Investing In Metro Detroit

We seem to get the same questions about investing in Detroit over and over again.

Where are the cheapest houses? What zip code should I buy in? Why shouldn’t I buy that property with a Quit Claim Deed? And so on and so forth. Most of these questions have been answered previously by us or another Detroit expert here on Bigger Pockets, with ample warnings about avoiding scams. Few, though, seem to want to do the “look before you leap” research they should before investing. So, we thought we’d do our best to create a fairly comprehensive overview of the Metro Detroit market to help out-of-state and international investors avoid fatal mistakes.

Let’s start with why we even care. Let’s use one of our favorite sayings to illustrate: “a rising tide raises all ships.” To us this means that the more money invested in Detroit, the better it is for all those who’ve invested in Detroit already, because increases in demand lead to increases in prices. Unfortunately, if an out-of-state or international investor is scammed into a bad experience, they typically liquidate and take their money elsewhere. If this happens too many times, all the ships in our metaphorical harbor may sink, and everyone loses!

What Makes Metro Detroit Unique?

In the early 1900s, the rise of the auto industry made the City of Detroit the wealthiest city in the world. This was reflected in buildings and houses built during this time, which were also some of the best in the world. Workers flocked to Detroit as the auto industry expanded, and the population grew along with the geographical size of the city. The population of Detroit peaked in the late 1950s at around 2 million.

Then this period of growth gave way to a period of contraction. The early 1960s saw residents starting to leave Detroit, enticed by a new fad called suburban sprawl. Race riots in the late 1960s accelerated migration to the suburbs via a phenomena called “white flight”, which left Detroit a shell of its former glory by the mid-1970s.

Fast forward to the early 2000s, and the City of Detroit’s population was down to less than 600,000 by some estimates. Detroit was left with an oversupply of tens of thousands of housing units with almost zero demand - which drove housing prices lower and lower. This led to huge numbers of abandoned housing units, with entire neighborhoods turning into blighted “ghost towns”.

Now, for some reason, everyone outside the State of Michigan seems to mistakenly think the City of Detroit is all there is to Metro Detroit. Remember all those people we mentioned that left Detroit for the suburbs? Well, they took a lot of money with them, and made Oakland County, immediately north of Detroit, one of the wealthiest counties in America. Other cities surrounding Detroit also benefited and are doing quite well, thank you.

Back to Detroit itself: recently, around 2010, American billionaire Dan Gilbert started buying up downtown Detroit commercial buildings on the cheap and simultaneously moving in his companies to occupy them. He also put pressure on suppliers and innovators to follow his lead. His commitment and vision led to the “critical mass” needed to spur the revitalization of the city's urban core, and now property prices in the Downtown area have skyrocketed. Midtown, Corktown and East English Village, to name a few areas, have also experienced dramatic price increases in real estate. The days of bids for Detroit houses starting at $1 on eBay are long gone.

While the population of Detroit is now increasing for the first time in decades, and the city government is tearing down around 5,000 vacant houses annually, there are still tens of thousands of housing units sitting empty. So far, the revitalization has mostly been in a few key areas, and those areas have now gotten too expensive for the average small investor.

But there are still lots of great areas for investment between these two extremes, which are both affordable and up-and-coming, it just takes some due-diligence to understand where they are.

Where to Invest?

The first question a real estate investor should ask themselves before investing in the Metro Detroit area is: how much risk are you comfortable with? Yes, Detroit is coming back strong, but the population is still under one million, and there are still many areas of major blight. It’s been estimated that around 50% of Detroit tenants are on some type of government subsidy. All this means that investors should be prepared to deal with lots of deferred maintenance, low-demographic tenant issues, and theft of mechanicals from vacant properties.

Specifically, focus on the "Ring Cities," or the cities that touch the City of Detroit, when investing. These include Eastpointe, Warren, Hazel Park, Roseville, Warren, Royal Oak, Southfield, Livonia, Wayne, Dearborn, etc. All of these are "safe bets" cities for new investors who don’t want to deal with the inherent issues of the City of Detroit’s rental market.

Why Invest?

Metro Detroit overall has great potential for rental investment. Here are just some of the reasons why so many buy and hold investors are turning to this area to build their portfolios:

• Favorable Rent-to-Value Ratio

The city of Detroit has one of the highest rent-to-value ratios in the country, with rental yields ranging from 8.5% to 14%.

• Low-Priced Gems

The Metro Detroit area is still recovering from the post-2008 meltdown, resulting in many low-priced properties (at a median price of $50,000) to invest in for decent cash flow in the future. Just beware of properties selling at prices significantly lower than this, since they’ll probably come along with a host of repairs and tenant issues that can seriously impact rental profits.

• Home Value Growth

Despite the economic slowdown, Metro Detroit home values are expected to grow by 20% over the next few years. This should motivate you all the more to look for hidden gems that show appreciation and growth potential, especially on the outskirts of up-and-coming Ring City neighborhoods.

• Neighborhoods on the Rise

With the increased gentrification and growth of Metro Detroit, downtown areas are starting to see further development, new infrastructure projects and employment opportunities are springing up, and rental rates are rising. Look for the places that are indicating significant and sustained growth, like the cities surrounding the popular University District, to benefit from this growing rental demand.

Ready to get a piece of the action and start investing in the Metro Detroit area? Start by scanning the Ring Cities surrounding the City of Detroit to find the ideal neighborhood that fits your criteria, and make sure you screen each area thoroughly to understand the risks and opportunities involved.

There are tons of great investment areas here, as long as you’re prepared to do your due-diligence as a newcomer to the Metro Detroit market, and these will only increase as the rising tide of investment lifts our ships even higher.

Any other suggestions on how to find the best rental investment areas in Metro Detroit? Share them with us below!

Image Courtesy of Karolina Grabowska