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