Would you invest in this property? (esp Detroit investors)

Question

Just closed on my first SFR property in Nashville. Now trying to make my second SFR investment in the Detroit area.

Would love any feedback on what people think of the area and my assumptions/estimates here. Thanks in advance!

https://docs.google.com/spreadsheets/d/1sF2XVHTK4IN7sYywKC51lYvIJ5JIbB43IharPgZZVI0/edit#gid=1078050668

Jonathan Streufert · Answer

Hi @Jim Frye,

I really like your analysis spreadsheet! You seem to be very thorough in your expenses and accounting for the ones you should. It's often the downfall of new investors to conveniently "forget" about certain expenses like vacancy or cap ex. to justify their purchase, so I think you're taking the right approach in being conservative with your numbers.

I just have a few comments. First, as @Chris Silva alluded to, do not trust Zestimates when estimating rent, appreciation, or house value. It can be a slippery slope of assumptions that end up burning you if you can't prove they're right. I find that in general, Zestimates are usually within about +/- 30% of the actual numbers so it may be held as a general guideline for *about* how much a house may be worth or rent for, but take it with a grain of salt for sure.

Oak Park is in a good spot right now in terms of appreciation for the area, but I personally tend to be cautious about assuming any more than 3% annual appreciation. 3% has been the overall average appreciation across many decades, and any appreciation that ends up above and beyond what I assume is icing on the cake. Lowering the rate of appreciation from 4.4% to 3% decreases the value in 5 years by $10,000 from what you have in the spreadsheet, so just be aware.

Your cash flow would be less than $100/mo starting out. This seems a little tight for me. One major expense that comes up costing you $5k and there goes your cash flow for the next 4 years! And how do you know there will be absolutely nothing you need to do to the house to prep it for rent? Just a little too tight in the cash flow department for Oak Park in my opinion. Perhaps try aiming for a house that will get you more than 1% monthly rent-to-purchase price so the cash flow can improve to safer levels, to protect yourself against any surprises.

I hope this helps! Best of luck!

Jim Frye · Answer

@Jonathan Streufert

Thanks Jonathan! I really appreciate the feedback here. It's so nice to get such thorough input, especially from people in the area.

About the analysis (credit: www.homey.com). Although some will probably think it's too simple, it does forecast a bunch of different expenses (e.g., 5% vacancy, 8% prop mgmt, 2.5% leasing fees, 14% repairs/capex). I actually like doing it this way (vs the 50% rule) because I can balance out the expense conservatism with a location-based forecast for appreciation.

I know Zillow is like the bane of existence for a lot of folks in real estate and I get why. But if I am going to put the time in to nail out the possibility of expenses, I think it is acceptable to balance the analysis with the possibility of a higher appreciation rate (or lower in some areas).

I get that any appreciation figure other than the standard 3% is looked down upon, but I think it helps when I'm evaluating a bunch of properties (e.g., nashville vs detroit area).

Anyway, I do like the metrics you pointed out (1% rent-to-price), and yes, $100/month in CF is probably too light. (And I know I stated it before, but the analysis is based on the list price and advertised market rent).

Other than Oak Park, what neighborhoods are people still excited about? I've heard Jefferson Chalmers or East English Village area isn't too bad for SFR.

Christopher M. · Answer

@Jim Frye

In my opinion  Oak Park is a great location for investments. That being said I would never, ever trust Zestiments, for rent or price. Without actually running the numbers, 140k seems like absolute top of market for area. 1300 seems really high for rent.

Anecdotally I know a family renting a 3 bedroom house in that neighborhood (near Roanoke & 9 Mile) for 900 a month.

Is it Oak Park Schools, Ferndale Schools or Southfield Schools? What is the condition?

Jim Frye · Answer

Christian Hutchinson - thanks for the feedback here.

Christian Hutchinson · Answer

I would not spend that type of money for a home in Oak Park. Below Average Schools, no Downtown, and yes the rents look nice now but I would guess thats its population is highly sensitive to the economy.

I just did a quick search online and see there is a place on the same street thats only $95K, it has only one bathroom, but it has a full unfinished basement, you can build a nice brand new bathroom for $6000. Your rents would be just as strong at the 3/2 you looked at, and you would have $30K in equity to play with in case a recession or drop in rents.

Wendy Patton · Answer

@Jonathan Streufert Thanks for the mention

Jim Frye · Answer

Awesome! Thanks for the input!

Jonathan Streufert · Answer

@Jim Frye

I'd recommend getting on wholesalers' buyers lists. If you're in the area, you can go to a local real estate investor group (such as Michigan Real Estate Investors or Renegade Detroit Investors), and talk to wholesalers there. Both groups have opportunities for you to stand up and declare you want to be put on wholesalers' lists for certain areas, and more than likely you will get a number of wholesalers with no problem adding you to their email lists.

You can also get mailing lists and send out letters or postcards to homeowners in distress, called direct mail (multiple ways to do this and types of lists you can get). You could also do what BP calls Driving for Dollars, meaning you drive around neighborhoods you want to buy in, write down addresses of houses that look distressed in some way, look up the owner's address in the public records, and send them mail.

There are multiple articles on BP that discuss these off market deal-finding strategies in grave detail, so read up if you want to pursue one!

Jim Frye · Answer

@Jonathan Streufert

Got it. That makes sense. I'll definitely take a look into the areas you mentioned. Where do you look for off-market deals?

Jonathan Streufert · Answer

@Jim Frye

Having those percentages for expenses aren't too far off what I use. I aim ever so slightly higher in the expenses category, estimating 11% for total property management costs (including leasing fees) and 15% for repairs/cap ex (though one could argue capital expenditures will be about the same regardless of the rent amount). It's definitely more accurate than the 50% rule; the 50% rule is intended to be more of a quick pass/fail calculation when you first see the deal than the rigorous income/expenses you should be using once you're seriously considering going through with it (which you have laid out).

I'm not even going to try to point you in the right direction when it comes to Detroit. I'm not originally from the area and do not currently invest in Detroit itself. There are many other people on this site much more qualified to answer that question than me.

Many neighborhoods in southern Oakland county are holding the eyes of investors. Royal Oak has been booming the last few years, and continues to explode in appreciation, along with some other cities nearby. I think Oak Park is one of those cities that hasn't *quite* seen the same rise in value, but has a half decent chance of feeling the "wave" of appreciation in the near future as well. Just be wary of neighborhoods that have already seen the high rise in value and don't overpay with the assumption it will continue to see the same appreciation for the next few years.

I'm more focused in western Wayne county myself, around Redford, Livonia, and Westland. It's a pretty good market for rent-to-price ratios (there's tons of properties that pass the 1% rule), and most areas fall under what people could consider their "bread and butter" zone, B and C class properties that offer good cash flow and a decent chance at appreciation. Lately, however, it has become very difficult to find good deals for investing, at least on the MLS, partly due to extremely low inventory. It wouldn't be a bad idea to shift your focus to off market deals if you can.

Would you invest in this property? (esp Detroit investors)

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