I spent $800K with Own It Detroit -- $20,000 on this rehab. Rate it! (Part 2)

[Jonathan Weinberger]

Hey guys, 

So I received a TON of dm's about my post in detroit. Really appreciate all the comments and thanks for being open and honest. If I haven't responded to you, I'll get to ya eventually. I'm always happy to chat and provide value to those looking to get started in realestate. It's truly the best way to building wealth and it's fun. 

Agenda: 

1. Common Expenses
2. FAQS
3. Rehab Quality (Rate it!) 

Alright, so over the course of a year, nearly $800,000 was spent acquiring, rehabbing, and placing tenants. I sold a couple properties as well. Before we get started, I want to dive into the FAQS. Some people think I jumped in too quick, etc. And the only thing I have to say to you is money is relative. $800k is a drop in the bucket when I enter a new market. It allows me to test the waters and see If I want to continue. 

Read part 1 of my post to get caught up. It's somewhere on this forum. To answer the question of do I want to continue? Hell yeah! The appreciation of Detroit is unlike any I've ever seen when done right and right now, for 2024 Detroit is continued to be the #1 appreciating market. Of the nearly $800,000 spent, my portfolio is valued at about $1.1M now. 

I just got done re-financing 3 properties, and one of which was purchased for $65k came in at $100k!! 

Detroit is extremely block by block and it's why you truly need a subject matter expert to start your journey. My journey was with Own It Detroit and my main point of contact was the owner, Mousa. Genuinely only good things to say about him. I genuinely hate his property management team and processes to a core though. (It's what started this public blogging) 

Some FAQS: 

1. Common expenses. I could almost guarantee that every single day when I would log in to my management portal, I would see a new expense, automatically approved on the ledger. No email, no phone call, no description. For months, I couldn't even figure out where the invoice locator was on the dashboard. Super disorganized. These expenses would range from $70 to $1200. Often times, things are related to water heater issues and heating, especially in the winter months. Doesn't matter if the property was newly rehabbed or not, I received repair bills for heating problems. I'm not 100% sure if this is avoidable, and overall I just plan to budget higher for repairs moving forward. 

2. Slow Pay vs No Pay. 

From the looks of my ledger, I have about $18,000 in uncollected rents

Attached is the balance owned and the current monthly rent expected. 

As you can see, some people accumulate in the thousands. The mutual team is okay with this and refused to evict anyone. There excuse is that they pay "some" rent and that's better than nothing... This led to the immediate termination of them. The new property management group has already sent out eviction notices to anyone with an outstanding balance, and it's working! People paid their **** the day of. Anyone not paid up in full by the 5th of next month will be evicted. No exceptions.

The strategy moving forward is to prepare the properties to be move-in ready once again and place S8 tenants. 

So far, the new PM's (Logical Property Management) is doing exactly what we agreed. They're not making excuses, exceptions, and I've denied any payment plans. 

3. Many asked about getting started in detroit. My best advice is to go find a subject matter expert. I've done it both ways where I worked with a realtor to go after properties, and I've done with Own It Detroit. I would 1,000% pick Own it Detroit. While my experience with them has turned negative, they genuinely purchased good properties for me. The rehab work (all but 1, was SOLID!). The appreciation matched the expected ARV.

I was just talking to a buddy of mine who's looking to enter the markets, and I still referred him to Mousa. I said **** their management team though...

Turn key is how you enter these markets. You'll pay a slight premium, but you'll get a better home than just winging it. Many properties are cheap in detroit and it's tempting to buy them all like candy. It's incredible how truly just 1 block over, a house is $50k and then the next street is filled with $85k properties. Sometimes even $90k+ 

Sites I've considered and talked to/done business with: 

1. https://logicalpm.com/ -- This is my property management group. Fantastic so far. They offer acquisition/rehab services but I will never use them. I plan to keep a tight leash on the relationship of tenant management. (I advise you do the same) 

2. https://www.ownitdetroit.com/ (Over a dozen doors purchased and rehabbed) - $800k turned into $1.1M in a year. Amazing appreciation. Terrible property management and overall team experience and has caused me to lose a bit of investor confidence in the area. I'm slowly gaining this back by only purchasing in the truly strong neighborhoods and even Metro Detroit (hazel park or bagley) 

3. https://martelturnkey.com/ -- You'll pay a premium here, but you'll actually get a good property, strong tenant, and cash flow day 1. I haven't purchased through here, and they have actually rejected my low ball cash offers (lol) - but I have talked to some people who took his rehab training course, and they have nothing but great things to say. I use his rehab works in detroit to compare against the location of my properties in detroit and to begin my research process to see if the ARV I'm being told is ******** or not. 


4. How much money to start? Finding lenders who will lend on sub $75k is challenging. They do exist though. That being said, I like to buy properties in cash to get the best deals and then delay finance them. When you bundle 3 properties, you'll qualify for a DSCR portfolio loan with many lenders and it's easy from there.

5. If the cash flow wasn't positive why did I keep buying? 

The cashflow actually was positive. But each month, they would allow tenants to slow pay their rent, and mix that with ******** expenses that carry over month to month, it was always just a net 0 month. The rents slowly paid down the expenses, but allowing the rents to get behind caused a never ending loop. I never lost money. I just didn't get cash in the account either. if 100% of rents been paid on time, they would have surpassed the expenses EVERY MONTH. But the management team was okay with sending out repair men like it's free, and failing to collect rents on time and making excuses. 

Plus, the appreciation in Detroit is very real. I knew I was going to win either way.

REHABS:

So many people have asked how much I spent on rehabs and what does the quality of work look like. Now here's a lesson I learned the hard way. Ask for VIDEO of the rehab work. Photos are easy to ********.  5 of my rehab projects were completed on time. On budget. And a tenant was placed fairly quickly. Within 30 days. 

My 6th rehab project is actually what has now terminated my acquisitions relationship with Own It Detroit. As an investor who spent nearly $800,000, I expect honest work. This last rehab project was anything but... 

Subject Property: Winston Ave

Purchase Price: $56,000
Rehab: $21,000 
ARV: $109,000 

Under contract: July 20th. Didn't close till August 8. Rehabs usually start immediately but I wasn't getting any updates...I emailed about updates on September 29  (idk why I waited so long. Probably forgot) re: rehab work. I get a reponse back letting me know this will be completed end of November. I genuinely think they forgot about the project. Was actually in shock. We reach the end of november, and to this day, the property is vacant. 

I decided to have the new PM check it out and figure out why. This is what they sent me. Let me know your thoughts on the quality of this rehab!

My favorite part is the shed in the back, with a legit hole in the roof lol

If you have any questions about my journey in Detroit, ask your questions. I'll answer them publically. Many of you DM me. Happy to chat privately as well. 

I'll continue to post about my experiences and be on the lookout for my scheduled March 5th post which will be about stabilizing my portfolio and the progress we've made as well as my next investments in the area. I'm planning to purchase nearly $800,000 MORE real-estate in Detroit this year. Excited to share the journey!

Jonathan

[Steve K.]

Why would you throw another $800k into a market that you're bleeding money in? It seems you're justifying it with appreciation, but it's not a time-proven appreciation market. Plus I suspect your valuations are high compared to what your actual net sales price would be if you sold those properties today. Don't forget transaction costs, seller concessions, vacancy loss if you sell vacant (which you should), capital gains taxes on the profit if there is any, etc. You need a minimum amount of rent to support a rental (realistically $1,500/month or more, this is what you need coming in to have the minimum amount of $300-500 going towards maintenance/repairs/capex/issues that come up), so your best buyer is probably an owner occupant. Can locals afford to buy a property there for $100k? Are there other less expensive options for them nearby that they might buy instead? If so, your valuations are high and your days on market will be long, and your list to sales price ratio won't be good. Maybe a newer investor with similar loose underwriting, just looking to get in the game will buy them (it's an offensive term and I'm sorry for that but it's called "The Greater Fool" theory). 

You're seeing the truth in your portfolio performance. Hiring a new PM is not going to fix this I'm afraid, because it's simply a math problem. Operating rentals costs a certain amount of money and it's really hard for low-rent properties to make enough to be self-sustainable and spin off any profit unless the owner is hands-on, self-managing, fixing things themselves etc. Every time a tenant has an issue, the PM calls an electrician, plumber or handyman to fix it, it's going to cost a few hundred bucks minimum, sometimes thousands. If your monthly budget for this type of thing is $100, you're losing money. Not making these repairs is not an option, you can't just not fix things or you lose tenants and suffer vacancy loss, potentially have legal problems, and just end up with more differed maintenance/ bigger issues over time if you don't stay on top of repairs. This is just the normal operating costs, never mind the big things that come up occasionally with capex like when you have to replace a major component (furnace, water heater, sewer line, driveway, steps, deck, windows, roof, doors, siding, landscaping, etc,) and it costs $10-20k. A typical turnover can be a month or 2 of vacancy and $2-10k in make-ready costs (cleaning, paint, flooring, appliances, towel racks, vanities, etc. that gets beat up and broken norma wear and tear). There's no budget for any of that when the rent is only $800 and at best you're putting $200 aside for those things in a rainy day fund. Realistically you're probably taking a haircut on these purchases, and definitely continuing to lose money every month if you keep them. What is the point? 

It seems that you can afford to invest in a better market where you'd be more likely to make money instead of losing it. Why not do that? Not to mention it would be so much less of a headache and so much less time and energy invested on your behalf, plus much less exposure to risk, easier to manage etc. to just buy a single multifamily for $800k in a good location with strong underlying fundamentals. If you were somebody who could only afford a $75k property and your only option is to bootstrap your way up starting from the bottom, then that would be different. I'd say go for it, everybody has to start somewhere. If you were to self-manage one property like this like a hawk then slowly add another and another, ideally down the street from where you live, doing all the maintenance and repairs yourself in order to avoid losing money, then that could make sense. But it sounds like that's not your situation, so I don't get why you'd want to hold a portfolio like this. Too much risk, too little upside.  

Detroit is not what most investors consider an appreciation market. 2 years of appreciation during a time period when every other market appreciated also, following decades of up and down with extra down doesn't suddenly make it an appreciation market. Not if your strategy is long term buy and hold. It's more of a classic boom/bust town that is still bulldozing whole neighborhoods because of an oversupply of housing due to the population shrinking by half. In 2010 the values there went all the way down to what they had been in 1993, 17 years of appreciation gone. The next downturn could be a repeat, if the subsidies dry up and the dumb money stops coming in, propping up prices. One thing I like about real estate over stocks is that there is always the underlying asset with RE, and it's rare for RE values to go to zero in good locations, but there is the risk of that happening in places like Detroit. These assets are illiquid in a downturn. Why buy the real estate equivalent of a penny stock when you can afford to buy blue chip aristocrat dividend stocks (Class A multifamily properties in good locations with actual strong fundamentals like population growth, a diverse and recession-resistant job market, limited supply and high demand, affordability, and consistent long-term appreciation)?