The Verdict on Detroit—Is it a Good or Bad Market for Investing?

by | BiggerPockets.com

Metro Detroit is in a fairly legendary place in terms of its housing market. Tens of thousands of empty houses sit decomposing in some areas, while other areas are blossoming. You can find houses worth $80k that are selling for $150k—and some that are selling for $80. In terms of real estate investment, there has never been a place where the emptor needs more caveat. For an investor who mixes risk tolerance with diligence and patience, however, the potential rewards are above and beyond.

4 Upsides to Investing in Detroit

Upside #1: Rent-to-Value is Through the Roof

According to BiggerPockets’ annual real-estate market review, Detroit has the second highest rent-to-value ratio in the country at just over 8.5%. This means that investment properties in Detroit have enormous potential to pay off the initial investment quickly and turn into profit streams.

Upside #2: Low Entrance Requirement

Obviously, in a market where houses come in such a wide range of prices and actual values, it’s going to be possible to get in on the housing market for less money than in a market where houses are consistently kept near their actual value. This makes Detroit a choice market for people who want to turn a small amount of initial investment into a decent amount of cash flow.



Related: Rents Dip Below Inflation, Home Appreciation Slows: Are Markets Cooling Off?

Upside #3: Growth Happens

The Metro Detroit area is a mix of wealthy, fast-growing areas—and the opposite of that. As it happens, that’s a great recipe for finding homes in areas that are going to start growing, provided the overall economy of the area keeps trending upward. As the Metro Detroit area is trending upward and seems to be set to do so for quite some time, this makes finding likely investment homes easier here than in many markets.

Upside #4: Proactive Government

The City of Detroit is strong on its position that the real estate market in the city needs help—and they are definitely helping. By demolishing sizable tracts of empty, deteriorated homes, the city is in the process of “filling in the crater” that is the housing market of the suburbs surrounding midtown and downtown. Add to that significant improvement projects like the Cuts, a series of long, narrow parks connecting inland neighborhoods to the river, and the question becomes not if the real estate market is going up in value, but how fast.

4 Downsides to This Market

Downside #1: Risk is Inescapable (and Dire)

Effectively the flip side of a low entrance requirement, the risk of investing in a market where there’s little correlation between house price and house value is that it’s surprisingly easy to get caught in a trap where the home you just purchased for $80 ends up being worth -$60k. It can happen! Detroit homes are often loaded with debts that must be paid before anything can be done with them, and not all sellers are particularly inclined to be forthright about what their houses come with.

Downside #2: Costs Also Vary Wildly

It’s not that hard to find a house with a great rent-to-value ratio, but it’s important to realize that R2Vs are based on gross rental income—and costs in the Detroit area can easily be significant enough to turn your net rental income negative if you’re not careful. Getting an accurate estimate of your home’s future costs is one of the most difficult tasks associated with successfully navigating the Detroit housing market.

Downside #3: Proactive Government

As much as the government is doing great things for property values, they’re also in the process of causing a significant problem. To wit, the city has declared that it will soon start enforcing its long-ignored rental registration laws, meaning thousands of landlords in the city is going to have to choose between bringing their ancient, abused homes (currently being rented to extremely iffy tenants) up to code or selling them. For most of these homes, the cost of renovating up to code isn’t worth it, which means the supply of genuinely bad homes to purchase is going to shoot up.

real-estate-negotiation

Related: How Legalized Marijuana is Impacting the Colorado Real Estate Market

Downside #4: Poor Tenant Quality

Speaking of iffy tenants, Detroit has far more than its fair share. It’s not something often spoken of, but those thousands of empty homes sitting there deteriorating aren’t all empty. There are a scary number of squatters and an equally scary number of ex-squatters who have managed to trick their way past an inattentive landlord’s tenant screening system. And yes, they are exactly the kind of nightmare tenants you want to avoid at all costs. So don’t come to Detroit unless you have a passion for screening tenants (or a local property manager who knows the tricks working for you).

The Takeaway

The honest truth is that the question in the title is overly simplistic. Detroit real estate is an amazing investment opportunity if you are a risk-tolerant, assertive investor willing to put in the effort to check every last detail of a home (and every tenant) to the nth degree. The risk-intolerant, hands-off, procrastination-prone, and detail-averse should investigate markets with less risk, and accept that their potential rewards will naturally be commensurately lower as well.

Would you put your money into the Detroit market? Why or why not?

Weigh in with a comment!

About Author

Drew Sygit

Drew is the manager of Royal Rose Property Management, a fairly high-tech solution for Detroit Metro area property owners & investors.

38 Comments

  1. Christopher Smith

    I myself wouldn’t invest in Detroit. But almost anything at certain price can become an attractive investment for those with a keen eye for spotting growth opportunities and deep analytical understanding of the risks they are facing.

    For the novice investor (and when it comes to investing in Detroit I would clearly be a novice and then some), its likely just a place to get your lunch eaten. However, for those who really fully understand the ins and outs of selecting, renovating and operating properties in the most challenging of property markets, tremendous opportunities and tremendous risks likely dominate the Detroit landscape.

  2. Joe Villeneuve

    I was born and raised on the west side of Detroit. It’s still depressing as He77 driving down the street I used to live on, and remembering the past. My old stomping grounds is a disaster, and you couldn’t pay me enough money to live there…or invest there…now. However,…

    As the article mentioned, there is hope…enormous hope. Changes are happening so fast you can’t keep up. There are so many neighborhoods that used to be disasters, that are now desirable…in perspective. It’s a checkerboard pattern, which to me still tells me not to invest there…again, “yet”.
    Who can’t invest there now? Small time, 10 or less unit buyers. You need to control a neighborhood so you can affect the change…and keep it in place. You can’t do that one unit at a time.

    Who can invest there? Big pockets…make that huge pockets. Multi million dollar REI that can completely “control” a neighborhood from the start to finish…and beyond. There are a number of those investors in place, and that number is growing. Unfortunately, too many of them are opportunistic slumlords from out of state. Poachers, that don’t know the market, just see the opportunity. Don’t care about their impact, just their bottom line.

    What’s needed are local REI with that large cash amount to invest. They’re there, they’re investing, and they are the ones that are having the greatest impact on that incredibly fast change taking place as I write this.

    • Drew Sygit

      @JOE VILLENEUVE: hello fellow Detroiter!

      While what you state is one way to invest in Detroit, we assist many investors that have less than 10 properties in Detroit. It’s crucial to buy in the right neighborhoods, so you get the same net effect as “control” of a neighborhood as you recommend.

      And yes there are plenty of nonlocal investors buying properties that don’t want to put anything into them to improve their condition — so they are slumlords. We just parted ways with one of them as they always gave us an extremely difficult time about making even the littlest repair.

        • Drew Sygit

          @MISTY MILLER: it’s not that easy of a question to answer!

          Even in the “good” areas of Detroit there are bad streets to stay away from.

          In general, areas like East English Village, the North End and Grandmont are fairly stable areas, but many out-of-area investors have been scammed by locals selling them houses on the worst streets.

          If you’re serious about investing in Detroit, you should take time to understand all this.

  3. Wilburt King

    The more successful Real Estate investors in Detroit are tireless at due diligence. Market stability tends to change per block in certain areas.
    As mentioned earlier you need a seasoned Detroit property manager or you could be headed for a lot of stress

  4. Cedric Corpuz

    Agree Due diligence in the right parts of Detroit can absolutely payoff and as the article suggests your tolerance for risk will weigh…it helps to have a trusted agent on the ground to mitigate risk. I have a property I purchased and has done quite well and I plan to purchase more.

  5. Kenneth Scrues

    I will be retiring in about 2 years, and will be relocating to the 313 where I was born. I see a lot of potential there not just in flipping but rental properties as well. The closer to downtown the better. If you have the investment, you can buy, demolish build downtown within a 5 mile radius, and the development will come to you.

    • Drew Sygit

      @TONY: investing in any suburb that touches Detroit (we call them the Ring Cities) offers a lower return than the City of Detroit, but with less risk also.

      We typically recommend novice investors to start with the Ring Cities before taking the plunge into Detroit.

        • Drew Sygit

          @CHRISTINE JOHANNS: we’re pretty sure we created the term, “ring city” in regards to metro Detroit. Our definition of it is any city that touches Detroit.

          So, since Pontiac doesn’t touch Detroit, we don’t consider it a ring city.

          It is an urban city we refer to as a Mini-Detroit. Meaning, it has the same rent-to-purchase price positives of Detroit. While we have the same issues with squatters and theft in Pontiac that we do in Detroit, they are significantly lower in occurrence. So, while we consider it lower risk than Detroit in that respect, Pontiac is still looking for its “tipping point” where property values are on a long-term upwards trajectory.

          Ring Cities we recommend for novice investors are all those in Oakland and Macomb Counties and those to the west of Detroit in Wayne County. Those south of Detroit are higher risk than the rest, but still lower than Detroit.

          How can we assist you with investing in our marketplace, so you’re successful?

  6. Chester Lee

    Hi Drew,

    Your article and this message board is focused on Detroit itself. Can you (and posters) comment on the suburds outside of Detroit like Romulous, Taylor, Dearborn Heights, Melvindale and other downriver cities? I’m curious as to stability and growth in these areas. The houses in Taylor, Dearborn Heights, and Melvindale seems limited in supply, and the right property in on a good neighborhood can yield near double digit net passive return.

    • Drew Sygit

      @CHESTER LEE: please search our articles for “ring cities” and you’ll find more info on the cities that border Detroit. Lower risk/returns than Detroit itself, but the returns are still higher than most other areas of the country.

      Regarding the cities you specifically inquired about — Dearborn Hts is at the top of that list, but the city government is above average regarding maintenance of rental properties. Check out this link: http://www.ci.dearborn-heights.mi.us/Ord_Brochure.cfm.

      The rest of the cities you mention have higher vacancy & theft rates than comparable cities in Macomb and Oakland Counties. So, proceed with caution:)

    • Drew Sygit

      @RAZIJA BEGOVIC: never been asked that question before!

      Let’s be clear you asked about a “tiny home community”, not a “tiny apartment” or a “small spaces” building. So, let’s move forward referring to “tiny houses”.

      In our opinion, tiny houses are still in the “fad” stage by any historical measure. Of course, they are great for the environment, but we haven’t really seen a family raised from birth to high school graduation in one. Can’t really imagine senior citizens retiring in one either, due to most have loft-type sleeping areas that most seniors wouldn’t be able to navigate. Perhaps they will become the preference of earth-minded singles and couples with no children or only small children.

      If those interested in tiny houses were going to locate in a suburban ring city, as opposed to traveling or living in a more rural area, our question would be “why” a ring city. In our opinion, it would be because they want:

      1) Proximity to sources of income, as opposed to working strictly online.
      2) Proximity to suburban/urban amenities.
      3) Proximity to in-person social networking and long-term building of those networks.

      Since most ring cities are fully developed and thus have very little unused land, to build such a community would require acquisition and redevelopment of enough land to be able to call it a community. What number of tiny houses constitutes a community? Even if the numbers for a single home are considered, it may not make economic sense to buy a 800-1000 square foot house, tear it down and build max 400 square foot tiny house in its place. The only way a builder could make money would be if they could get a city to subdivide & rezone a typical 40′ x 110′ city lot to allow multiple tiny houses on it. Given that most ring cities in the Detroit area have mostly recovered from the depths of the Great Recession, and many are becoming affordable destinations for millennials, we don’t see the need for a city to cooperate with this. Perhaps if it was on a large enough scale to bring in significantly higher revenues for the city government and the citizens wanted it, it could work.

      If you want to switch your location to the city of Detroit, why it’s already being done! Check out this link https://detroit.curbed.com/2017/5/24/15686640/tiny-home-detroit-photos.

      Detroit has an abundance of vacant lots and houses that are cheaper to tear down than to fix up. It also has a significant number of residents with lower incomes than residents in the suburban ring cities. Tiny houses make sense for the City of Detroit as they are cheaper to build and easier to afford.

  7. We decided to sell our beautiful recently built suburban home for a nice profit and invest in a historic home in Detroit. We chose Rosedale Park and we love it. Our neighbors are welcoming and observant in our area. The home itself comes with it’s unique challenges but was expected. The City of Detroit is more cumbersome to navigate with all the permits, paperwork, city services, etc… But given the choice, i would choose Detroit again.

    • Drew Sygit

      @THOMPSON: fantastic! Detroit needs more “reverse-flights”, where suburbanites move back to the city.

      We know someone looking for a house near the Detroit Yacht Club on Belle Isle, as hey want to move their boat there and have easy access to it.

  8. Are there any resources that any of you can point me to that would show, maybe a neighborhood breakdown ie. which neighborhoods are more stable vs which are more risky, for someone looking to get started on a smaller scale in Detroit?

    • Drew Sygit

      @ERIKA: You can check out https://makeloveland.com/us/mi/wayne/detroit#b=neighborhoods and similar sites, but be WARNED – Detroit should be research block-by-block.

      We recently gave a paid tour to some potential clients from California, who were amazed that we drove down a very attractive block and literally the next block over looked like a war-zone.

      Unfortunately, this somewhat unique oddity of Detroit makes it so easy for out-of-state and out-of-country investors to be scammed into buying bad rental properties:(

      Don’t be penny-wise, yet dollar-foolish and try to invest in Detroit all on your own to be thrifty. Either come to Detroit and do your own leg work, or hire someone like us to do it for you, or gamble-like-its-Vegas and try to do it all on your own and accept your inevitable losses. In Detroit and Vegas, the “house” always wins.

  9. Raymond Egana

    Hi Drew, very interesting article. What really prompted my search was the recent announcement that Ford will be restoring the Michigan Central Station. I’ve been to Detroit and have always admired the beautiful architecture but saddened by its delapidated state. I’m just looking for your thoughts on investing in the Corktown neighborhood. I’ve always thought that Detroit would eventually flourish. Maybe this is a start. What do you think?

  10. Jack Calhoun

    Hello Drew. It seems like a very exciting time for Detroit. I love a good comeback kid story. I am thinking about flying out to Detroit (from CA) and driving the streets and neighborhoods to get a deep understanding of the town and ring cities. I am mainly focused on apartment building so I would think driving the streets would be expedited due to the lesser quantity. How long (days) would you recommend for a research expedition like this? I read that you offer paid tours. I also read that you might be the man to inquire about finding the right managers and brokers. Having the right team is vital for success and it sounds especially true in Detroit. Thank you for your time.

    • Drew Sygit

      @JACK CALHOUN: Great news!

      You can do the City of Detroit in a day if you plan it well. The Ring Cities could be another day, but in reality, you should pick just a few cities or it could get out of hand.

      Yes, we do paid tours and do our best to connect investors with quality team members:)

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