Any insight on Detroit?

Question

Hello everyone, I was chatting with an agent two days ago and he was saying Detroit Michigan is seeing a lot of market activity lately.Does anyone buy properties in Detroit?Homes seem affordable and rent prices pretty good.Thanks in advance.

Travis Biziorek · Answer

Hey Josh, I'm the BP Detroit expert here :-)

I own 14-doors there but live in California. I used to live on-the-ground in Detroit Metro from 2017-2022 and actually grew up in Michigan as well. I get back to Detroit every few months for about a week at a time to check on projects and meet with clients.

The city has come a LONG way and is undergoing a major revitalization effort. Most people haven't figured this out yet and still think Detroit is left for dead.

That's just not the case.

Industry is also becoming increasingly diversified. It's not just the automotive space anymore.

I could go on and on. I'm extremely bullish on the city and can't wait for it to go mainstream. Just the other month Detroit edged out Miami for the highest appreciating market in the country.

I've been investing there since 2019 so it's pretty fun to watch my thesis unfold like this. We're just getting started!

Drew Sygit · Answer

@Michael Martin

We use the following to rank Property Classes, in order of importance:

• Property Tenant Pool: closely linked to location, but not always.
• Property Location: closely linked to tenant pool, but not always.
• Property Condition & Amenities: it’s important to, “Maintain to the Neighborhood.”

Key metrics for each Property Class:

Class A Properties:
Tenant Pool: Majority of FICO scores 680+, no convictions/evictions in last 7 years. 
Tenant Default: 0-5% probability of eviction or early lease termination.
Section 8: Class A rents are too high and won’t be approved.
Vacancies: 5-10%, depending on market conditions.
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.

Class B Properties:
Tenant Pool: Majority of FICO scores 620-680, some blemishes, no convictions/evictions in last 5 years.
Tenant Default: 5-10% probability of eviction or early lease termination.
Vacancies: 10-15%, depending on market conditions.
Cashflow vs Appreciation: Typically, 1-3 years for positive cashflow, balanced amounts of relative rent & value appreciation.
Section 8: Class B rents are usually too high for the Section 8 program.

Class C Properties:
Tenant Pool: Majority of FICO scores 560-620, many blemishes, but should have no convictions/evictions in last 3 years. Verifying recent 2-years of rental history very important! Same for 2-years of job/income stability.
Tenant Default: 10-20% probability of eviction or early lease termination.
Section 8: Class C rents usually meet program requirements, proper screening still recommended.
Vacancies: 10-20%, depending on market conditions and tenant screening.
Cashflow vs Appreciation: Should cashflow immediately, at the lower end of relative rent & value appreciation.

Class D Properties:
Tenant Pool: Majority of FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, but should have no convictions/evictions in last 12 months. Verifying last 2-years of rental history and income/employment extremely important to find the “best of the worst”.
Tenant Default: 20-30% probability of eviction or early lease termination.

Section 8: Class D rents meet program requirements, often challenges to pass Section 8 inspection.
Vacancies: 20%+, depending on market conditions and tenant screening.
Cashflow vs Appreciation: Typically, all cashflow with little, maybe even negative, relative rent & value appreciation.

Where did we get our FICO credit score information from?

Check out this chart:

FICO    Score

Pct    of Population

Default    Probability

800 or more

13.00%

1.00%

750-799

27.00%

1.00%

700-749

18.00%

4.40%

650-699

15.00%

8.90%

600-649

12.00%

15.80%

550-599

8.00%

22.50%

500-549

5.00%

28.40%

Less than 499

2.00%

41.00%

Source: Fair Isaac Company

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.

Metro Detroit has 132 cities, the City of Detroit 183 Neighborhoods, which we’re analyzing and classifying. Check out the map on our website where we’ve made this all easy to follow.

We can also share numerous examples of properties & portfolios we’ve assisted investors with!

DM us if you’d like to discuss this logical approach in greater detail!

Michael Smythe · Answer

@Josh Mac we agree with 100% of what @Travis Biziorek has written, but...

An OOS investor can't search for properties or learn anything about the City of Detroit market with a "block-by-block" approach:(

Yes, zip codes are too big and will lead to bad experiences.

We believe you can use Neighborhoods to narrow your search to a reasonable area and THEN use a block-by-block strategy as confirmation before signing a purchase contract.

Google Streetview can be a great tool to peruse "block-by-block", but you do have to watch the Capture Date in the bottom righthand corner. Most of Detroit keeps improving, but don't assume every area has! Worse-case you can hire us or Travis to do a video evaluation of the area of a target property.

Read below for some additional helpful info.

We think the Midwest is a GREAT place for OOS investors to consider!

Check out some of things happening in Detroit in 2024:

https://michiganchronicle.com/2024/01/03/major-developments-that-will-define-detroit-in-2024/

Your first question shouldn't be WHERE to invest (that is #2 question), but HOW you will invest!

Many OOS investors set themselves up for failure because they don't invest the time to ACTUALLY understand:

1) The Class of the NEIGHBORHOOD they are buying in - which is relative to the overall area.

2) The Class of the PROPERTY they are buying - which is relative to the overall area.

3) The Class of the TENANT POOL the Neighborhood & Property will attract - which is relative to the overall area.

4) The Class of the CONTRACTORS that will work on their Property, given the Neighborhood location - which is relative to the overall area.

5) The Class of the PROPERTY MANAGEMENT COMPANIES (PMC) that will manage their Property, given the Neighborhood location and the Tenants it will attract - which is relative to the overall area.

6) That a Class X NEIGHBORHOOD will have mostly Class X PROPERTIES, which will only attract Class X TENANTS, CONTRACTORS AND PMCs and deliver Class X RESULTS.

7) That OOS property Class rankings are often different than the Class ranking of the local market they live.

Class A is relatively easy to manage, can even be DIY remote managed from another state. Can usually allot 5-10% vacancy factor and same for maintenance.

Class B usually also okay, but needs more attention from owner and/or PMC. Vacancy and maintenance factors should be higher than for Class A as homes will be older, have more deferred maintenance and tenants will be harder on them.

Class C can be relatively successful with a great PMC (do NOT hire the cheapest!), but very difficult to DIY remote manage. Vacancy and maintenance factors should be higher than for Class A or B. Homes will have even more deferred maintenance and tenants will be even harder on them.

Class D pretty much requires an OWNER to be on location and at the property 3-4 times/week. Most quality PMCs will not manage these properties as they understand most owners won’t pay them enough for the time required and even then it’s too difficult successfully manage them.
***Only exception is if an owner has plan & funds to reposition Class D to Class C or higher.

https://www.biggerpockets.com/forums/776/topics/960183-what-they-dont-tell-you-about-cheap-rental-properties?highlight_post=5562799&page=3#p5562799

Also, SERIOUSLY consider - do you really have the time to be a DIY landlord or should you hire a PMC?

Let us know if we can help in any other way.😊

Josh Mac · Answer

Thanks,that makes sense!I have to develop my skill to recognize the different classes of properties.What would be the best way to go about investing remote?I've read finding a good team is key.My question is how do you put together a good team when most people are out to scam you or looking out for there best interest?

Michael Smythe · Answer

@Josh Mac use our info as a template for wherever you invest!

Travis Biziorek · Answer

Haha, yeah I get it man. Happy to chat offline if you want. There's a lot to it all for sure. I think we have a DM thread going already. Feel free to hit me there and we can talk.

Michael Martin · Answer

@Drew Sygit I'll definitely DM you!

Michael Martin · Answer

@Joe Hammel would love to chat about the Detroit market!

Joe Hammel · Answer

Metro Detroit has what 99% of Real Estate Investors want. Couple hundred bucks a door monthly cash flow, solid ROI, and yes plenty appreciation. (#1 appreciating city 2023)

I personally make well over $100k/yr cash flow from my portfolio here. All of which, I’ve purchased within the last 5 years.

There are 2 types of people who dog on Detroit..

1. People who don't actually own property in Detroit

2. People who did it wrong and weren't able to execute.

If you do it right, it’s arguably the best market to invest.

Purchase: $80k-$130k

Rent: $1100-$1500 (no rent control in MI)

1% rule: .9%-1.4% rule deals

Coc ROI: 4-12%

Total ROI: 20-40%

Cash flow: $50-$250/door (after all expenses and budgeting for maint, capex, vacancy)

Appreciation: 3-10%+ (has been double digit for a decade)

Location: C+, B-

These numbers are based on the “sweet spot” in Metro Detroit. These are largely in the suburbs and some markets within the city. You can find higher ROI (on paper) here and probably in other cities…but the probability of actually collecting rent significantly decreases. Where these numbers are found, there is a very high rate of rent actually being paid.

We have over a dozen Fortune 500 companies just in Metro Detroit with huge Healthcare, Auto, and mortgage industry National footprints. Ford, Rocket mortgage, Beaumont hospitals and more. All complimented with Amazon fulfillment centers, google, and more tech manufacturing jobs.

The bad reputation of “Detroit” comes from OOS investors wanting sub $40,000, D class properties in poor condition, because they pencil out to 2-3% deals on paper. We don’t buy those.

We have found what works and repeat it as much as funds allow.

Detroit has one the highest rent to price ratios in the country…and we focus on the best balance of price/location within the area.

Josh Mac · Answer

Thank you for the insight.I am still very curious about Detroit.I feel I should start out buying my first close to where I live though.But you cleared up a lot for me,thanks again!

Any insight on Detroit?

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