The Risks and Rewards of the Detroit Rental Market: An Overview

by | BiggerPockets.com

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.

Related: 5 Risks of Buying Rental Properties in Declining Markets

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!

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.

13 Comments

  1. Erik Whiting

    Thank you for taking time to bring up Detroit, a city of which I’ve heard the legends and nightmares.

    Even for an overview pieces, this article is pretty light. I invest in strictly Class C properties–which I define as no frills but safe, functional, and clean–in hoods that aren’t quite as bad a Detroit perhaps, but still most of the issues you raised are applicable to my hoods too. I was expecting something a bit more….specific?….unique?….special? to the Detroit market. Why is it so much different than any run down area of any town? That’s what I’d like to hear about and how your company has addressed those people-issues.

    Btw, I am 100% in agreement that rental properties are primarily a people business. The houses are simply the tools we use.

    I hope to see a more in-depth follow-up piece. Surely, I could learn some techniques and tricks of the trade that are applicable to my home town. Class C (i.e. what many investors call “pigs”) are cash cows if managed correctly.

    Looking forward to hearing more.

    • Drew Sygit

      Thanks for the comment, Erik (and everyone else who me-too’d below)! We actually have several more posts in the works that will get into the nitty gritty of individual areas like marketing, tenant screening, and owner management. Keep an eye out; they’ll be coming in over the next few weeks.

  2. Ahmed Hamza

    Great Article Drew, I would like to connect and talk more about Detroit rental properties and investments as I just moved here 2 years ago and still getting the feel for the market. Please let me know if you’d be interested in connecting and maybe meeting up for coffee. I reside in Saint Clair Shores.

    • Drew Sygit

      @ANDREW SYRIOS: we hear that a lot about Detroit:( On the other hand, we also have investors “leaping in before they look” and then panicking when they find out the realities of investing in Detroit.

      One other thing we are constantly trying to correct investors on – everyone wants to lump the City of Detroit with Metro Detroit! Investors that don’t like the risk of Detroit should still look at Metro Detroit as there are wonderful opportunities there also:)

  3. Randy Campbell Sr

    Hi like most comments on here I would like to know more about Detriot as well. I live in a small suburb of Cleveland and have watched the blighted crisis first hand here. I believe here and Detriot are similar so if we can fix one city it should work in the other, well in theory. Looking forward to more info. Thanks

    • Drew Sygit

      @RANDY CAMPBELL SR: Is the Power Station still open in the flats area? Had a great time there many years ago:)

      We’ve heard about Cleveland’s issues and also several other Midwest cities. They all suffered from the loss of local auto-related jobs.

      Seems the only sure-fire way for recovery requires government and businesses working together. For Detroit, it also required the city had to stop telling the suburbs their help wasn’t needed.

  4. Chad Skop

    Glad there is going to be a series about investing in Detroit. I work, live and play in Detroit and also have been investing in real estate in Detroit since 2014. The bullet pointed risks you listed are definitely prevalent and I’ve experienced many of them first hand. Detroit has many great deals and it comes down to having the right people to being successful

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