The Risks and Rewards of the Detroit Rental Market: An Overview

The Risks and Rewards of the Detroit Rental Market: An Overview

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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Our company operates out of the Metro Detroit area, which, as of this writing, contains the second-least-expensive housing market—the City of Detroit—in the U.S. This means that we’ve got a solid perspective on low-cost rental markets for which you won’t find much advice about online. Over the course of the month, we’re going to talk a bit about how operating in a high-risk, high-reward environment affects the property management process. Today, in preparation for our next several posts, we’re going to give you a snapshot of what you can really expect if you come to the D to get your real estate game on.

NOTE: we’re going to be focusing on the actual City of Detroit, not suburban Detroit, which is conversely one of the more affluent areas of the country.

The Reality of Operating a People-Oriented Business as a High-Stakes Game

It might seem like property management is all about real estate, but really it’s an extremely people-oriented industry. We are the interface between owners, contractors, property hunters, tenants, and more. In an economy as edgy as Detroit’s, you can be assured that you will deal with people in each of those groups who are going through a period of significant financial stress. This stress creates a number of undesirable behaviors that are themselves risks to those who aren’t prepared.

Dealing with these behaviors (mostly by predicting and negating—or outright avoiding them) is the majority of the challenge of managing properties in a high-risk, high-reward housing market. It’s not the only challenge by a longshot, but most of the challenges we deal with fall under that umbrella.

Related: 5 Risks of Buying Rental Properties in Declining Markets

The Facts about Blight and Restoration

Depending on what you read about Detroit, you’ll either read a lot about how the city is bulldozing another 10,000 empty houses to combat blight, or that the city is rising like a phoenix from the ashes thanks to the efforts of billionaire Dan Gilbert (and the people who have allied themselves with him). The truth is, they’re both right.

construction site build construction work 159306

Detroit is currently about one-third downtown and midtown, which are the areas getting big money from big, eager investors. It’s also about one-third blighted wasteland, with an estimated few thousand families squatting in abandoned, slowly rotting houses. But the final third of Detroit is what I call Opportunity Land, where the costs are low and the returns are high. Opportunity Land is our playground.

The Art of Minimizing Risk

The downside to a low-cost, high-return environment is the high risk that comes with investing in inexpensive rental properties. There are a lot of risks, and while we go too into detail, the short version is that you should watch out for:

• Properties that are cheap in cost but have significant hidden costs like disputed titles, unrevealed tax liens, or damaged substructures
• Jerks that break into houses and steal anything sellable—or just move in and squat
• Contractors that only work for cash, have addiction problems (making them unreliable), or are too expensive to work on an inexpensive property
• Bad tenants moving into perfectly good properties and ruining them
• Good tenants who have an economic setback they can’t recover from
• And a city government that demands a lot but provides little—police never get there!

Related: The Date is In: These are the Best Cities for Rental Investing

The thing about that list is that the middle four points are all examples of the “undesirable behaviors” we mentioned above—which means they can mostly be compensated for by being canny and assertive and aware of the challenges themselves. (Or, by hiring a property management company to be all of those things for you.) Even the first point is mostly avoidable by being cautious and getting an independent house inspection and title insurance.

Which means that, if you’re one of the laudable folks who is both prudent and has a decent risk tolerance in the first place, Detroit is the place for you: it offers the kind of returns that most investors can only dream of.

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Do you have experience investing in blighted markets?

Share your stories in the comments below!