A Tale of Two Markets: Metro Detroit vs. Phoenix-Mesa-Scottsdale, AZ

Source: Crains Detroit and KJZZ.

As a rental property investor, one of your primary goals is expanding your portfolio. In the United States, this is easy to achieve, as you have thousands of opportunities, with over 400 different housing markets to choose from.

But the main challenge is knowing where to invest next. It will be difficult to check each area and decide which markets are worth investing in—let alone have a deep understanding of the critical investing information to maximize the market and yield high returns from a rental property.

So, we’ll make the decision-making easier for you by using our 25+ years of experience as a property management company in Metro Detroit with this ongoing series that compares two real estate markets at a time.

For this part of the series, we’ll be discussing the two rental investment hotspots: Metro Detroit, MI, and the Phoenix Metropolitan Area of Phoenix-Mesa-Scottsdale in Arizona.

We will highlight the strengths and weaknesses of each location, empowering you with the necessary investment details to make the best decision for a successful real estate investment.

We’ll show you the potential and risk of each area by evaluating areas such as

• - The expected return on investment from rental properties
• - The potential tenant pool
• - The level of property management required

Let’s begin by digging deeper into the background of both areas.

Overview of Metro Detroit

Metro Detroit saw most of its wealth move from the city to the suburbs in the 1960s and 1970s. The move resulted in a unique price spread where the closer you get to the city, the more affordable the real estate prices are.

In the income map below (assuming that income directly relates to property values), you can see that the property values get increasingly more expensive the farther you get from the city:

Source: Proximity One.

Since the Great Recession in 2008, the City of Detroit has seen a significant increase in population and employment—now also moving into its surrounding suburbs. As a result, there’s a resurgence of real estate and rent prices, indicating that the market is constantly evolving.

The neighborhoods within the city are becoming rental investment hotspots, but the surrounding cities arguably have even more potential to increase a rental investor’s cash flow. So, to ensure you don’t miss out, we’ve covered all the opportunities you can find across Metro Detroit.

Further reading: We go into the details of each city and neighborhood in Metro Detroit in our Deep Dive series, should you want to examine the real estate potential of each area. Check it out!

To stay up to speed, here’s a quick summary:

• - Metropolitan Statistical Area (MSA) of Detroit-Warren-Dearborn includes the 6 counties of Lapeer, Livingston, Macomb, Oakland, St. Clair, and Wayne.
• - Metro Detroit is the Detroit tri-county area that only includes Macomb, Oakland, and Wayne counties. They cover 3,888.4 sq mi (10,071 km2) and a population of over 4 million—the most populous metro area in Michigan.
• - The City of Detroit is the biggest city in the Metro Detroit metropolitan area and Michigan. It’s 142.89 square miles (370.1 km²).

In 2023, Metro Detroit remains the most densely populated among all Michigan metropolitan areas. There are a total of 72 cities in Metro Detroit, subdivided into three counties:

Source: Georgetown Public Policy Review.

To further assist you in understanding and truly getting a grasp of Metro Detroit’s real estate market, we’ve coined the term “Ring Cities,” which refers to the suburban cities surrounding the City of Detroit. The Ring Cities offer an excellent balance of cash flow and buy-and-hold potential. More than that, they also have an affordable housing market and don’t pose as many risks associated with Detroit investing.

Below is a list of all the cities comprising Metro Detroit, and the ones highlighted in green are the Ring Cities. If you’re new to Metro Detroit investing, we highly recommend you focus on the Ring Cities. Any hyperlinks in the list will take you to our Deep Dive series, where you can learn more about each real estate market:

If you’re considering investing in the City of Detroit, here’s what you need to know. First, the Motor City is divided into 11 regions:

Source: Wikipedia.com

Then, the regions are further split into 105 neighborhoods. The hyperlink in the list below will redirect you to the corresponding Deep Dives for a more detailed explanation of each neighborhood’s investment potential:

Source: Loveland’s Detroit Neighborhoods Map

In the 1950s, the City of Detroit was home to roughly 2 million people. Today, only half of that population still lives in the area, which means that thousands of vacant properties are just sitting around waiting for a new owner to reside in it. Of course, only some cities and neighborhoods managed to retain a good part of their population, and they’re in high demand today.

For several years now, the city’s property and rent values have been constantly increasing. One reason for that is the local government’s program of pursuing federal funds to deal with the vacancies by specifically demolishing and rehabilitating as many buildings as possible to reduce the over-supply of homes in Detroit neighborhoods.

Here’s a snapshot of Metro Detroit’s real estate market and demographics:

Source: Home Area

While the City of Detroit is part of Metro Detroit, there are major differences between the two in terms of real estate. That’s why it’s even more critical for out-of-state (OOS) investors to understand the differences to set their expectations correctly and avoid blind investments.

For OOS investors, we discourage investing in Metro Detroit based only on a zip code or neighborhood recommended by someone you know. For example, property classes vary widely from one block to another. You don’t want to invest in an area that someone said to be a Class B property only to find out that it’s full of Class D properties in need of major and costly overhauls.

Great opportunities come with great challenges; the same is true in Metro Detroit and the City of Detroit. The best way to navigate risks and reap famed returns is to do your due diligence and partner with trustworthy and experienced experts when needed. And, just to reiterate, consider the Ring Cities if you want to invest with relatively less risks.

Overview of Phoenix Metropolitan Area

The Phoenix-Mesa-Scottsdale Metropolitan Statistical Area, also known as the Valley of the Sun, is the largest MSA in the Southwestern United States. It’s home to about 67% of Arizona’s population and is considered one of the top growth areas in the US. It comprises all of Maricopa County and Pinal County, including the large middle-class suburbs of Peoria, Mesa, Chandler, Glendale, and upscale Scottsdale.

Here’s a map of the Phoenix MSA:

Source: Proximity One

The Phoenix-Mesa-Scottsdale MSA has a total population of 4.86M, with a total area of 14,587 square miles, resulting in a population density of 333 people per square mile.

Similar to Metro Detroit, the properties in Phoenix MSA get more affordable the closer you get to the center, particularly in Maricopa County, as shown in the chart below:

Source: Proximity One

As seen in the map, it shows that the residents of Phoenix MSA, especially in Pinal County, aren’t as financially well-off as you might expect. As a result, the property values in the MSA are most likely at the lower end of the spectrum. We’ll discuss further the specifics of the Phoenix MSA real estate market in the following sections.

Here’s a quick overview of the Phoenix-Mesa-Scottsdale real estate market and demographics:

Comparing Real Estate in Metro Detroit vs. Phoenix-Mesa-Scottsdale, AZ

Source: Zillow

Home Value

According to Zillow, the average home value of Metro Detroit properties is $243,918. This figure reflects a 1.1% growth over the past year, and it will likely continue increasing in the future:

Source: Zillow

Moving to Phoenix-Mesa, Scottsdale, AZ, the median home value is $448,579, an 8.6% decline over the past year. Similar to Metro Detroit, the Phoenix MSA shows an optimistic 1-year Market Forecast:

Source: Zillow

Most of the properties that are for sale in Metro Detroit are in the City of Detroit and the Ring Cities surrounding it. It’s in these areas that you can find the famous less-than-$100k properties that the Detroit market is popularly known for. If you look closely, you’ll notice that housing density in Metro Detroit is much higher compared to other US real estate markets, and that’s only because they have smaller lot sizes:

Source: Zillow

The heat map below illustrates the affordability of the Metro Detroit area when it comes to property value increase. It’s noticeable that the properties in and around the City of Detroit have a much lower price. Nonetheless, it’s vital to remember that the variation and diversity within Metro Detroit lead to pockets of opportunity scattered throughout the area. For example, it won’t be challenging to find affordable houses around developing neighborhoods that’ll allow you to gain more equity in the years ahead.

Source: NeighborhoodScout

In contrast, current Zillow listings in Phoenix-Mesa-Scottsdale show that property prices get more expensive as you get closer to the metropolitan center. Of course, exceptions exist, but most properties up for sale (and for rent) follow this pattern in Phoenix MSA. You’ll also notice that the properties in this area are clumped in the metropolitan center, where the farther you get, the fewer properties you can find.

Source: Zillow

The properties in the metropolitan center tend to be pricier. However, property appreciation rates in Phoenix-Mesa-Scottsdale can differ from one subarea to another, so it’s challenging to generalize the price spread in the area. Here’s a heat map to help you better visualize this:

Source: NeighborhoodScout

Appreciation

More on property appreciation rates, here’s more detailed information provided by Bestplaces:

• - Metro Detroit home appreciation in the past decade has been 115.9%.
• - Phoenix-Mesa-Scottsdale home appreciation in the past decade is 208.1%. The area is in the 2nd spot of the Top 5 cities in the United States with the most significant percentage increase in home value.

Overall, both MSAs offer relatively affordable homes with increasing home appreciation rates. Comparing them to national rates from last year, home values grew by 11% to $416,000 in November 2022.

Despite the housing market’s slowdown (declined by 5% from July 2022), this year remains with a favorable forecast on home appreciation rates. One factor that adds competitive pressure on property prices and other forms of housing today is the fact that millennials (the largest segment of the population right now) are starting to purchase homes.

Average Rent

Looking at average rent, Metro Detroit has higher rates compared to Michigan but a tad lower than the national rate. But, it’s the opposite case in Phoenix-Mesa-Scottsdale metropolitan as they charge a lower rental price than Arizona but higher than the national rate.

Source: BestplacesSource: Rentdata and Bestplaces

Based on the current listings on Zillow, we see that the average rent prices provided are accurate and, in fact, understated. With that, it means that you can most likely charge a higher rental fee than the average rate as a landlord.

Source: Zillow

In Metro Detroit, the potential tenant pool size is around 26.6%, while in Phoenix-Mesa-Scottsdale, you’ll have about 32.1% prospective renters.

Based on these figures, you’ll have a slightly larger tenant pool to choose renters from in Phoenix-Mesa-Scottsdale than in Metro Detroit. We’ve explained further the demographics and financial ability of the residents in both metropolitans in the later section on tenant quality.

Rent-to-Price Ratio

We use the rent-to-price ratio as a measure to assess a property’s potential to generate a positive cash flow. The industry’s widely recognized “1% rule” establishes the minimum acceptable ratio, which we recommend you employ as part of your initial screening of prospective properties.

You can calculate the rent-to-price ratio by using this formula:

Monthly rent / (Purchase Price + Rehabilitation Cost) ≥ 1%.

Considering the substantial diversity in property types within Metro Detroit and the Phoenix-Mesa-Scottsdale area, this ratio should help you estimate potential returns in seconds.

Side by Side Chart

Let’s use actual listings on Zillow to see the data in action.

Here are examples of three-bedroom properties with two bathrooms in Metro Detroit and Phoenix-Mesa-Scottsdale. Look at the difference in terms of property values and estimated monthly rent amount:

Source: Zillow

These two examples show that Metro Detroit has a rent-to-price ratio above the industry standard, while the listing in Phoenix-Mesa-Scottsdale falls short. So, although you can charge higher monthly rentals in Phoenix MSA, you’ll most likely have a more robust cash flow in Metro Detroit. Combine that with Metro Detroit’s healthy property appreciation rate, and you’re looking at an outstanding balance of cash flow and equity gains in the years ahead.

Quality of Tenants, Properties, and Living

Factoring in the quality of tenants, properties, and neighborhoods is essential to all rental investors. After all, tenants are the lifeline of your rental business, especially since they influence the following:

• - The stability of your income
• - The property maintenance needs to protect your assets
• - The necessary and possible home renovations and rehabilitations
• - The kind of property management required to handle the tenants

The following information we’ll be providing comes from our local knowledge and experience in property management in Metro Detroit and multiple research points that serve as a definitive metrics guide.

We’ll begin with this map that reflects the quality of life in the City of Detroit (and its surrounding areas) and Phoenix MSA. The ratings are based on property values, employment, school quality, income levels, and other critical investment criteria:

Source: Roofstock Detroit and Phoenix

Most properties in Detroit are Class C, meaning they come with multiple tenant issues and require property rehabilitation — not ideal for newbie rental investors.

The Phoenix-Mesa-Scottsdale MSA also shows a similar situation, where the closer you get around the area’s center, the lower the ranking of the neighborhoods.

Tenant Quality

Average Income

The average income of a Metro Detroit resident is a bit higher than what a resident in the Phoenix-Mesa-Scottsdale metropolitan earns. Correspondingly, the unemployment rate in Metro Detroit is lower than in Phoenix MSA. However, the latter shows a better job growth forecast, which will likely attract more residents to move into the area.

Source: Bestplaces

As a real estate investor, of course, you want to charge a higher rent as much as possible. But you have to do it responsibly. With that, we mean that you have to find tenants who can afford your rent and keep up with the monthly payments—in short, a tenant with a stable income and employment.

Overall, a growing job market tends to result in a population increase and a stronger local economy—expanding your tenant pool and finding quality tenants in the process. Plus, the growth will also mean a spike in property values and rent prices, and thankfully, both metropolitans project a positive future job growth based on historical data.

Educational Attainment

Residents in both Metro Detroit and Phoenix MSA have nearly the same educational attainment. The only notable difference is that Phoenix-Mesa-Scottsdale has slightly more residents with a college degree than Metro Detroit. Nonetheless, most of their residents are high school graduates, meaning both have potential tenants who can secure well-paying jobs.

Property Condition

Property Age

The average home age in Metro Detroit is 53 years, while Phoenix Metropolitan has an average of 29 years. The difference is significant, but just because a property is old doesn’t mean it is bad—it only means that you might need more renovations and maintenance to deal with as a rental property owner.

Home Ownership and Rental

The percentage split between homeowners and renters in Metro Detroit and Phoenix-Mesa-Scottsdale are similar, although the latter has a higher percentage of renters. Nevertheless, you have around one-third of the entire metropolitan population to consider as potential tenants, which means you have many opportunities to attract and retain renters in both areas.

Quality of Life

Local Economy

The recent 3-year pandemic affected the world, including Metro Detroit’s economy. Apart from the resilience shown by the Motor City’s automotive and manufacturing sectors, smaller businesses and the leisure and hospitality industry were greatly affected.

The post-pandemic era, however, seems to be promising for Metro Detroit:

• The economy is showing strengths as Ford Motor Co., one of the area’s biggest employers, announced its multi-year plan for a 30-acre “mobility innovation district” in Downtown, which could mean more employment opportunities for residents.
• 
  
• According to Eric Larson, CEO of Downtown Detroit Partnership, the number of daily visits in the metro is constantly climbing to pre-pandemic levels (2019) of an average of more than 88,000 visits daily.
• 
  
• Michigan’s economy ranked first among 37 other states with a population of over 2 million in a ranking made by Bloomberg. Michigan earned its crown thanks to its impressive recovery from COVID-19.
• 
  
• Google joins Ford as a Founding Member at Michigan Central and plans to train locals to fill the 5,000 job positions in the future Mobility Innovation District.
• 
  
• General Motors plans to transform the state to an all-electric future with 5,000 manufacturing job opportunities.

Phoenix-Mesa-Scottsdale also felt significant economic effects caused by the pandemic, but like Metro Detroit, it’s also showing growth in the post-COVID-19 landscape.

Still, the Greater Phoenix region, which includes the Phoenix-Mesa-Scottsdale area, continues to be a national leader in terms of economic growth and prosperity. The trend is mainly backed by the state’s steady devotion to innovation and technology, resulting in an additional 633,000 jobs over the last decade (a 31.4% increase)—and will continue to increase in the coming years.

There are also some notable global businesses expanding their operations in the Phoenix-Mesa-Scottsdale area:

• - JA Solar, a global solar cell and module manufacturer, is building a facility in Phoenix. The expansion will create over 600 jobs in the area.
• - Vincit, a leading software development and design agency, recently moved to Scottsdale, where they invested $100 million into the state’s semiconductor industry.

Arizona’s tourism post-pandemic (including a large part of Phoenix-Mesa-Scottsdale) is bouncing back as overnight visitors in 2022 spent over $28.1 billion, an increase of $4.5 billion from 2021.

Overall, the economic activity in the Phoenix metropolitan area is strong, with positive labor market growth.

To summarize, here’s a snapshot of the economy of the two metropolitan:

Source: Brookings.edu

Despite the economic struggles caused by COVID-19, both areas remained resilient and showed positive growth. This is good news for real estate investors like you because whichever metropolitan you decide to invest in, you’re assured that both areas will continue to attract new residents while retaining current tenants as they offer excellent quality of life.

Safety and Crime

In terms of safety, data shows that both metropolitan areas have higher crime rates than their respective greater areas (Michigan and Arizona). Notably, Phoenix Metropolitan has higher property crime rates compared to Metro Detroit and the whole of the United States, unlike Detroit.

Source: Bestplaces

In Metro Detroit and Phoenix-Mesa-Scottsdale, you’ll see that the crime and safety rates can vary greatly with each neighborhood. Along with that, it’s possible to find a property that’s completely safe and beautiful to live in across an area deemed unsafe.

Here’s a crime rate heat map of the two metropolitans to show how the crime rates can vary:

Source: NeighborhoodScout

To reiterate, crime rates vary in all areas, and it’s constantly changing. So, we recommend that you conduct thorough research on the area by visiting and getting a first-hand experience of the community. Quality tenants will always prioritize safety, so it’s only expected that you should, too.

Diversity

As a rental investor, your goal should focus on purchasing rentals in an area where a significant portion of the tenant pool is responsible, reliable, and communicative (regardless of race). You should prioritize renters who don’t have issues handling payments, maintaining your assets, and following your lease agreement.

The potential tenants in Metro Detroit are largely different from those in Phoenix-Mesa-Scottsdale, so you must evaluate with yourself what kind of renters you want to work with before committing to a property.

Liveability

To put it simply, here’s the kind of life the residents of the two metropolitans are living and what to expect:

*A high population density isn’t always a con, as it can also mean more potential tenants.

Both Metro Detroit and Phoenix Metropolitan Area demonstrate robust economic growth opportunities for people seeking better career prospects, and numerous educational institutions are available for families with young children.

Still, it’s vital to exercise caution when selecting a location for your rental investment. We advise that you prioritize areas in high demand among reputable tenants with stronger financial stability. You should also consider each subregion’s unique characteristics by paying close attention to its demographics and assessing its properties’ condition.

For beginners and OOS investors, we strongly recommend seeking guidance from experts as they can provide in-depth insights into all the critical factors you need to consider before putting your money into either of these metropolitan areas.

Conclusion

When deciding where to invest and expand your rental business, you should do a rigorous inspection and evaluation of the many opportunities in Metro Detroit and Phoenix-Mesa-Scottsdale. These metropolitans have a huge land area and are composed of numerous cities and neighborhoods with their own strengths and weaknesses—all dependent on what you prioritize as a rental investor.

To summarize everything, here’s a summary of all the information presented above

If you ask for our opinion, the two markets share similar traits as they both grow economically and offer excellent living quality. However, based on our over two decades of experience and bias towards our home market, we conclude that Metro Detroit presents more lucrative opportunities for rental investors.

We know money is the root of all investments, so our friendly advice is to focus on finding a good balance between cash flow and appreciation when looking for properties to purchase. Always remember that it’s always better to have high short- and long-term returns.

_

If you still want to explore your options, we have an ongoing that goes into detail with every city in Metro Detroit and neighborhoods in the City of Detroit. Check those out!

But if the data has already convinced you to invest in Metro Detroit, ! We’ll also answer any questions you have, so comment below or shoot me a message. I’m more than willing to help you on your investment journey — one investment property at a time.