My journey investing in Detroit

46 Replies

About 2 months ago, I was planning for a my 1-week trip to Pittsburgh-Cleveland-Detroit (the classic rust-belt cities) and I started networking on BiggerPockets to find good turnkey companies/realtors that I can work with locally. At the time, I knew very little about Detroit or any of the 3 cities, but the idea was to survey these 3 markets that regularly rank as cities with the best rent-to-purchase ratios and decide where to start. I would never have imagined that I'm already in contract for an investment property near downtown Detroit 2 months later (aiming to close August 2019). I would love to share my experience along the way to give back to this community as I found my amazing realtor team (https://www.detroitpropertybrothers.com/) here. 

A bit about myself - I'm your classic Silicon Valley cliche: can't afford any investment property in the bay area but want to invest in real estate to achieve financial freedom in the long-term. I love real estate for the same reasons as many people on this forum - there are so many ways to play in real estate (leverage, rehab, addition, buy and hold, etc.) and tax benefits are tremendous.

Why Detroit? I believe that there are a few macro trends benefiting Detroit (we are mostly talking about downtown Detroit and some adjacent neighborhoods): 

1) the city climbed out of bankruptcy in 2013 and is having a historical rebirth with the new mayor Mike Duggan in office (likely running for another term). His revitalization strategy and partnership with the private sector (Dan Gilbert, Ford, etc.) have worked better than many people's expectations so far and he also brought in great staff into the administration. With all the new businesses coming into downtown Detroit, the demographics is changing very rapidly - Exodus of older-generation auto industry workers are replaced by a steady inflow of college-educated young talent into Downtown Detroit for jobs created for the new economy...Same thing started in Pittsburgh about 5-10 years ago: https://www.citylab.com/equity/2015/08/brain-gain-in-the-rustbelt/402922/

2) coastal cities are getting so expensive that most millennials and Gen Z cannot afford to live in San Francisco/Seattle/NYC anymore. Instead, they are looking for more affordable second-tier cities that have exciting job opportunities (startups, tech, etc.) and also a critical mass of other like-minded young people. Downtown Detroit offers exactly that with the tech scene booming (check out StockX, Rocket Fiber, Bloomscape, Microsoft, Google/Waymo, Amazon, Quicken Loans, Ally, etc.) and big Autos (Ford, GM, etc.) putting their autonomous driving and EV teams in downtown Detroit to compete with Silicon Valley for top talent in this country. For the auto giants, this is a strategic imperative otherwise they would become irrelevant in the 21st century, that's partly why Ford is trying to rehab the Michigan Central Station in Corktown to compete with Silicon Valley: https://www.youtube.com/watch?v=c42nTd6t1fA&fbclid=IwAR1PmOZYjwoGNG0cjY_ra2_MU9S_lcR3kPLP3gPphPguh3qZ20OUx7iW7eE

3) millennials and Gen Z prefer high-density urban living much more than the previous generations and they don't want to own a car if possible. You don't need to own a car to get to restaurants/bars/groceries/parks in Downtown Detroit and some adjacent neighborhood such as Corktown, Midtown) because everything is within walking distance. 

If you are interested in this topic, please feel free to leave a note with specific questions.

Updated about 1 year ago

Closed the deal first week of September, already signed lease with tenants. Rent is more than 1% of the purchase price. Message me if you'd like to know more.

@Chen Zhou I live in Berkeley and currently looking to enter in Michigan too. Very new and been doing a lot of researching. Thank you for sharing your story. Can we meet up for coffee? I would love to learn more of your experience so far. Aaron

Congrats on the deal!  Detroit is an amazing city! Would love to hear more about how you finance the deal as an out of state investor! And how the appraisal process works in Detroit (knowing that there is a wide range of property price within a short distance in Detroit). 

@Xiaoxiao Li I'm using Wells Fargo for a conventional loan (they require 25% down). Most national lenders cover Detroit. Some of the local lenders include Flagstar and Quicken Loans (Dan GIlbert's mortgage company).

On appraisal, homes in the more established neighborhoods (downtown, Corktown, Woodbridge, Bagley, etc.) with a lot of transaction activities are easier to appraise. But yes, you are right that in some weaker neighborhoods, appraisal is a problem, and that's why Detroit Home Mortgage alliance was started: 
http://www.detroithomemortgage.org/

Detroit Home Mortgage makes up for the currently low property values by allowing you to borrow up to $75,000 more than the home’s current appraised value. But you might have to use the property as a home (not as a rental) to be able to apply from out-of-state.

"The housing and credit crisis from 2006-2010 greatly reduced home values and the number of home sales in Detroit. As a result, many homebuyers could not get mortgages because appraisers could not find similar homes to compare sales prices. This situation led to banks not lending the amount needed to fix up a home or buy one that is already renovated. Currently, home values across the city are still very low and have yet to recover from the recession. Many homes do not qualify for a traditional loan to buy them or to fix them up and make them livable. Detroit Home Mortgage allows a qualified buyer to borrow on the true value – not the current appraised value – of their home."

@Chen Zhou I'm a local investor that lives and invest in the Detroit area. It's a great market with high returns if you form the right team. I would be open to meeting with you once you come if you have any questions, concerns or insight.Making the trip here to get a feel for the area is the first step to getting started well wishes for your journey. 

Thanks for sharing @Chen Zhou , would you mind sharing the numbers on the deal or perhaps numbers on similar deals?

I know when I looked at the market a while back those downtown neighborhoods (Corktown,etc) were pretty expensive as they were already hip, but nearby areas did seem much cheaper.

Which neighborhood are you buying in?

Will your realtor team be helping you with rehab (if rehab needed) , finding a property manager,etc?

@Joseph M. You are looking at $70k and above for decent properties with good bones in Core City/Mexican Village/Island View types of neighborhoods. Rentals are between $900-$1300 depending on the size and condition of the property but hopefully will rise with more developments near downtown/higher-income workforce moving in. So really I'm looking at cap rate around 7% and betting on that the ratio will keep improving in the next 3-5 years. Agree that Corktown seems to be very expensive already.

Yes, Jon and Scott helped me to find property managers and contractors for light rehab. I tried to avoid big rehab projects since it'd be pretty difficult to manage from California and I don't want to spend too much cash upfront. Want to wait for the right timing to upgrade things in the next 3-5 years. 

Chen

@Chen Zhou , thanks for your post. Rents sound to be pretty decent if can be bought around that price. I definitely like the idea of investing on the fringe areas that are close to hot areas. 

That is great they are helping you in that way. That makes sense to focus on lighter rehab especially from a distance and starting in a new market. Best of luck and look forward to hearing more about the progress.

@Chen Zhou so after your trip, what made you decide to actually go for Detroit rather then the other markets you visited? Did the opportunity present itself first in Detroit? Did you develop the team first there? Did the city vibe along with macroeconomics encourage you?

@Constance Kawa-Small Compared to Pittsburgh and Cleveland at least, I was attracted by the size of the opportunity (potential upside) and timing of the market (Detroit just started to climb back up from bankruptcy so has a lot more room for appreciation). The infrastructure in Detroit also makes it easy for any business to expand. Also other smaller factors such as low property tax and no rent controls, etc.

Great thread

I am a believer, been playing in this market for over 12 months

However unless you have all the stars aligned you will very quickly go from a cashflow position to negative

What does this mean?

Buy the right product

Good neighborhoods that are appreciating

A good honest reliable maintenance/contractor

Ditto - property management

I would not recommend sourcing finance until your portfolio is stabilized

But can I say .... ignore the noise, Detroit Rocks

Check out my post ‘Detroit the comeback kid’



Originally posted by @Chen Zhou :

About 2 months ago, I was planning for a my 1-week trip to Pittsburgh-Cleveland-Detroit (the classic rust-belt cities) and I started networking on BiggerPockets to find good turnkey companies/realtors that I can work with locally. At the time, I knew very little about Detroit or any of the 3 cities, but the idea was to survey these 3 markets that regularly rank as cities with the best rent-to-purchase ratios and decide where to start. I would never have imagined that I'm already in contract for an investment property near downtown Detroit 2 months later (aiming to close August 2019). I would love to share my experience along the way to give back to this community as I found my amazing realtor team (https://www.detroitpropertybrothers.com/) here. 

A bit about myself - I'm your classic Silicon Valley cliche: can't afford any investment property in the bay area but want to invest in real estate to achieve financial freedom in the long-term. I love real estate for the same reasons as many people on this forum - there are so many ways to play in real estate (leverage, rehab, addition, buy and hold, etc.) and tax benefits are tremendous.

Why Detroit? I believe that there are a few macro trends benefiting Detroit (we are mostly talking about downtown Detroit and some adjacent neighborhoods): 

1) the city climbed out of bankruptcy in 2013 and is having a historical rebirth with the new mayor Mike Duggan in office (likely running for another term). His revitalization strategy and partnership with the private sector (Dan Gilbert, Ford, etc.) have worked better than many people's expectations so far and he also brought in great staff into the administration. With all the new businesses coming into downtown Detroit, the demographics is changing very rapidly - Exodus of older-generation auto industry workers are replaced by a steady inflow of college-educated young talent into Downtown Detroit for jobs created for the new economy...Same thing started in Pittsburgh about 5-10 years ago: https://www.citylab.com/equity/2015/08/brain-gain-in-the-rustbelt/402922/

2) coastal cities are getting so expensive that most millennials and Gen Z cannot afford to live in San Francisco/Seattle/NYC anymore. Instead, they are looking for more affordable second-tier cities that have exciting job opportunities (startups, tech, etc.) and also a critical mass of other like-minded young people. Downtown Detroit offers exactly that with the tech scene booming (check out StockX, Rocket Fiber, Bloomscape, Microsoft, Google/Waymo, Amazon, Quicken Loans, Ally, etc.) and big Autos (Ford, GM, etc.) putting their autonomous driving and EV teams in downtown Detroit to compete with Silicon Valley for top talent in this country. For the auto giants, this is a strategic imperative otherwise they would become irrelevant in the 21st century, that's partly why Ford is trying to rehab the Michigan Central Station in Corktown to compete with Silicon Valley: https://www.youtube.com/watch?v=c42nTd6t1fA&fbclid=IwAR1PmOZYjwoGNG0cjY_ra2_MU9S_lcR3kPLP3gPphPguh3qZ20OUx7iW7eE

3) millennials and Gen Z prefer high-density urban living much more than the previous generations and they don't want to own a car if possible. You don't need to own a car to get to restaurants/bars/groceries/parks in Downtown Detroit and some adjacent neighborhood such as Corktown, Midtown) because everything is within walking distance. 

If you are interested in this topic, please feel free to leave a note with specific questions.

Welcome to the market, Chen! Sorry I'm just getting to this.

My wife and I moved to metro Detroit 2 years ago after spending 12+ years in SF proper and then 4 years in a town home we bought in Walnut Creek and sold 4 years later. We took that money, bought a big house in Troy, MI and renovated ourselves. It'd be a $2MM home in Walnut Creek. People can't wrap their heads around that here.

My income hasn't changed, so we're investing our cash into Detroit rental properties and also utilizing our HELOC.

One red flag I noticed in your post is that you mentioned your first property is yielding a bit more than 1%. IMO that's not enough to make money in Detroit. I almost always shoot for 2% or more. I'll generally go as low as 1.8% but it's rare. 

 

@Travis Biziorek thanks for sharing. Yeah, for certain neighborhoods in town, looks like 2% would be very very difficult unless you can pay by cash and be able to a bunch work on your own. Where do you typically find these 2% and above properties?

Originally posted by @Chen Zhou :

@Travis Biziorek thanks for sharing. Yeah, for certain neighborhoods in town, looks like 2% would be very very difficult unless you can pay by cash and be able to a bunch work on your own. Where do you typically find these 2% and above properties?

The 2%, 1% rule, etc. has nothing to do with whether you're paying cash or financing 100% of the deal (extremes as an example). It's simple math.

If you buy a house for $40,000 and rent it for $400/mo that's 1%... it doesn't matter if you financed all, some, or none of it.

If you're buying in Bagley or other hot neighborhoods you definitely won't be hitting the 2% rule. And you likely won't make money unless your not leveraging it as much as possible (e.g. anything more than 25% down).

If you want to share the actual deal numbers I'll walk you through my thought process. But if you've financed the property and aren't getting about 1.8% or more on it, I find it's not a great investment. All the savvy, local folks that are involved in Detroit have echoed my learnings.


2% properties are ALLLLL over Detroit. Hell, I could get you 3% pretty easily. But you don't really want to own those ones. You don't have to look hard for either of these.

 

@Travis Biziorek paying with cash = better purchase price = higher likelihood of achieving higher cap rate...

And yes, you are right. I have no intention owning in crappy neighborhood that doesn't have upside...

Originally posted by @Chen Zhou :

@Travis Biziorekpaying with cash = better purchase price = higher likelihood of achieving higher cap rate...

And yes, you are right. I have no intention owning in crappy neighborhood that doesn't have upside...

You won't get that much of a break paying cash to get you from the 1% rule to the 2%. In my experience you get about a 10% discount.

I saw in your profile that you purchased for $125,000 and your "cash flow" is $1,300/mo. I assume you mean rent is $1,300/mo which is not even in the same sport as cash flow. 

I digress.

I don't know your exact figures in terms of what you pay for taxes, insurance, etc. (again, happy to go over them for you). But with some pretty safe assumptions it's pretty safe to assume your cash flow on this property is negative.

Appreciation is a pretty good bet in the CA market. I know, I've played in that pool. But it's a tougher bet in Detroit. I think we'll see it, but I still think the best strategy is picking up properties that conform to (or very close to) the 2% rule that have potential to greatly appreciate. There are plenty out there if you do the leg work to understand the market. But not everyone has the time and energy for it, for sure.

 

@Travis Biziorek My cash flow is pretty positive for now for this property, even with 40% operating expenses...(In reality, i'm not even close to %40 operating expenses). 

Everyone has their own strategy - there's a whole spectrum with some people weighing more cash flow and some people weighing more appreciation. The reality is that Detroit market overall bounced back a lot in the past few years. You are more than welcome to share facts and your experience here, but I wouldn't say which strategy is better, since whats better for you might not work better for someone with another financial profile/goal.

Originally posted by @Chen Zhou :

@Travis Biziorek My cash flow is pretty positive for now for this property, even with 40% operating expenses...(In reality, i'm not even close to %40 operating expenses). 

Everyone has their own strategy - there's a whole spectrum with some people weighing more cash flow and some people weighing more appreciation. The reality is that Detroit market overall bounced back a lot in the past few years. You are more than welcome to share facts and your experience here, but I wouldn't say which strategy is better, since whats better for you might not work better for someone with another financial profile/goal.

I would genuinely love to see your numbers.

The way I see it you're financed at 25% likely on a 30-year fixed paying 5%.

That comes out to a $503/mo payment.

Management is taking 10% (or so people always think). The reality is that it's always higher when you factor in tenant placement, markup on repairs, and other fees. But we'll call it 10% for fun... so $130.

I don't know what your insurance is but it's probably $100/mo or more.

I also don't know what your taxes are, but on my properties (generally less than half your purchase price) it usually runs about $110/mo. I wouldn't be surprised if yours is double. Let's round down to $200.

Your hard costs right now are $933/mo and that's with some conservative estimates.

Let's not forget vacancy of 5% ($65/mo), capex of 10% ($130/mo), and repairs of 10% ($130/mo). That's another $325/mo in expenses you'll have but aren't seeing today.

So you're spending $1,258/mo while taking in $1,300/mo in rent. Again, I'm almost certain this number creeps above the $1,300 mark when you consider your real costs for management, taxes, and insurance. 

I'm not trying to beat you up, just pointing out to folks that this is not a cash flow play you have here. You are banking on appreciation and rents moving higher in the future. That's a great game to play, many folks have been successful doing it, and I'm not knocking it. But it's an odd strategy to lean 100% on in Detroit IMO.