All Forum Posts by: Robert Plumpe

Matthew John:

I would echo what Dylan Tanaka stated earlier in the thread...

Looking for properties on MLS and Zillow and such is probably an exercise in futility. Things that are posted there are listed for TOP DOLLAR. I would very strongly suspect that properties that make it onto MLS & Zillow have probably already been looked at by "connected" buyers and they have passed.

I deal with commercial properties...EVERY single property I've bought has been "off market" OR directly from the seller. No agents involved at all.

I would also counsel that it is better to do NO deal at all than to do a bad one.  Just be patient...maybe expand your search area?

I deal primarily on the east side of Detroit.  Prices have gone up tremendously.  Deals are harder to find...but there are still some out there.

Good luck!

Sam:

I would ABSOLUTELY not invest in either Detroit or Cleveland UNLESS you are very familiar with the local market(s).  This is especially true in Detroit.  Detroit is a very difficult market and is probably NOT for beginners or absentee owners.

The prices in the Detroit market have gone up TREMENDOUSLY, and there are plenty of houses selling for $15k now!  Those same houses were selling for $100 just a few years ago (if there were even any buyers at all).

There is certainly opportunity & great deals to be had in & around Detroit, but you've got to know the local market very well.

As for section 8, this is a government welfare program that helps people live in privately owned houses instead of government owned housing.  Some landlords have good success with it, but they are set up for that right from the beginning, and they intimately know the code, and how to comply with it, and how to avoid problems with it.  Section 8 is not something that you casually go into...you have to study it, know it, how to work with it.  You've certainly got to know it MUCH better than your tenant...

I am hearing "get rich quick in real estate" ads on radio & TV in the Detroit market.  If that is not the sign of a market top, I do not know what is!

If you have capital burning a hole in your pocket AND you are in the UK, I would suggest investing in publicly traded REIT's.

I suspect that Cleveland is somewhat similar to Detroit, but Cleveland appears to have a MUCH more prosperous urban area.  Cleveland also appears to have done much, Much, MUCH better than Detroit has in recent decades.  I sometimes go to Cleveland on business, and I wonder why people have made so much fun of it over time.  Cleveland appears to be a MUCH nicer place, and more prosperous than the Detroit area...

Good luck!

Terry:

I am sure that you are correct in that the government employees are hoping/banking on the assumption that you will not contest the assessment.

When I bought my commercial properties outside of Detroit, I knew the taxes were SILLY HIGH.  I bought them on the gamble that I could get them reduced.  

I went in front of the board with several different arguments showing the assessment was incorrect.  I was looking for an 80% reduction in rates....I wound up getting a 40% reduction.  

I would not automatically nix a deal if the taxes are initially too high.  It depends on how much you think you can get them reduced AND your confidence of getting that done.

Terry:

One of the reasons that taxes are so high in relation to the value of the property is that the properties are worth significantly less than in other parts of the country.

2% taxes on a $1mm property are 20k a year...Taxes on a $80k property at 2% would only be $1,600  a year.

Another HUGE problem is that a LOT of these mid-western cities have BLOATED government structures....they are burning money on education, they have a LOT of retired workers with underfunded pensions, they have LOTS of current workers that are not very efficient.

It is a huge problem that is going to get bigger/more attention in the near future.  I've been fighting egregious taxes in the Detroit area.  Detroit is MUCH worse than Cleveland.  Detroit has higher rates (generally speaking) AND has the added insult to injury of properties being OVER ASSESSED.  For example, property tax rate is 5%....you buy a property for $25k, but it is assessed at $150k.  Clearly the $150k assessment is WRONG...and you can fight it, and you get some relief...but the assessment will go from $150k to $80k.  Clearly an improvement...and perhaps your $25k property is certainly worth more than $25k, but NO WHERE near worth $80k.  So end result is that you are paying SILLY taxes on properties.

This is keeping the valuation & (re)development of properties low.  It is also impeding growth of communities.  What is maddening is that most of the government employees do not seem to understand this, and could care less.  They just want to keep the money train rolling.

So the end strategy is that you've got to be INCREDIBLY careful in how you invest...you've got to understand how to protest your tax rate...how to go in front of the board of review, how to make your case, how to appeal the new assessment.  

Finally, you've got to buy properties with SILLY TAXES at SILLY PRICES!

Ashley:

My very first real estate project was a lot like yours.  It was a building in a downtown area that was in need of major work...although not quite as much as yours is.  

One problem that took me YEARS to learn was that a fixed up building in a bad/undesirable area of town is just not worth very much.  It doesn't matter how cheaply you got the building, how you did the repairs, how nice it looks when done...the end result is that you've got a good building in a bad area.  The downtown we were in had very high vacancy rates.  We were renting to certain class of professionals that needed to be downtown.  There were a few different buildings that competed with us in that market.  We had nicer/bigger facilities, but our competitors had offerings that were "good enough" and they could undercut us on price.

We bought the building for only $5k.  It was steel/brick but was structurally sound.  The prior owner had actually gutted it and started on the renovations.  They got a divorce and went broke...so it was sold at auction.  

We were diligent in estimating what needed to be done, but in the end it almost always took longer and more $ than what we budgeted for.

We did as much of the work as we could ourselves...and put in thousands of hours.  I still remember to this day spending weekends clearing tar/asphalt from the roof, stripping it down and prepping it for the real roofers later. Ultimately, we made money, but on an hourly basis, it was not really worth it in the end.

If I were getting started, I would look for relatively easy deals to do...accept less money/return...BUT get the accomplishment/experience "under your belt".  As you do more projects, you can start doing more rehab and complicated things.  With hindsight, that is how I wish I started.

Maybe your area/project is different.  I wish you good luck!

Michael:

It is indeed terrible what is going on with the tax situation!  Harper Woods may indeed be one of the very highest in the country.  I actually started a different thread on this.

It is VERY anti-business and it retards the value of real estate...and retards formation of NEW real estate projects.

As bad as it is...it is one of the factors that is going into the getting of good deals.  It was a MAJOR factor in how I got my property.  The previous owner was retired...getting up in age...didn't have energy/will to fight...and wanted out.  That lead me to getting a good deal.  

Try to use the tax situation to your advantage...the seller will know all about the tax situation, and if you point it out and harp on it, you will likely get a better deal.

The key is that you've got to know EXACTLY what the tax situation is and what your likelihood is to get it reduced and if the project is still a go EVEN if you don't get that much of a reduction.

I would very much like to hear of anybody else's experience with this.

Mike:

A couple of factors that you need to keep in consideration...

A). A property might need some improvements to bring it up to code.  Mine did, and I was surprised at a couple of things...Not a terrible expense, but it adds to the cost.

B). I would do a VERY detailed cash flow analysis.  REMEMBER ABOUT PROPERTY TAXES AND INSURANCE.  I simply cannot stress this enough.  I bought buildings within 1-2 miles of where you are looking.  When I purchased them, the tax rate was about 28% of the purchase price.  I contested that, and got it lowered significantly, but the tax man is going to take a MAJOR amount of your rent roll.

A major problem is going to be "over assessment", I will guarantee you will encounter this and it will be a major problem.

C). It is highly likely that you will be leasing to very weak & marginal businesses.  Tattoo parlors, wig shops, hair salons, beauty supply, payday lenders, low end cellphone vendors, "smoke" stores, and so on.  You are going to have to discount the property to reflect it's risky nature.  You might also to be VERY active about collecting rent, and also about getting paid on the 4th, 5th or 6th of the month instead of the 1st.  You are almost certainly going to have credit & collection issues with your tenants.

D). You might not be able to lease quickly.  I've seen some store fronts that have sat vacant for YEARS & YEARS.  Of course, the landlord might have been asking too much.  Even with the up tick in economic activity, there is NO shortage of available space.  The dudes asking $10-$13 square foot in rent are asking top dollar, and might have their property sitting vacant for years.  I think those rates are simply "pie in the sky" and not realistic.   If you can make a GREAT return with $7/square foot...you probably are OK, as you could even make a decent return at $6/sq. ft or even $5/sq. ft.

E). You have to watch out for city zoning issues, especially in regards to parking & signage.

With all those warnings & caveats...sure, you can make some incredible money IF you buy right!

Good luck!

Michael:

As before, I think you could do something on Kelly Rd.  IF THE PRICE IS RIGHT...

ADDITIONALLY, I would most certainly have some type of "plan" worked out before buying the property.  Specifically, I would have some plan of attacking the tax assessment.  I would also have some firm lines on putting in a business there.  OR maybe you are going to revamp OR re-purpose the real estate that you are considering.

I guess what I am trying to say is that I would most definitely WOULD NOT buy a property on Kelly between 7-8 mile and just hope to get a tenant in it.

I have walked down that road many times...and have driven down it hundreds of times.

You are most certainly correct, it is better than most parts of Detroit.  Unfortunately, that is not saying much.

I briefly looked at buying some commercial frontage in Detroit on Kelly Rd. It was something like 4-5 businesses and a whole block! Price was something like $75k. Every business was abandoned and boarded up. I took a pass.

What is going to happen to Harper Woods when Eastland Mall finally goes under?  The Macy's store there is closed down...the mall owner defaulted on the mortgage...the vacancy rate is high...almost all national tenants have left.  Almost all the restaurants have shut down.  Remaining tenants are Ma&Pa type operations.  ALL tenants of the mall are on month to month leases....Maybe it gets redeveloped eventually?

Finally, you've got to keep in mind that the tax rate on commercial property is about 5.5% in that area!!!!!  That is like a mortgage that can never be paid off!  You are going to need pay about 5:1 of the rent roll to make anything like an acceptable rate of return.   Thus, if a property will lease for $1,000 a month, the MOST I would pay would be about $60k ($12k x 5 times).  I would also wager that most properties along that strip are "over assessed".  I've seen properties for sale in Harper Woods where 30%+ of the rent roll goes to taxes!  You've also got insurance costs, Utilities are also shockingly high (water & trash especially!)  Depreciation and repair expenses, you've also got to factor in some sort of risk premium.  Finally, you've got to get a return on your capital...

Eastpointe might be a slightly better hunting ground.  I've had some amount of actual success there.  It is lower taxes than Harper Woods, somewhat safer, and a slightly better demographic.

Good luck, let us know if you do anything...

Hey all:

I'm analyzing a rather unusual situation.  It is a commercial property with 3 retail stores/offices that are all filled at or near market rates....HOWEVER, there is an apartment above the commercial spaces.  It is in a rather odd situation...the neighborhood is OK, maybe slightly better than average...HOWEVER, due to a very unusual zoning situation, it is in an INCREDIBLY good school district.  That should make renting out the apartment relatively easy...BUT FOR the fact that it is a walk up and above commercial spaces.  While the school district would be a BIG draw...the fact that it does not have a yard and so on probably makes it unappealing for a family with school age children.

I think it might be great for Airbnb.  It has been modernized and is spacious.  It is near major roads & freeways.  It is a little bit isolated from houses, has plenty of parking, very private.  No neighbors would complain or even notice if different people were staying there during the month.

In this part of town, there are almost no hotels...you either have to stay downtown OR move 5-6 miles further out to the suburbs to get decent overnight accommodations.  So I was thinking of simply updating that space and then turning to AirBnB to rent it out.  It is immediately adjacent to some of the best/wealthiest suburbs in the area.  A couple of miles away, nightly rents for apartments/small houses seem to be going for over $100/night.

If that space could be rent 10 nights or so a month, that would turn that property into a tremendous cash flow situation.  At 8 nights a month, it would probably bring in MORE revenue than it would as an apartment.

I am in the area...so managing it would be of little difficulty.

Has anybody else done this?  Anybody have any experience with a situation like this in re: Airb&b

Mike:

I forgot to add that I would be EXTREMELY careful if you are an out of town investor...

The Detroit area/market is a weird place.  Property/cap rates here are almost unheard of when compared to the rest of the country.  That sometimes will lure in unsuspecting investors that don't know the "lay of the land".  

If you are out of town, I would very highly recommend to have relatives help you out OR have a trusted business partner that can keep an eye on things on a daily basis.