Newbie Investor Guidance - Detroit - City or Suburbs?

[Danielle Rosenscruggs]

My husband and I are looking to get into REI but feel a bit overwhelmed. We are hoping to invest around $50,000 - $75,000 (e.g., downpayment, closing costs, initial maintenance), would like to be somewhat local (we live in Ann Arbor), and don't want anything that would be a massive project (don't mind minor cosmetic improvements). We have been looking at SFH properties in the $250,000 - $350,000 range in Detroit (Bagley, Jefferson Chalmers, Piety Hill, etc) and some of the surrounding suburbs (Ferndale, Madison Heights, Royal Oak, Farmington Hills, etc). Still, we feel torn/confused about the city vs. the suburbs. We are focused on long-term appreciation, although we would want the monthly rent to cover our expenses (e.g., mortgage, insurance, taxes, PM) plus a small amount to put aside for maintenance. We'd also like to be able to charge at or slightly below market rates to help improve our chances of securing long-term tenants (we've had success with that approach in the past). We'd love to hear any advice folks have to offer! We don't know what we don't know, so any guidance is appreciated!!

[Michael Smythe]

@Danielle Rosenscruggs Joe V is from that area!

First, you should probably understand what different property Classes offer:

In our OPINION (always verify yourself!):

Class A Properties:
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% the more recent norm.
Tenants: Majority will have FICO scores of 680+.

Class B Properties:
Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support.
Tenants: Majority will have FICO scores of 620+, some blemishes, but should have no evictions in last 5 years

Class C Properties:
Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation. Can try to reposition to Class B, but neighborhood may impede these efforts.
Vacancy Est: Historically 10%, but 15-20% should often be used to also cover nonpayment & evictions.
Tenants: majority will have FICO scores of 560-600, many blemishes, but should have no evictions in last 2 years. Verifying previous 2-years of rental history very important!

Class D Properties:
Cashflow vs Appreciation: Typically, all cashflow with zero or negative relative rent & value appreciation
Vacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.
Tenants: majority will have FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, recent evictions.

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.

Second, understand that even a Class A or B property in the City of Detroit, will have a higher probability of experiencing break-in's & theft, and other challenges due to the urban location vs a property in the suburbs. Of course, you should also experience a higher ROI with this higher risk.

We manage properties in Macomb, Oakland & Wayne (including Detroit), so we really don't care where are clients invest - as long as they understand the risks involved.

Feel free to DM us if you need more info.