Posted 11 months ago

A Tale of Two Rental Markets: Metro Detroit vs. Cleveland

Normal 1634402808 ImageImage courtesy of ideastream.org



According to the International Investor Survey, the US ranks first for being the country with the best real estate investment opportunities. A whopping 86% of the respondents said they plan to maintain or increase their real estate investment in the country!

But with 50 states and nearly 20,000 cities, where in the country should you invest in rental properties?

To answer that question, we’ve created this series to compare the different US real estate markets that are known to be goldmines for rental investors. We have more than 25 years of experience operating as a property management company, and we’re drawing on our knowledge (and extensive research) to give you a comprehensive, side-by-side rundown of different cities. These articles will help you decide between popular real estate markets, showing you all the information you need to make sound decisions for your rental portfolio.

We’ll show you the strengths and weaknesses of each location, evaluating key factors such as:

  • - The expected returns from rental properties
  • - The types of tenants to expect
  • - The kind of management required

For this installment, we’re comparing two key Midwest markets: Metro Detroit and Cleveland.

Admittedly, we might be a bit biased towards our home market (Metro Detroit). Nevertheless, we’re going to be as factual and objective as possible.

Let’s start by going through each metropolitan area in more detail:


Overview of Metro Detroit

The Metro Detroit area is a bit of an anomaly in the real estate market. Most metropolitan areas have property values rise as you get closer to the city; however, because most wealth ran away from Detroit during the 1960s and 1970s, the opposite is the case here. This means it’s not uncommon for properties near downtown to be cheaper than those on suburban streets ten miles out.

Just take a look at the income heat map below, assuming that income corresponds to property values:

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ProximityOne: Patterns of Economic Prosperity by Neighborhood

Since the Great Recession in 2008, however, the City of Detroit has been bouncing back. After years of economic downturn, property values and rents are starting to increase at rates that far surpass nearby suburbs—all because people have started moving back into this once-failing metropolis in droves.

Our ongoing Deep Dive series talks about this in more detail, where we analyze the investment potential of each Metro Detroit city and specific Detroit neighborhoods. Be sure to check those out if you want a more granular view of the area!

Given the uniqueness of Metro Detroit’s situation, we’re comparing it to other cities—not necessarily other metropolitan areas. We’ll make sure to keep reminding you of this as we get into the meat of our comparative information.

The Metropolitan Statistical Area (MSA) area of Detroit-Warren-Dearborn includes the 6 Michigan counties of Lapeer, Livingston, Macomb, Oakland, St. Clair, and Wayne. What we call “Metro Detroit” refers to Macomb, Oakland, and Wayne counties - in other words, the Detroit Tri-county area.

Metro Detroit covers 3,888.4 sq mi (10,071 km2) and has a population of over 4 million. Within this metropolitan area is the City of Detroit that occupies 142.89 sq mi (370.1 km²).

Here are the 72 cities in the Detroit Metropolitan area:

Map showing Tri-County Metro Detroit CitiesSource: Georgetown Public Policy Review

If you’re an out-of-state (OOS) investor, it’s crucial to understand the difference between the City of Detroit and the rest of the metropolitan area. Doing so will ensure that your investment expectations are met. Because of this, we’ve also coined the term “Ring Cities,” which refers to the suburban cities bordering the City of Detroit in a semicircle. Ring Cities are known for three things, which are what most OOS investors are expecting when they begin to invest in the Detroit market:

  • - Affordable housing stock
  • - Good rental cash flow opportunities
  • - High buy-and-hold investment potential

Here’s a list of the cities in Metro Detroit. The ones highlighted in green are the Ring Cities, and the ones with hyperlinks are the areas we’ve already covered in previous Deep Dives:

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Now that you know about Ring Cities, let’s look at how you can invest in the City of Detroit. The city is separated into 11 main regions, as shown in this map below:

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These 11 regions can be broken down further into 105 neighborhoods. The hyperlinks you see are quick links to previous Deep Dives we’ve already published, in case you want to know more about each area:

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Normal 1634403777 ImageSource: Loveland’s Detroit Neighborhoods Map

Given the complexity and variety, OOS investors shouldn’t invest in a zipcode or neighborhood without visiting the area first-hand. Do boots-on-the-ground evaluation (or have someone you trust do it on your behalf) to see the area surrounding your prospective purchase. Property class (A, B, C, or D) can certainly vary from block to block. We’ve seen way too many investors purchase what they think is a class A or B, only to find out that’s actually a C or D upon closer evaluation.

These challenges make the City of Detroit a great place to find investment opportunities in—as long as proper due diligence is done. If you’re looking for lower-risk investments, consider Ring Cities instead to still take advantage of the high cash flow opportunities in the area.

Overview of Cleveland

The City of Cleveland, or “Cleveland” for short, resides in the state of Ohio, being the county seat of Cuyahoga County. It is the largest city on Lake Erie, anchoring both the Greater Cleveland Metropolitan Statistical Area (MSA) and the Cleveland-Akron-Canton Combined Statistical Area (CSA). The latter is considered the most populous CSA in Ohio, as well as the 18th largest CSA in the country.

Cleveland covers a total of 82.47 square miles (213.60 km2). Its location borders several inner-ring and streetcar suburbs, including Lakewood to the west, Shaker Heights to the east, Linndale to the southwest, Newburgh Heights to the south, Warrensville Heights to the southeast, and Bratenahl to the northeast.

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According to Mashvisor, real estate in the City of Cleveland is affordable and profitable—defying the notion that the two factors cannot exist in a real estate market. Roofstock also describes the city as one of the top places to buy a rental property for cash flow and appreciation.

The area includes 44 neighborhoods, all of which are listed below:

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Within the city, Mashvisor recommends the following areas for investing in traditional rentals or short-term rentals (like Airbnbs):

  • - Industrial Valley
  • - Stockyards
  • - Central
  • - Riverside
  • - Old Brooklyn
  • - Kamm’s Corner
  • - Tremont

Mashvisor calls Cleveland a “hidden gem for Midwest real estate,” attracting both investors looking for cash flow and appreciation.

While Cleveland is already known for generating high rental income, it wasn’t until recently that Cleveland’s appreciation rate (2.27%) overtook the national average, and home values rose by a whopping 8%. These numbers resulted in Cleveland property owners gaining unexpected appreciation, and are estimated to continue doing so in the next few years.

Comparing the Real Estate Scenes in Metro Detroit vs. Cleveland

Now that we have an overview of both areas, this section will now detail the factors that contribute the most to the financial viability of rental investments. We’ll begin by comparing the rent amounts, house values, appreciation rates in Metro Detroit and Cleveland. Later on, we’ll compare the quality of tenants, property conditions, and general quality of life between the two areas.

The image below shows the rental properties currently listed on Zillow for Metro Detroit (as of April 2021) and Cleveland (as of May 2021):

Normal 1634404870 ClevelandSource: Zillow



Let’s go through the differences and similarities between the two areas, focusing on the homes currently listed on Zillow and their respective rent-to-price ratios.


House Value and Appreciation

House Value. According to Zillow, the average home value in Metro Detroit is $209,728. This number shows an 11.0% increase over the past year and is forecasted to rise by 9.9% in the next year:

Normal 1634405044 ImageSource: Zillow



Over in Cleveland, homes are typically valued at $86,559—with a significant increase of 23.4% over the past year. There is no specific forecast available on Zillow as of the writing of this article.

Normal 1634405620 ImageSource: Zillow

If you take a look at the current listings on Zillow, the majority of available homes in Metro Detroit are in the City of Detroit or the Ring Cities. Many of the famous below-$100k properties are located in these areas. The lots are generally smaller, resulting in higher housing and listing density.

Normal 1634405761 ImageSource: Zillow



NeighborhoodScout has provided a heat map of Michigan showing the average appreciation rates in Metro Detroit. In general, the Ring Cities surrounding the City of Detroit tend to have higher appreciation rates compared to those within the city.

Still, keep in mind that the exceptionally diverse and varied Metro Detroit has a lot of sweet spot opportunities scattered in the area for rental investors to buy affordable houses around expensive, developing neighborhoods.

Normal 1634405933 ImageSource: NeighborhoodScout




In Cleveland, listings on Zillow and the heat map in Neighborhoodscout both show that—while there are exceptions—property prices tend to increase faster the nearer you get to the center of the city.

Normal 1634406226 ImageSource: Zillow



The heat map from NeighborhoodScout shows that areas closer to the center of the city tend to appreciate higher than in the southeast.

Normal 1634406355 ImageSource: NeighborhoodScout


Appreciation. In terms of appreciation rates, Bestplaces reported the following:

  • - Metro Detroit home appreciation in the past decade is 29.8% (up by 8.2% YOY).
  • - Cleveland home appreciation in the past decade is -3.0% (up by 8.4% YOY).

Both areas have affordable homes, but Metro Detroit has significantly higher appreciation rates.

Comparing them to the national rate, home values have climbed significantly this year, and are forecasted to continue appreciating over the next decade. National home prices increased by almost 49% in the past decade, where the last two quarters (January 2021 data) show an impressive annualized rate of 9.3%.

At this rate, Renofi predicts that the US will reach an average home price of $382,000 by 2030.


Average Rent

Looking at the chart from Bestplaces, we can see that the rent in Cleveland is lower on average than those in Metro Detroit across all housing sizes.

Normal 1634406631 ImageSource: Bestplaces



The latest listings on Zillow also reflect these average rent amounts:

Normal 1634406737 Image

Normal 1634406775 ImageBased on current listings on Zillow

Rent-to-Price Ratio

As you’re scanning the properties available in Metro Detroit and Cleveland, use the rent-to-price ratio as a quick indicator of a property’s likelihood to yield positive cash flow. Stay close to the industry minimum standard of 1% when shortlisting prospective properties.

The formula for the rent-to-price ratio is as follows:

Monthly Rent / (Purchase Price + Rehab) > 1%

For areas like Metro Detroit and Cleveland where you’ll find a lot of properties varying greatly from each other, the rent-to-price ratio is a handy formula to instantly estimate your return on investment (ROI).


Side by Side Chart

To see all these data in action, let’s pull up current listings on Zillow.

Here are examples of properties in Metro Detroit and Cleveland. You can see how they compare to each other in terms of rent amount and house values:

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Metro Detroit shows a more favorable rent-to-price ratio, with better appreciation rates and a positive forecast for home values. Cleveland has seen an impressive increase in home values the past year; however, it has a less favorable rent-to-price ratio and lower appreciation rates overall.


Quality of tenants, properties, and living

As a rental investor, you want to be keen on the quality of tenants, properties, and living you offer in an area. These factors heavily influence your investment success, as they will determine the following:

  • - The stability of your rental income
  • - The maintenance of your properties and assets
  • - The necessary and possible property renovations and rehabilitations
  • - The type of tenants you’ll attract
  • - The kind of property management required to handle such tenants

The following information comes from a variety of research points and our own local knowledge. They are meant to guide you in understanding individual areas in Metro Detroit and Cleveland, and not to be used as definitive metrics.

As a general overview, we’ll begin with Roofstock’s neighborhood overview based on the quality of schools, home values, employment rates, income levels, and other investment criteria:

Normal 1634407864 ImageSource: Roofstock

Based on these maps, both properties that are nearer to either the City of Detroit or City of Cleveland tend to be lower-ranking or Class C. These neighborhoods are not exactly ideal for beginner investors, as you’ll run into more tenant issues and property maintenance requirements here. However, with proper guidance and knowledge in diverting risks, rental investors can still successfully invest in these areas.


Tenant Quality

Average Income. Locals in Metro Detroit experience higher average income, with the lower unemployment rate and higher job growth. Cleveland tends to fall short in comparison, especially with its declining job market in recent years:

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As a rental investor, you want to charge higher rent and have tenants pay them consistently. With higher-than-average rent and income in Metro Detroit, investors can enjoy a large and steady rental income here than in Cleveland. With that said, a thorough tenant screening is still key to finding quality tenants, whichever area you choose to invest in.

Additionally, you want to invest where the job market is growing, increasing the population and strengthening the economy. These factors will impact property values and rent prices.

Educational Attainment. Generally, residents in Metro Detroit have achieved higher education than in Cleveland. This factor increases your chances of having higher demographic, higher-income tenants.

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Property Condition

Property Age. The median age of the houses in Metro Detroit is 51 years old, while Cleveland’s is 78 years old. More than half (53.7%) of homes in Cleveland were built in 1939 or earlier. This difference means that the property conditions in Metro Detroit will generally be newer and more updated than in Cleveland.

Nevertheless, both areas do have older homes, compared to the national average property age of 40. Investors are highly encouraged to have professionals evaluate the property prior to purchase, anticipating any necessary renovations to bring up to rental standards.

Normal 1634409339 ImageSource: Bestplaces




Blighted Areas. In addition to older homes, both Metro Detroit and Cleveland are dealing with blighted properties. Both areas are implementing rehabilitation plans for areas with abandoned properties that tend to make the neighborhood more dangerous.

Back in 2014, the number of blighted Detroit properties reached nearly 80,000, with more than 20 square miles of vacant land. Since then, the city implemented blight remediation programs that demolished 19,000 homes and rehabilitated 9,000 others. Just this year, the City of Detroit has announced that it sold $175 million in bonds to finance their massive project to demolish and renovate thousands of more homes.

Meanwhile, Cleveland has accrued hundreds of abandoned, condemned, and vacant apartment buildings since the foreclosure crisis in 2008. According to a recent study done by Cuyahoga Land Bank, there are 571 vacant and abandoned apartments in Cleveland, with News 5 Investigators confirming that 22% of those buildings are condemned.

Normal 1634409587 ImageSource: News5Cleveland

Thankfully, Famico Foundation, a nonprofit organization created to revitalize the neighborhoods in Cleveland, have already succeeded in rehabilitating portions of the city. Cuyahoga Land Bank has also completed a total of 8,829 demolitions and 2,435 renovations since its inception.

As an investor, you need to find properties that are in relatively good condition and repair, ideally located in up-and-coming neighborhoods within Metro Detroit and Cleveland. Blighted properties come with their own set of structural problems, requiring you to budget and plan for rigorous evaluation prior to purchase.

Home Ownership and Rental. More homes in Metro Detroit are owned (61%) than rented (27.7%). This indicates that homes are likely better maintained, as owners tend to treat their property with long-term living in mind.

Cleveland’s ratio has more renters (46.3%) than owners (33.2%), indicating that you’ll have a larger tenant pool while having to deal with properties in poorer condition. Renters don’t usually maintain a property as well as owners do.

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Investors should pay attention to the condition of homes in both locations, especially older homes that were rented out before. It’s best to hire a professional to inspect the home for accurate budgeting when it comes to maintenance and repairs.

Quality of Life

Local Economy. The economy of Metro Detroit was greatly affected by the recent pandemic. While the well-known automotive and manufacturing sectors within the City of Detroit (nicknamed “Motor City”) show resilience, smaller businesses and the leisure and hospitality industry were hit hard.

Nevertheless, the following statistics show promise:

  • - The median sale price of single-family homes in Metro Detroit increased by 23.3% from the first to the third quarter of 2020, reaching an impressive $236,300. New construction permits are also reflective of 2019 levels, showing no slowdown due to the pandemic.
  • - In late 2020, Ford Motor Co. also unveiled its multi-year plan for a “mobility innovation district” centered on the former Michigan Central train station, just west of downtown Detroit. This $350-million project will transform the long-derelict building into an innovation hub, along with the 30 acres of Corktown in the surrounding area. The new redevelopment will soon accommodate 5,000 new employees.
  • In Warren and Sterling Heights, a $217-million project is transforming a stretch of Mound Road into a “connected” roadway, transforming it into a “21st century multimodal corridor.” There will also be a connected and autonomous vehicle corridor between the City of Detroit and Ann Arbor, revitalizing the communities along Michigan Avenue and I-94—effectively bringing more opportunities for real estate investors.
  • Despite the pandemic, Michigan’s new business applications also increased by 42.2% in 2020 compared to previous year, showing steady growth in the economy after the recession.

Cleveland was also affected by the pandemic, however, its diversified economy has helped the rental market stay strong. The city was once dependent on its manufacturing industry and has now transformed into a well-balanced blend of blue and white-collar employment.

The following local news indicates a healthy economy in Cleveland:

  • - The Ohio REALTORS trade association reported that the number of homes sold in the pandemic year 2020 is impressively at 4.3% higher than 2019. The average sale price in Ohio increased by 10% to $212,517 in 2020, with the total value of all the houses sold reaching $34.4 billion
  • - According to Freddie Mac, mortgage rates in Cleveland fell below 3% for the first time in five decades (data from July 2020). Real estate agents describe the market as “roaring in Northeast Ohio,” with experts forecasting this positive interest rate to continue for 18 months. Cleveland is a hot seller’s market, with high demand and low inventory.
  • - The city is also seeing thousands of new apartments being built and renovated—with developers frequently announcing upcoming projects. Data from CoStar real estate analytics reported 1,460 new units added to the Cleveland area in 2020, including Cuyahoga, Geauga, Lake, Lorain, and Media counties. These developments show no slow down in the market.

Both Metro Detroit and Cleveland are showing solid growth, despite the unpredictable year of the Coronavirus pandemic. They boast of great opportunities for rental investors, remaining attractive to citizens seeking greener pastures.

Safety and Crime. Looking at the safety of each area, both Metro Detroit and Cleveland have higher crime rates than their respective larger areas (Metro Detroit versus Michigan, and Cleveland versus Cleveland-Elyria Metro and Ohio). Cleveland’s crime rates are more than double the rates of its metropolitan area and state.

Normal 1634736292 ImageSource: Bestplaces

According to NeighborhoodScout, Cleveland has one of the highest crime rates in the nation compared to communities of all sizes. Within Ohio, less than 1% of all communities have a higher crime rate than the City of Cleveland. The city places 16th in the list of top 100 most dangerous cities in the US.

The City of Detroit is no different. Within Michigan, less than 1% of all communities have a higher crime rate than the City of Detroit—however, largely due to the other cities in Metro Detroit that are much safer. Oakland Township and Huntington Woods are two great examples, being ranked by SafeWise as two of the ten safest cities in the state.

As you comb through the different neighborhoods, keep in mind that there will be localized crime rates for every area in Metro Detroit and Cleveland. You’ll likely find properties in perfectly safe neighborhoods just a few streets away from those deemed unsafe.

Safe neighborhoods are preferred by good-quality tenants—therefore, so should you.

Diversity. Below is a breakdown of the racial diversity in the two locations:

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To run a successful rental business, you need to have a tenant base that is reliable, communicative, and responsible for paying rent and maintaining your properties. With how different the potential tenants are in Metro Detroit versus Cleveland, a self-evaluation on what kind of tenants you want as a rental investor is strongly recommended before choosing between the two locations.

Liveability. The pros and cons of living in Metro Detroit and Cleveland as a resident are as follows:

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Both Metro Detroit and Cleveland attract residents seeking a lower cost of living in up-and-coming neighborhoods—opening many opportunities for rental investments to thrive.

The rule of thumb is to buy properties in areas that are in high demand by high-quality tenants. Consider the characteristics of each sub-area, evaluating their tenant demographics and common property conditions carefully. With the variety of neighborhoods in Metro Detroit and Cleveland, each investment factor needs to be evaluated meticulously and, ideally, with expert guidance from a property management company (especially if you’re investing remotely).

Conclusion

Ultimately, each investor has to conduct a thorough evaluation of the opportunities within Metro Detroit and the City of Cleveland. Each of these real estate markets has its own cities and neighborhoods with varying pros and cons—being highly dependent on your goals as an investor.

Below is a recap of all the comparative data presented in this report:

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It's tough to decide between the two real estate markets. So we'll be biased and say that Metro Detroit has more overall wealth than Indianapolis, with a significant portion of this going towards revitalizing the City of Detroit after decades of neglect. Just look at how the city has emerged from the ashes since 2011!

Disclaimer: At the end of the day, money remains to be the root of every investment. We encourage all investors to focus on the financial viability of every property they’re deciding to purchase. Your goal is to find a good balance between cash flow and appreciation, allowing you to generate the most returns immediately and in the long run.

Found this comparative report useful?

We’ll continue to compare Metro Detroit against other well-known real estate markets in our next installments. Should you have a particular market in mind that you’d like us to prioritize, leave a comment below and we'll be sure to cover them in our future reports.










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