Deep Dive into Detroit Neighborhoods: University District

If you're like most rental investors, the City of Detroit is definitely on your radar with its affordable housing market and increasing demand for single-family homes. As a result, investors looking to yield solid cash flow are gravitating to Michigan's "Motor City," where opportunities to acquire properties for only $100k are plenty.

However, the City of Detroit is also known to be exceptionally diverse. There are 84 neighborhoods in the city—all with their unique tenant demographics, property conditions, and investment opportunities. Beginners and experts alike need the necessary guidance to navigate the complex rental market for lucrative investments in the City of Detroit.

Because of this, our team is on a mission to create "Deep Dive into Detroit Neighborhood" guides for every single neighborhood in the city. Our goal is to give all investors—including newbies and out-of-state investors—the in-depth view needed to get started with investing in the rental hotspot. All the information you see in this article comes from reliable data points and our own experience as a property management company serving the greater Metro Detroit area.

With this guide, you'll be able to evaluate the real estate potential and risk of a particular neighborhood. We'll help you assess key factors such as:

• 1. The expected returns from rental properties
• 2. The types of tenants to expect
• 3. The kind of property management required

For this installment, we're taking a look at University District—an up-and-coming rental market neighborhood in the City of Detroit, named for being a neighbor to the University of Detroit Mercy (UDM).

City of Detroit

First, let’s take a look at the big picture. The City of Detroit has 11 regions: 

Source: Wikipedia.com

These regions have distinct personality. For example, Downtown Detroit is the city's central business district and residential area. Midtown has a mix of business, cultural, residential, and university areas. New Center is a historic district that has commercial and residential places. And the North—where our featured neighborhood resides—has historical, residential, and university areas.

The North area includes neighborhoods surrounding the campus of the University of Detroit Mercy. Said neighborhoods are Chaldean Town, Grixdale Farms, Highland Park, Palmer Park Apartment Building Historic District, Palmer Woods, Sherwood Forest, and University District.

Here’s how the regions are broken down by neighborhoods in the City of Detroit:

Loveland’s Detroit Neighborhoods Map

The neighborhood we’ll focus on in this article, the University District, sits one mile (1.6km) west of Woodward Ave. On its north is the residential Seven Mile Road, on its south, is McNichols Road and the UDM campus, on its east, is the Detroit Golf Club and Golf Club Estates, and on its west is the Livernois Avenue.

University District Neighborhood

The University District has a population of 4,435 people, according to Areavibes. The population density is 10,015 people per square mile, which is 107.39% higher than the average density of the City of Detroit.

Living in the University District gives an urban feel. Trees line the streets, the architecture is widely varied, and there is an active community organization. Locals are primarily college-educated and proudly raise their children in the neighborhood. It also helps that there are both public and private schools for elementary-level education. Open parks and green spaces are also within reach in nearby neighborhoods.

Residents can get around to schools, restaurants, and stores on foot—making it easy to run daily errands without depending on the neighborhood’s infrequent transit services. Most real estate listings are also only a short car ride away from the closest freeway.

The housing stock in the University District includes many beautiful and well-maintained properties built in the 1930s. The majority (65.9%) of homes in the neighborhood are single-family homes, with 18.2% being apartment complexes, and the remainder being smaller apartment buildings (3-5 units), townhomes, and mobile homes. These houses also tend to be more affordable than the nearby neighborhood, Sherwood Forest.

The majority of residents in the University District own their homes (90%), while the rest (10%) rent their units. The fact that there are more homeowners means you won’t have too much competition as a rental investor and there’ll always be a demand for rentals. However, there is a higher entry purchase price—and rents don’t keep pace. In other words, while it’s a good rental market, it may not necessarily give a good rental investment return.

So, with a location close to an expensive neighborhood and attractive livability features, should investors consider expanding their portfolio to include rental properties in the University District?

Investment Opportunity

Investing in a property can be very lucrative, but you need to do your research before investing. We've compiled all the information on average rent, typical home values, and other factors that will help you find properties in the University District with good prospects for investment success.

While there are many vital points when evaluating an investment opportunity, one of the most important ones is the financial viability of real estate. Here's some info about what makes up this factor.

Property Condition

The majority of homes in the University District were built in 1939 or earlier, making the average property age roughly 82 years old and older. This age is similar to the rest of the City of Detroit that has properties ranging from 70-100 years old.

Source: City-data

According to City-data, most homes in the University District have two (36.03%) to three (34.72%) bedrooms. The rest are evenly spread among one-, four-, and five-bedroom units. Moreover, while most owned homes are detached, the majority of those rented are attached, with detached and two units trailing closely behind.

As a rental property investor, these numbers indicate that you should focus on homes and apartments with two to three bedrooms. The renters in the University District generally prefer those types of units.

Like the rest of the city, you'll find a mix of properties that need repairs and modernization and properties that have recently been updated and refurbished in the University District. As a rental investor, you should be familiar with the possible underlying issues that often come with these types of properties. Doing so will help you budget the renovation costs accurately for a successful investment.

Here are some common problems you should prepare for:

• 1. Toxic lead paint used in older homes
• 2. Outdated electrical outlets that might be ungrounded, having two prongs instead of three
• 3. Underpowered electrical systems due to lower power consumption in 1939 and earlier
• 4. Corroded galvanized plumbing
• Failing sewer lines

While this isn't an exhaustive list, it should help you evaluate the home you're considering investing in. Our advice is to work with a real estate agent and professional inspectors to assess the property's condition before purchase.

A good fixer-upper in the University District can be a good investment opportunity, especially if you compare it to another Class A area such as Los Angeles, where purchase prices can be $700k for a 2-3 br, with a monthly rent of $3k. In the University District, you can acquire a similar home for only $202k, bring it up to rental standards, and rent it out for $1,875—a much better ratio for a more profitable investment.

You can charge even higher if the property is close to a school area—the University of Detroit Mercy and the other two area colleges. Families and students looking to rent near a school would be attracted to your rental simply for convenience.

Average Rent and Rent-to-Price Ratio

According to Zumper’s data for July, these are the rent amounts you can expect in the University District:

• 1. $995 per month for a studio apartment (17% increase YOY)
• 2. $1,270 per month for a one-bedroom apartment (15% increase YOY)
• 3. $1,525 per month for a two-bedroom apartment (2% increase YOY)
• 4. $1,875 per month for a three-bedroom apartment (7% increase YOY)

According to Niche, the median household income is $8,381 per month. Using this number and the average rent of $1,525 for a two-bedroom home, the rent-to-income ratio in the University District comes out at 18%. Your tenants only need to set aside less than a fifth of their household income to pay rent—lower than the industry benchmark of having rent amounts not more than 30% of the tenants’ income to ensure payments each month.

Home Value, Price, and Appreciation

Niche states that the median home value in the University District is $202,243. This value is 311.06% higher than the median value of $49,200 in the City of Detroit. Redfin reports an even greater value, with an average sale price of $435k for homes in the neighborhood:

Source: Redfin

Nevertheless, the University District does offer lower purchase prices than other nearby neighborhoods, like Sherwood Forest, where the average sale price is $535k (an increase of +105.8% in the past year).

Trulia has provided a breakdown of the typical home values in the University District, where we can see that the high property value is primarily due to four-bedroom homes:

Source: Trulia

In addition, a decent portion of the housing stock in the University District has been made into student housing—compared to other areas that have a more diverse mix. In the University District, you can find more two-four family properties (excluding apartment buildings) than one-two family homes.

As a rental investor, you need to evaluate the home prices against the average rent as well. Checking the rent-to-price ratio will indicate the potential cash flow you can generate from the rental and how fast you'll be able to pay off the initial investment.

The industry standard is the 1% Rule, where your monthly rent should be at least 1% of the house acquisition price (including the purchase price and necessary renovation costs). The higher the ratio is, the greater the potential cash flow of the investment opportunity. Across the City of Detroit, the ratio is consistently within the range of 1.0-2.0%—making it one of the most attractive cities in the country that’s ideal for cash flow investors.

Properties in the University District are no different. With an average rent of $1,525 (two-bedroom home) and an average home value of $110k, the rent-to-price ratio in the neighborhood is at an impressive 1.37%—reflective of the favorable ratio across the city.

In terms of appreciation, properties in the University District offer opportunities for investing in equity gains. House values are showing growth according to Redfin’s chart that shows an increase in sale price of +22.5% versus the previous year. Trulia reports a price growth as well, where the typical home value increased from $289k in June 2020 to $320k in May 2021:

Source: Trulia

Potential Tenant Pool

Each neighborhood in the City of Detroit varies wildly, meaning the tenant demographics from one area to another will also be vastly different. Therefore, as a rental investor, you need to know the potential tenants you'll get in the University District to budget for potential issues and accurately assess the financial viability of your rental property.

We've evaluated the tenant pool in the University District based on crucial factors. This information combines multiple research points and our own experience as a property management company in the greater Metro Detroit area.

Tenant Demographic: A

Average income: According to Niche, residents in the University District earn a median household income of $8,381 per month. This is significantly higher (+225.6%) than the city average of $2,574 per month.

Unemployment rate: Areavibes show that the unemployment rate in the University District is 9%. This number is lower than the city’s rate of 11.9%. Moreover, the population in the neighborhood that falls below the poverty level is only 5.5%, compared to the city’s 30.6%.

Neighborhood Livability: A

Aside from the demographics, you also need to evaluate the livability of the area of your property. You want to invest in areas that high-quality tenants will want to live in, increasing your chances of securing those that will pay rent, take care of the property, and abide by the lease agreement.

Here's a glimpse of life in the University District:

Diversity: The racial diversity breakdown in this neighborhood is as follows:

Source: Niche

Crime and safety: While the crime rates in the City of Detroit are higher than in the rest of Michigan, Niche surveys show that more than half (57%) of the locals in the University District feel safe. Trulia users also said that the streets are well-lit (85%) and that they would walk alone at night (57%).

Transportation and walkability: Compared to the rest of the city, almost all (89.6%) of the workers in the University District drive to their place of employment. This means properties with parking spaces and is close to major highways will be attractive to prospective tenants.

Overall score: A-

Based on all the information you see in this article and our experience as a property management company in the local area, we’re giving the University District an overall score of “A-” for rental investing. The only reason we didn’t give it an A is that it’ll be tough to meet the 1% rule here unless you buy a fixer-upper.

Our evaluation comes from the following key factors:

• 1. The rent-to-income ratio in the University District is an impressive 9.4%—indicating a strong potential for generating cash flow from financially capable tenants.
• 2. Home values in the neighborhood are on the rise, where home prices have increased by +22.5% in the past year. This growth brings great opportunities for those investing for equity gains.
• 3. Homes are more expensive here than in other areas in Detroit, but investors who are willing to take on a fixer-upper can still enjoy healthy returns with solid, Class A tenants.
• 4. Locals are enjoying a higher income and lower unemployment rate compared to the rest of the city, potentially attracting new people to live in University District for years to come.

With all the information we’ve gathered for this article, we see the University District as an up-and-coming neighborhood where rental investors can find excellent opportunities to grow their rental portfolio.

If you’re not too confident in investing in the City of Detroit just yet, feel free to reach out for more guidance. Our team is more than willing to help you in your investment journey, having helped many investors over the years to invest all over the greater Metro Detroit area successfully. We are excited for you to grab these opportunities as well.

Image Courtesy of Jess Loiterton