development Block Grant Program. Here again, politicians would decide which groups (and even individuals) would receive state funds for various "renewal" schemes. Later, big business was brought into the fold. In exchange for various concessions, the Big Three automakers "gave" $488 million to the city for use in still more redevelopment schemes in the mid-1990s.

What happened? Even with all of their power and all of the money, centralized planners couldn't succeed with any of their plans. Nearly all of the upper- and middle-class citizens left Detroit. The poor fled, too. The Model City area lost 63% of its population and 45% of its housing units from the inception of the program through 1990.

Even today, the crisis continues. At a recent auction of nearly 9,000 seized homes and lots, less than one-fifth of the available properties sold, even with bidding starting at $500. You literally can't give away most of the property in Model City areas today. The properties put up for sale represented an area the size of New York's Central Park. Total vacant land in Detroit now occupies an area the size of Boston. Detroit properties in foreclosure have more than tripled since 2007.

None of this is surprising. It's exactly what you'd expect to see given the implementation of a socialist scheme like a Model Cities' program. Quite simply, coercion doesn't work for economic development. You cannot tax yourself into prosperity.

It might buy votes... but sooner or later the voters will realize all that's been promised was a lie. Won't they?... Maybe not.

You see, the failure of the Model Cities program and of the War on Poverty wasn't surprising. What is surprising is that every single mayor of Detroit since 1961 has been a Democrat. And extremely liberal.