Detroit Area Investing – The City versus the Suburbs

• Either can make you money, but have you really considered everything when evaluating the risk versus reward of each?

• It seems almost every day someone’s asking us about buying investment properties in the City of Detroit. While there’s nothing wrong with investing in Detroit properties, we’re amazed at the general naiveté of those asking us about it.
  
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• They inevitably have read something online or heard about someone through their personal grapevine that has made a lot of money doing so. The general context of these discussions is that it’s “so easy” to make money doing this.
  
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• Hmm, that sounds vaguely familiar doesn’t it? Didn’t a lot of people say the same thing about the stock market in the 1990’s – right up to the tech bubble bursting?
  
• Or how about how “easy” it was to make money in real estate in the 2000’s – right up until the housing bubble burst?
  
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• It can be relatively “easy” to make money investing in Detroit & area Suburban properties, if you know what you’re doing or working with someone that does. FYI – we’re going to assume that anyone deciding between investing in the city versus the suburbs has already researched the pro’s & con’s of investing in real estate in general.
  
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• So, what are issues potential investors should be aware of when considering investing in real estate in the City of Detroit versus Detroit area suburbs? Let’s list a few (in no particular order):
  
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• City of Detroit

  Detroit area Suburbs

  Pro’sPro’s$10k+ Acquisitions (need work)$20k+ Acquisitions (need work)Turnkey Rentals for $25k-$40kTurnkey Rentals for $30k-$45kCash-on-Cash Returns 24-38%Cash-on-Cash Returns 20-34%Large Supply of HomesRental Rates IncreasingLots of Wholesale DemandLots of Owner-Occupant DemandMany Areas to Choose FromAppreciation more likely than in DetroitOrdinance Officials Overwhelmed*Overall Safer than DetroitLarge Section 8 Tenant BaseLess Property StrippingLots of Affordable Brick HomesInsurance more AffordablePhilanthropic Investment in DetroitLower Millage RatesCon’sCon’sOne Block can make a Huge Difference!Not as many Brick HomesAggressive Lead-Based Paint OrdinanceAggressive Code EnforcementTenant Biased Court SystemSmaller Supply of HomesProperty Stripping a Big ProblemMore Frame than Brick HomesExtremely High Insurance RatesCrime is up in Affordable AreasCity Services being Continuously CutRental License Fees IncreasingHigh Crime, Unsafe NeighborhoodsMore Owner-Occupant CompetitionHigh Property Taxes & Millage RatesHigher Tenant ExpectationsCity Income TaxesHarder to Wholesale Properties
• *An observation only, we do not suggest ignoring city ordinances.
  
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• The list shows that investing in either obviously has its pro’s & con’s. Can you think of more?
  
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• The real challenge for an investor is figuring out:
  
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--The specific risks they can handle

• --The risks they aren’t comfortable with and should avoid
  
• --Do the potential returns justify the risks?
  
• --How will they manage the specific risks
  
• --What reserves they have to absorb any risk events
  
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• With real estate investing in general we see too many people not doing their homework or putting in the effort to really understand the risks with investing. Often, they contact us for assistance after their attempted investment has turned into a train wreck. Most of these same investors should have looked to partner with an experienced investor (like us) or just lent their funds out to an experienced real estate investor (like us) for a nice return.
  
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• If we can be of assistance in answering any real estate investing questions, feel free to contact us. Be sure to also comment on any pro’s or con’s we may have missed, or if you disagree with any of ours.