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.

16 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.

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