Our company operates out of the Metro Detroit area, which, as of this writing, contains the second-least-expensive housing market—the City of Detroit—in the U.S. This means that we’ve got a solid perspective on low-cost rental markets for which you won’t find much advice about online. Over the course of the month, we’re going to talk a bit about how operating in a high-risk, high-reward environment affects the property management process. Today, in preparation for our next several posts, we’re going to give you a snapshot of what you can really expect if you come to the D to get your real estate game on.
NOTE: we’re going to be focusing on the actual City of Detroit, not suburban Detroit, which is conversely one of the more affluent areas of the country.
The Reality of Operating a People-Oriented Business as a High-Stakes Game
It might seem like property management is all about real estate, but really it’s an extremely people-oriented industry. We are the interface between owners, contractors, property hunters, tenants, and more. In an economy as edgy as Detroit’s, you can be assured that you will deal with people in each of those groups who are going through a period of significant financial stress. This stress creates a number of undesirable behaviors that are themselves risks to those who aren’t prepared.
Dealing with these behaviors (mostly by predicting and negating—or outright avoiding them) is the majority of the challenge of managing properties in a high-risk, high-reward housing market. It’s not the only challenge by a longshot, but most of the challenges we deal with fall under that umbrella.
The Facts about Blight and Restoration
Depending on what you read about Detroit, you’ll either read a lot about how the city is bulldozing another 10,000 empty houses to combat blight, or that the city is rising like a phoenix from the ashes thanks to the efforts of billionaire Dan Gilbert (and the people who have allied themselves with him). The truth is, they’re both right.
Detroit is currently about one-third downtown and midtown, which are the areas getting big money from big, eager investors. It’s also about one-third blighted wasteland, with an estimated few thousand families squatting in abandoned, slowly rotting houses. But the final third of Detroit is what I call Opportunity Land, where the costs are low and the returns are high. Opportunity Land is our playground.
The Art of Minimizing Risk
The downside to a low-cost, high-return environment is the high risk that comes with investing in inexpensive rental properties. There are a lot of risks, and while we go too into detail, the short version is that you should watch out for:
• Properties that are cheap in cost but have significant hidden costs like disputed titles, unrevealed tax liens, or damaged substructures
• Jerks that break into houses and steal anything sellable—or just move in and squat
• Contractors that only work for cash, have addiction problems (making them unreliable), or are too expensive to work on an inexpensive property
• Bad tenants moving into perfectly good properties and ruining them
• Good tenants who have an economic setback they can’t recover from
• And a city government that demands a lot but provides little—police never get there!
Related: The Date is In: These are the Best Cities for Rental Investing
The thing about that list is that the middle four points are all examples of the “undesirable behaviors” we mentioned above—which means they can mostly be compensated for by being canny and assertive and aware of the challenges themselves. (Or, by hiring a property management company to be all of those things for you.) Even the first point is mostly avoidable by being cautious and getting an independent house inspection and title insurance.
Which means that, if you’re one of the laudable folks who is both prudent and has a decent risk tolerance in the first place, Detroit is the place for you: it offers the kind of returns that most investors can only dream of.
Do you have experience investing in blighted markets?
Share your stories in the comments below!