Newbie, investing in Detroit.
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Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
15yWhenever you invest in an area away from yours, you MUST, MUST, MUST hop on a plane or jump in the car and go have a look and meet people. You're placing a bunch of trust in people in the place you're investing, so you MUST get to know them personally.
You must be very careful not to evaluate property in a different location with your local eyes. If you live in the bay area, and look at a house for $2000 in Detriot, you may think "wow, its a steal". And someone might be able to send you great pictures. But if you go there in person you may discover every house on the block is empty or inhabited by squaters. Taxes are high, and there are too many houses for the current population. Many houses have back taxes that will have to be paid by the new owner. Folks here sometimes label houses NFF - not for free.
When you're at a distance, every little thing becomes a big expense. Once of my tenants called about a month ago and said there was water dripping under the sink. I went over and the flex hose to the sprayer was loose. It was loose because the top of the faucet had broken. I told them, you broke it, you'll have to pay for a new one. OK, they said, and I took it to Home Depot. I noticed the new one (identical faucet) was much more heavily built than the old one. And the box said "limited lifetime warranty". Woo Hoo, HD exchanged it for free. So, it was two hours of my time but nothing out of pocket for me or the tenant. Tenant's happy, I'm happy.
Now, not everyone's willing to do that sort of thing. Some will argue you should use the time to do more deals. Probably the best use I'd have made of that time was reading BiggerPockets. More likely I'd have sat on the couch and watched TV. But by having my rentals nearby I at least have the option of doing the work myself. Had I paid someone, it would have been, what, $100 for a plumber who would have bought a new faucet and charged me for it, too?
I'd strongly encourage you to at least have an in-person look at where you're going to invest. If possible, find something closer. Even if its not the bargain basement prices that appear to be in Detroit. Personally, I've thought long and hard and even being in Denver, I can't convince myself to buy something in KC.
31 Replies
- Real Estate Investor · Kalamazoo, MI · Member since 2010 · 681 posts · 241 votes15y
Welcome, Hal!
Good luck with your first rental property. There are challenges operating from a distance, but it can be done.
- Attorney · Raleigh, NC · Member since 2008 · 4k+ posts · 1k+ votes15y
Hal,
Welcome to Bigger Pockets. I'm not going to lie to you and am going to go right into the meat of it. "Newbie" "Investing in Detroit" and "Out of State" are a less than ideal combination of three major hurdles. The only thing you could do to make it worse is do what I did and buy too many...lol.Can I ask you what it is about Detroit that attracts you as an investor? Perhaps we can help you find it closer to you.
Tim
- Rehabber · Denver, CO · Member since 2010 · 79 posts · 20 votes15y
Hal,
Welcome to BP, Tim is right on this one in that this being your first investment property you would be better suited to try and find something that is alot closer to you. Alot of things can go wrong and it would be easier to deal with being near your property than trying to figure it out from states away.Your statement of this being a learning experience is accurate but it can easily turn into the "painful" type that you're trying to avoid. Good Luck
- Real Estate Investor · Dearborn, MI · Member since 2009 · 55 posts · 7 votes15y
Hi Hal - welcome to BP! We are in the Detroit area but invest in the suburbs. If you are committed to the city, though, and would like someone who is knowledgeable to work with, shoot me a note and I can suggest a few people for you to talk with. Good luck!
- San Antonio, TX · Member since 2009 · 3k+ posts · 1k+ votes15y
Welcome to BP Hal, thanks for sharing your story! You'll find it very community oriented here; it's a great site to network with others in all different fields and levels in real estate. Best of luck to you on your journey! :D
- Investor · Holly, MI · Member since 2009 · 95 posts · 23 votes15y
Hello and Welcome to BP
As a fellow Michigan investor I look forward to helping any way I can. I invest in the suburbs but know a few investors in Detroit that are doing well. Good Luck - 15yHal AlamReal Estate Investor · Member since 2010 · 6 posts · 0 votesOP
Thanks guys for the welcome, its very much appreciated !
Tim, Lee, CJ, you guys are probably correct, that it's a tough one starting off on a remote deal.
It just seemed that Detroit offered good value and the possibility of decent returns.
Kevin & William, thanks for the offer of local advice / contacts, I will probably take you up on it.
- Full-Time Investor · Charlotte, NC · Member since 2009 · 2k+ posts · 1k+ votes15y
hey welcome! as tom said, there are some making big bucks in the detroit market right now...find them on here if you're serious, and learn...i lived in detroit for one winter....that was enough snow for me for the rest of my life! lol
- Residential Landlord · White Lake, MI · Member since 2010 · 12 posts · 6 votes15y
Hi Hal!
Congrats and thank you for investing in our beautiful state of Michigan! There are many great returns to be made here, and we know a lot of people that are doing very well in Detroit and the surrounding suburbs! We are doing the suburbs and Pontiac (very similar to Detroit), and are making great returns! Please don't hesistate to send a message if you have any question!! Best of luck to you!!
Kelly :) - 15yHal AlamReal Estate Investor · Member since 2010 · 6 posts · 0 votesOP
Tom & Bryan, thats really good to hear that some people are are doing OK in that Market. Perhaps I should find out how, before I shoot myself in the foot !
As for where I come from, lol, let's just say I come from a Galaxy far far away..........
- 15yCurt DavisBusiness MemberFlipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
Hal, the people who are doing well in Detroit are not new investors, they are seasoned local investors. Detroit is a less then desirable place to invest. Dont be fooled by the smokescreen. If your willing to invest you need to do your homework on several cities. Of course everyone will say their city is the best. If you feel Detroit is the place you want to invest the hit it full speed as you will need tons in momentum to make it there. Good luck
Curt Davis - KAIZEN Realty538 Reviews - Attorney · Raleigh, NC · Member since 2008 · 4k+ posts · 1k+ votes15y
Originally posted by Hal Alam:
It just seemed that Detroit offered good value and the possibility of decent returnsIt offers generally low prices and I am sure there are some good deals to be had in there. However, these features are not unique to Detroit. Is there another state closer to you? I only chose Indiana because it was close to me at the time but honestly, you could find near Detroit pricing in many states.
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes15y
Whenever you invest in an area away from yours, you MUST, MUST, MUST hop on a plane or jump in the car and go have a look and meet people. You're placing a bunch of trust in people in the place you're investing, so you MUST get to know them personally.
You must be very careful not to evaluate property in a different location with your local eyes. If you live in the bay area, and look at a house for $2000 in Detriot, you may think "wow, its a steal". And someone might be able to send you great pictures. But if you go there in person you may discover every house on the block is empty or inhabited by squaters. Taxes are high, and there are too many houses for the current population. Many houses have back taxes that will have to be paid by the new owner. Folks here sometimes label houses NFF - not for free.
When you're at a distance, every little thing becomes a big expense. Once of my tenants called about a month ago and said there was water dripping under the sink. I went over and the flex hose to the sprayer was loose. It was loose because the top of the faucet had broken. I told them, you broke it, you'll have to pay for a new one. OK, they said, and I took it to Home Depot. I noticed the new one (identical faucet) was much more heavily built than the old one. And the box said "limited lifetime warranty". Woo Hoo, HD exchanged it for free. So, it was two hours of my time but nothing out of pocket for me or the tenant. Tenant's happy, I'm happy.
Now, not everyone's willing to do that sort of thing. Some will argue you should use the time to do more deals. Probably the best use I'd have made of that time was reading BiggerPockets. More likely I'd have sat on the couch and watched TV. But by having my rentals nearby I at least have the option of doing the work myself. Had I paid someone, it would have been, what, $100 for a plumber who would have bought a new faucet and charged me for it, too?
I'd strongly encourage you to at least have an in-person look at where you're going to invest. If possible, find something closer. Even if its not the bargain basement prices that appear to be in Detroit. Personally, I've thought long and hard and even being in Denver, I can't convince myself to buy something in KC.
- Attorney · Raleigh, NC · Member since 2008 · 4k+ posts · 1k+ votes15y
Also Hal, take note that with the exception of Tom - everyone recommending Detroit or a surrounding area lives there and Tom formerly lived there. Spending time living in an area gives you insight of how to invest in that area and it does make a difference. That's why I never said in this thread that Detroit is bad. It's a hurdle. There may just be an easier way closer to you.
- Attorney · Raleigh, NC · Member since 2008 · 4k+ posts · 1k+ votes15y
About once a week Jon makes an "epic" post. This is one of them.
- Real Estate Investor · Dearborn, MI · Member since 2009 · 55 posts · 7 votes15y
The Detroit area is experiencing a lot of transition right now.
There are many areas which have always been viewed as "destination" areas, and are now financially within reach for people who wouldn't have been able to reach them in the past.
Other areas which are not viewed as destination areas are the ones who are experiencing some of the deeper price plunges. I think the key is to know which areas are magnetizing people - know where they are running to and where they are running from, and why.
In the Detroit area, this can vary a lot from city to city, and within the city itself, it varies block-to-block. If you buy in an area which isn't a destination area, you may struggle to attract a good tenant.
A lot of landlords find success by purchasing a rental property in a GOOD school district, near perhaps a not-so-good school district. People are often very motivated to get their kids into better schools and keep them there - and stay in your house, limiting your biggest expense, which is of course vacancy. Many such contrasts exist in our area.
Good opportunities exist here but don't fall into the trap of buying the cheapest properties - they are cheap for a reason.
My $.02. . . .
- Rehabber · Denver, CO · Member since 2010 · 79 posts · 20 votes15y
Hal, you've gotten alot of great advice and all that I would add to it is that if you do decide to buy in Detroit make sure that you take Jon's advice and either get in the car or on a plane and make sure that you personally see the property yourself before making your decision. And as Kevin said above alot of the cheapest properties are cheap for a reason.
- Residential Real Estate Broker · Grand Blanc, MI · Member since 2008 · 885 posts · 316 votes15y
I grew up in the Detroit area and my family had several rental properties in Wayne Couny. While none were in Detroit proper, several were less than a couple blocks from the City. Over the years, the properties did well and provided good income.
However, over the past decade, the economy and local issues (City Council and the mayor) really beat up the town. Now with the foreclosure issues, it's only compounded. I don't see it getting any better before it gets worse. However, there are still some very good pockets around the City which are great for investors. I have several friends who are doing well in White Lake, Madison Heights, Hazel Park, Canton, and Westland.
I live and invest in Genesee County. I have several properties in and around Flint. As recently as last month, I have officially committed myself to no longer buying anymore properties in Flint. To be frank, I'm tried of chasing dead beat tenants who don't pay. No matter how hard you screen, they still get through. With a lack of jobs, there's a lack of income to support the monthly rent. Diminishing property values and high property taxes don't make much of an incentive to continue to invest in the already hurting Cities (Detroit falls in to this category too).
I strongly agree with what Jon posted. You need to view the area and really get a handle on what to expect. These markets are not for the weak of heart. I've been doing this a very long time and have pretty thick skin. But at some point you need to decide when enough is a enough....or be smart enough to not even try making money in the really depressed areas!
- Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes15y
Hal, it seems you are getting a lot of solid advice on your first thread. Owning rental property can be more challenging than people realize. IMO it is much better to buy at least that first property in your own backyard.
There are many issues that can and do come up when you own rental property. While it is possible right from the start to have others do a lot of the work, you may find that you may find your returns are less than expected and it may be difficult to determine why. If you understand have some experience then you may be able to spot the reasons make adjustments.
Emergencies happen, tenants skip town, tenants quit paying, property managers have been known to claim a property is vacant and keep the rent payments, contractors may charge to much. When people know you are from out-of-town they may see you as an easy mark. Having some experience under your belt can eliminate some of these headaches.
I have been an investor for about 15 years and still have not purchased an out-of-state property. like Jon I would definitely want to get to know the location and try to understand the demographics and market before investing anywhere. Purchasing real estate is a large investment and mistakes can be quite costly.
- Real Estate Investor · St. Clair Shores, MI · Member since 2010 · 27 posts · 3 votes15y
Congratulations Hal!!!! And I wish you the best of luck with your new adventures.... I live in the South East side of Michigan, so if you ever have any questions feel free to contact me
- 15yHal AlamReal Estate Investor · Member since 2010 · 6 posts · 0 votesOP
Thanks for everyones input. I can't help but feel a bit chilly, after the bucket of cold water that's been thrown onto my plans.
I do understand that there are people on BP with significant experience in RE investing, so I am taking the views & comments seriously.
I think that it might be useful to give more
details about the deal, so that you guys have a clearer picture.The property is in the Bagley area of Detroit.
It is a multi family home with 2 units, which I'm buying for $15,000.
The house is in "apparent" good condition and I have been told that it needs about $3,000 of work to make it ready to rent out.
The 2 units will approximately rent out for $1150 per month, and the taxes are just under $3000 per year.
I thought it looked good primarily because it was in a good area, and was recommended to me by the property management company, as an area where renting would not pose a problem.
Look forward to everyones comments.
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes15y
Does that management company have any relationship whatsoever with the seller?
Have you personally researched the rental prospects for the specific area?
Do you personally known this is a good area, or at least one that meets your criteria?
IMHO, $3000 to make it rent ready is a bogus estimate. Paint and carpets will cost more than that, unless the place is tiny. If any repairs are needed, you're looking at more money. I say its a bogus number because either its move in ready as-is, or you're going to spend more than $3000.
The words "apparent" and "I have been told" make me think you're just relying on what someone's telling you. Do you know this person? Do trust them with your money? Not just the $15K or $18K, but whatever it will cost to escape if this proves a disaster?
This may or may not be a great deal. The "numbers" work. That is, the price to rent ratio is good. But are the other two factors in place. Those are rental demand, demand the you yourself must personally verify. And is the value there. If similar properties can be bought and made rent ready for similar prices, this one is no deal. You need to be into a property at a discount so you have protection against continued price drops and so you can escape if you need to. Real estate is funny. If you put $15K into stocks, the most you can lose is $15K. If you put $15K into real estate, your losses can be significantly more.
Have you put the address into google maps, then put in "real estate for sale" and looked at other properties for sale in the area? At least in the NE corner of the "Bagley area" it appears there's at least one house per block that's for sale, at similar prices to what you say.
- Investor · Atlanta, GA · Member since 2009 · 35 posts · 49 votes15y
I started out very similar to you, Hal. "Newbie", "Out of State", etc. One thing I learned real quickly is NEVER to rely on what someone says to you or tells you. I live in the NYC metro area and prices here are really high, similar to those in California, etc. As a result, out of state made sense for me too.
However, I went out and visited every market that I currently invest in--I probably visited them at least 2-3 times, built a team of professionals--inspectors, contractors, property managers, realtors, etc.--people that I could rely on. Then, I set up a system of checks and balances that one team member could verify another's work when I sent them to a project.
Per Jon's comment, $3K on a rehab seems very low, especially for a 2 unit. My magic number is 3. Always get 3 bids from 3 different contractors at a minimum per project. Have three people go out to the property before my inspection period ends (usually it ends up being 5 or 6--realtor, inspector, 3 contractors, property manager) to get a clear understanding about the property and its rental prospects. Due diligence is key because sure a $15K property that rents for $1150/month sounds great... but if you can't rent it out, it sounds horrible.
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