West Michigan Market Update for BRRRR

[Randy Charboneau]

Greetings! My name is Randy Charboneau. I'm a Broker here in West Michigan and an agent who focuses on investors and wealth building. I've had some out of state investors contact me recently asking about the West Michigan market and wanting an analysis of rent return and profit potential for this area. Specifically, they asked me to run some numbers and asked about the BRRRR method for West Michigan and if it was possible. I thought I'd share some of the data I produced as it may help you in your evaluation of this market.

West Michigan and particularly Grand Rapids is experiencing an inventory shortage of available homes to purchase and rent.   A few years ago Forbes identified Grand Rapids as the #1 place in the world to invest in Real Estate and that brought in a lot of foreign money into this area and many homes were snatched up and rented out.  This took them out of the inventory cycle.   So we were already running with a shortage of homes on the market when COVID hit and wreaked havoc.  With the Government intervention on foreclosures, this has made the situation quite dire.   The foreclosures are an important part of the Real Estate cycle and until they start coming back online we can't fix the inventory problem.  There are many that wish to sell and trade up right now but they don't dare do it because they'd be homeless if they sold right now so we just have to wait it out.

All of that means 2 very important things for investors - Appreciation is fantastic and rents/sales prices are climbing so your returns in this area are guaranteed to produce!  

Let's look at some examples of the market and the numbers that I ran so you can see what kind of returns you can expect:

I took a look at a  property at in Wyoming ( a suburb of Grand Rapids on the SW side).  This is a 3 bed 1 bath 1018 sq ft home in good condition
It has a 1 car detached garage. The substructure is a crawl space.  Most properties have full basements in this area so the lack of one  keeps the price a bit lower, but from an investor standpoint, this isn't a big deal.  Its actually preferred with tenants sometimes as they can be hoarders and this gives them less room to do that.

Asking  price is $150,000

There aren't a lot of properties for rent right now in the area, but I found 2 on the market:

4bed/2ba/1040 sq ft w/full basement for $2400/mo
3bed/1ba/944 sq ft w/full basement for $1795/mo

Both of those properties were refreshed/looked good. The subject property needs a few $$ to get to that point,  so let's set $5,000 aside for a property refresh (paint, carpet, repairs, etc.)

Let's say you buy the subject property for $150,000
5,000 for refresh
Total invested $155,000
Keep this property for 10 years.

Rents should trend in the $1800/mo range but we'll go $1600 just for conservative numbers

Monthly Rent $1600
Assume buyer pays all utilities + trash + lawn/snow
Expenses:
Property Taxes: $200/mo
Vac/Maint (10%) = $160/mo
Property Mgt (10%) = $160/mo
Insurance = $80/mo
Total expenses = $600

Total cash flow per month = $1600 - $600 = $1000/mo
Annual Cash Flow = $12,000 x 10 years = $120,000
Sell in 10 years

Appreciation is currently at 15%(!!!) but that wont last forever. A traditional rate for this area is more like 3-5% but honestly since our inventory has been so low for over a decade now the appreciation has been more like 5-10%.  Let's assume we average a conservative 6% appreciation over the next 10 years.

Sale price in 2032 = $268,627
Closing costs = $21,490
Net Proceeds = $247,137

Initial Investment = $155,000
Total 10 year return = $247,137+120,000 - $155,000 = $212,137 in 10 years or an annual return of about $21,214.

That's about a 9% return (compound interest) on your initial 155,000 investment in a safe liquid asset.

Rents and sale prices in the Muskegon, Battle Creek and Kalamazoo areas are running lower so if you have less money you could get the same gains over there with less capital outlay

As you know, the BRRRR method involves REHAB to gain some sweat equity. Rehabbing properties can be a challenge for an investor who is out of state due to supply issues, contractor availability and simply coordinating and supervising the work. With the rapid appreciation in this area right now (15% on average) you can gain equity in properties simply by purchasing and controlling an asset for any length of time. It's a fantastic time to invest! Because of this, an out of state investor can lean more heavily to properties that don't need extensive rehab and can simply refinance after a short period of time with less work.

Feel free to hit me up with questions about any of the areas over here and I'll be glad to help you with your evaluations