The Verdict on Detroit—Is it a Good or Bad Market for Investing?

The Verdict on Detroit—Is it a Good or Bad Market for Investing?

3 min read
Drew Sygit

Drew is a classic overachiever, bringing intensity and passion to everything he does. While in the mortgage business, he rose to a VP position at the first broker he worked for and then started his own company.

Experience
In the pursuit of excellence, Drew obtained several mortgage designations and joined mortgage and several affiliate association boards. He also did WebX presentations and public speaking engagements. It was during this time, he started personally investing in single family rentals, leading him to start Royal Rose Property Management with two partners. He also joined the board of a local real estate investors association, eventually becoming its president.

The real estate crash led to an offer from the banking industry to manage a Michigan bank’s failed bank assets they acquired from the FDIC. The bank went on to eventually acquire four failed banks from the FDIC, increasing from $100MM in assets to over $2B while he was there. After that he took over as president of Royal Rose Property Management and speaks at national property management conventions.

Accreditations
Former board member of Michigan Mortgage Brokers Association, Financial Planners Association of Michigan & Mariners Inn (nonprofit)

Former taskforce Member of Michigan Association of CPAs (though not a CPA)

Involved in mortgage business for over 18 years, obtained mortgage designations: Certified Mortgage Planner, Certified Mortgage Consultant, & Certified Residential Mortgage Specialist

Board member of Real Estate Investors Association of Oakland; President since 2012

2009-2012 Shared-Loss Manager for Talmer Bank (now Chemical Bank) handling FDIC failed bank loan loss strategy, reporting, REO management, collections, & gap analysis

Started investing in real estate in 1996

President of Royal Rose Property Management since 2001

Education
Drew received an MBA from Wayne State University, concentration in Finance & Marketing.

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LinkedIn

www.RoyalRoseProperties.com

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Metro Detroit is in a fairly legendary place in terms of its housing market. Tens of thousands of empty houses sit decomposing in some areas, while other areas are blossoming. You can find houses worth $80k that are selling for $150k—and some that are selling for $80. In terms of real estate investment, there has never been a place where the emptor needs more caveat. For an investor who mixes risk tolerance with diligence and patience, however, the potential rewards are above and beyond.

4 Upsides to Investing in Detroit

Upside #1: Rent-to-Value is Through the Roof

According to BiggerPockets’ annual real-estate market review, Detroit has the second highest rent-to-value ratio in the country at just over 8.5%. This means that investment properties in Detroit have enormous potential to pay off the initial investment quickly and turn into profit streams.

Upside #2: Low Entrance Requirement

Obviously, in a market where houses come in such a wide range of prices and actual values, it’s going to be possible to get in on the housing market for less money than in a market where houses are consistently kept near their actual value. This makes Detroit a choice market for people who want to turn a small amount of initial investment into a decent amount of cash flow.



Related: Rents Dip Below Inflation, Home Appreciation Slows: Are Markets Cooling Off?

Upside #3: Growth Happens

The Metro Detroit area is a mix of wealthy, fast-growing areas—and the opposite of that. As it happens, that’s a great recipe for finding homes in areas that are going to start growing, provided the overall economy of the area keeps trending upward. As the Metro Detroit area is trending upward and seems to be set to do so for quite some time, this makes finding likely investment homes easier here than in many markets.

Upside #4: Proactive Government

The City of Detroit is strong on its position that the real estate market in the city needs help—and they are definitely helping. By demolishing sizable tracts of empty, deteriorated homes, the city is in the process of “filling in the crater” that is the housing market of the suburbs surrounding midtown and downtown. Add to that significant improvement projects like the Cuts, a series of long, narrow parks connecting inland neighborhoods to the river, and the question becomes not if the real estate market is going up in value, but how fast.

4 Downsides to This Market

Downside #1: Risk is Inescapable (and Dire)

Effectively the flip side of a low entrance requirement, the risk of investing in a market where there’s little correlation between house price and house value is that it’s surprisingly easy to get caught in a trap where the home you just purchased for $80 ends up being worth -$60k. It can happen! Detroit homes are often loaded with debts that must be paid before anything can be done with them, and not all sellers are particularly inclined to be forthright about what their houses come with.

Downside #2: Costs Also Vary Wildly

It’s not that hard to find a house with a great rent-to-value ratio, but it’s important to realize that R2Vs are based on gross rental income—and costs in the Detroit area can easily be significant enough to turn your net rental income negative if you’re not careful. Getting an accurate estimate of your home’s future costs is one of the most difficult tasks associated with successfully navigating the Detroit housing market.

Downside #3: Proactive Government

As much as the government is doing great things for property values, they’re also in the process of causing a significant problem. To wit, the city has declared that it will soon start enforcing its long-ignored rental registration laws, meaning thousands of landlords in the city is going to have to choose between bringing their ancient, abused homes (currently being rented to extremely iffy tenants) up to code or selling them. For most of these homes, the cost of renovating up to code isn’t worth it, which means the supply of genuinely bad homes to purchase is going to shoot up.

real-estate-negotiation

Related: How Legalized Marijuana is Impacting the Colorado Real Estate Market

Downside #4: Poor Tenant Quality

Speaking of iffy tenants, Detroit has far more than its fair share. It’s not something often spoken of, but those thousands of empty homes sitting there deteriorating aren’t all empty. There are a scary number of squatters and an equally scary number of ex-squatters who have managed to trick their way past an inattentive landlord’s tenant screening system. And yes, they are exactly the kind of nightmare tenants you want to avoid at all costs. So don’t come to Detroit unless you have a passion for screening tenants (or a local property manager who knows the tricks working for you).

The Takeaway

The honest truth is that the question in the title is overly simplistic. Detroit real estate is an amazing investment opportunity if you are a risk-tolerant, assertive investor willing to put in the effort to check every last detail of a home (and every tenant) to the nth degree. The risk-intolerant, hands-off, procrastination-prone, and detail-averse should investigate markets with less risk, and accept that their potential rewards will naturally be commensurately lower as well.

Would you put your money into the Detroit market? Why or why not?

Weigh in with a comment!