Detroit numbers - what's missing?

Question

I find many listings in Detroit Metro suburbs that appear to have a 30% cash-on-cash rental value - e.g. $40K in a decent neighborhood with $1100/mo rental value.

I'm sure some of these require work that would reduce that, but it still seems an astronomically high return. Any investor would probably be happy to buy such properties outright, provided the vacancy rates are low and the neighborhood isn't being abandoned, which at least for these listings is true.

Am I missing something? As we all know - if it seems too good...

Rob K. · Answer

Sounds like you need to learn how to screen your tenants.

Geof Greeneisen · Answer

Lately I've been frustrated with the market as Rob K indicated. 2010 & 2011 were great years for us, we loaded up on rental properties, buying on the courthouse steps and had no competition, plenty to go around. The past 6 months have been dry. No bargains at the courthouse, inventories down across the board and the tax sales are getting above market bids. Since last year, prices in the neighborhoods I buy in have literally doubled but still represent great deals, I just can't get anything under contract.

I'm having a hard time adjusting my business model to justify these higher prices. All of the homes I bought were under $25k (acquisition + improvements) and have rented for $750 - $800. I only buy in Oakland County in the first tier suburbs outside of the City of Detroit itself. Last year at this time I closed on two houses just before year end. This year I've got about 10 low-ball offers out right now and at this point I think I got too aggressive on all of them, so I'm not optimistic on getting any of them.

It's tough chasing a rising market, better than the alternative I guess.

Rob K. · Answer

What happened in the Detroit area is that the housing prices crashed before the rest of the country. Many of the people ended up renting and rents didn't really take a hit. Houses that cost $80,000 in 2004 and rented for $800-900 per month were selling for $20,000 in 2009-2010 and still renting for $800-900 per month. The returns are huge.

Prices have been going up lately. The returns are not as good. I like houses with 3 bedrooms, a basement, and preferably a garage. I like the ones in nice shape that just need paint and carpet. They always need other stuff too - plumbing repairs, etc. Ideally, I like to have less than $30,000 invested when it's ready to rent and get $850-900 per month. Those kinds of numbers are good. There are more profits in the war zone, but I'm not interested.

I don't know of too many other parts of the country that get these types of returns. The appreciation might not be as good as some parts, but our economy is getting a lot better. (We finally have a governor that is pro business.)

The drawback to this area is flipping. I have done many flips, but finding deals with a good spread is difficult. With prices so low, I would rather buy and hold anyway and wait for the market to come back. In other states, you can buy houses on the courthouse steps and flip them for a nice profit. Here, it's not so easy. We have a six-month redemption period. If you do buy at the courthouse, you need to pay all of the money today and then wait six months for the people to move out. During that time, they can live there rent free, trash the house, not pay the water, get fined by the city, etc. If they do redeem before the six months is up, they just have to give you back your money plus interest at the low rate they were paying to the bank. I would love to be able to buy at auctions like others do, but you need a ton of money and patience to do so. It's hard to do when it could be a year or longer to turn each house.

I know that there are people from all over the world buying houses here. They see the good returns as well.

Mitch Monmouth · Answer

Thanks for all the replies!

Sounds like I'm a little late to the game, but hope there's still opportunity. I'll be looking at extending my geographic range. Hopefully that will help.

I'm starting to wonder whether reputable "wholesalers" actually exists.... do they?

Dwayne Stutzman · Answer

Joe maybe in those areas and I could see the stadium and down town from where I was which was about a month ago. Theres nothing being done in this area . I've never seen so much filth and trash and boarded up or burnt up houses, blocks after blocks. This area might be considered a war zone which the way it looked I wouldn't want to invest there. I also work in construction and we were doing a building for DTE Energy.

Josh Sterling · Answer

I agree with Michael on all these points. We have had similar results in the SE Michigan area, although it has become more difficult to find good deals since this summer. We will be closing on our 20th property this week, and I find it gets easier the more units you have due to the scale.

Joe Delia · Answer

To the contrary, there are several areas of detroit that are in a big upswing, like midtown and around the stadiums.  Gilbert and Illitch are making it their personal mission, combined with federal funds, to revive the skyscrapers.

Michael Dundon · Answer

No we don't have trouble collecting the rent at all. It's all automated- direct deposit.  We use a company called paysimple for that. We do have a few people who pay late every once and a while but we never waive our late fee so we've collected 100% of our rents and a few thousand dollars in late fees.

It's actually no more work having 24 houses than when we had 12 at the beginning of this year. It's actually less believe it or not because as cliche as it sounds we have the right systems in place for rent collection, Maintenance, ect.

It was a lot of time, energy and a decent chunk of money setting up the right systems but now that they're in place things run pretty smoothly.

Dwayne Stutzman · Answer

Yeah most of these are outside of Detroit. I worked in Detroit around I-96 and I-75  and I've never seen so much burn out or boarded up houses and building's in my life. One after another I just can't see how this part of Detroit could ever make a come back. They probably would be better off just bulldozeing these areas to the ground.

Eric M. · Answer

And I am sure you guys never have trouble collecting the rent each month right? 
I have 2 rentals and I can't imagine multiplying the promises, excuses and stories every month by 12 to handle 24 units.  I'll stick to flipping.

Detroit numbers - what's missing?

Most Popular Reply