Inner-City Investing: What am I missing?

[Justin Thind]

Hey everyone! I am about to close on my first single-family rental property soon, just two months after first dipping my toe into real estate research. It's in a regular B-grade type of area, and projects to have decent appreciation & good cashflow. Pretty ordinary stuff, but I'm already looking for the next deal. This time, maybe something different...

So when I posted this thread a little bit ago, one of the posters in there questioned my stance on avoiding inner-city properties, despite my plans to use always a property manager. I listed some reasons of avoidance that other trusted real estate pros told me including a lack of appreciation, higher repair costs (rougher tenants), higher vacancy rates, and occasional difficulty collecting rent.

Still, with that said, my eye kept wandering towards properties in Detroit city limits, and that brings me to posing the ensuing case to you all.

Looking at a property such as 20300 Albany St, Detroit, MI, it is listed for 39,900 and is turnkey (and looks pretty nice). The estimated monthly payment would probably be around $300 at the very most. Being moderately conservative, the estimated rent is looking like $1,100 per the BP calculator. Take out $110 from there for property management fees. Not including repair costs & vacancy, you're looking at a net profit of around $700. 

Not only is that the highest CoC return I've found (relative to non-Detroit addresses & neighborhoods), but I would also be able to pay this house off much more quickly than the other options in traditional neighborhoods and net its full potential much sooner.

So, my question to you all is this: What am I missing with these types of deals in general?

Let's say I'm okay with this house not appreciating much, and that I understand that I'll probably have to pay for slightly more repairs than with a house in Warren or Roseville for example. However, with that bottom line, why would that still not be worth it? Especially since I'm hiring a property manager regardless of where my houses would be.

Really appreciate any insight in advance! I'm sure many of you on this board (and many investors in my area) could easily afford houses like that in cash right now, yet I don't see those houses flying off the market at all, contrary to houses 2 miles north. I've gotta be missing something lol

(Note: The house I linked above is one of *many* similar options. My question is not about that house itself, otherwise I would've posted in the deal analysis subforum. My question is about this type of market/rental philosophy in general. Doesn't even have to pertain to Detroit. Take Baltimore, Cleveland, etc the same way).

[Jill F.]

@Justin Thind Renting in "D" neighborhoods is exhausting. I did it for 6 years and sold my 8 units last spring.  I had tenants of good character and  I made money every month even with the eviction moratorium as a local self managing landlord. HOWEVER, having tenants of good character is not the same as having a "good tenant" in a "B/C+" neighborhood property. People that are willing to live in this asset class are on the struggle bus and most of them will be on the struggle bus forever; I really admired the ability of some of tenants to remain optimistic in truly difficult situations.

You will have to (repeatedly) be willing to bow to reality and fix problems EVEN when the lease says it's the tenant's responsibility in order to protect your property. Being local if you are running properties in a "bad" neighborhoods is a HUGE advantage because people won't always be forthright with the landlord/property manager and are often hesitant to complain even about legit issues. Once my trash company failed to pick up for three weeks while I was on vacation and no one complained until the day I got back and had driven by and seen the issue. People suffered rather than notified me of a drug dealer (though I did have  'running up and down the stairs all the time' noise complaints and I just didn't understand what it meant until  I saw it when I was onsite doing improvements. You also better get good at picking poor people with good character so that when they have problems you can count on them to pay you back otherwise you are going to churn your property and just get someone else with the same kinds of problems. You will have to VERY carefully pick only the most essential improvements to the properties because you'll not be able to get the money back out on a sale. It can be rewarding to provide decent housing in a space where it is rare but it is very, very hard work.