Busting 3 Common Detroit Rental Myths

The real estate industry is incredibly complex. As a result, there’s an overabundance of information on the internet trying to explain the topic—some of this is useful, some of this is overwhelming, while some is complete myth.

Especially for new investors, it can therefore be challenging to separate fact from fiction. For example, many unfortunately believe in half-truths and exaggerations about the “infamous” City of Detroit rental scene, which leads them to make wrong (and costly!) decisions.

That’s why, in this article, we’ll bust some of the most pervasive myths about the Detroit rental market. But first, you have to understand why Detroit is such a popular target for real estate investments in the first place.

Where do these Detroit myths even come from?

Back in the 1950s, the city was thriving and had already reached 2 million residents. However, a combination of economic shifts, race riots, white flight, and an aggressive mayor led to the population plummeting a decade later.

Now, however, the city is on the rise once more. For example, in 2011 billionaire Dan Gilbert founded Bedrock, a real estate company that bought blighted properties. Since then, Bedrock has invested over $5.6 billion in the city, owning 100 properties in the downtown area alone.

Yet, despite the reinvigoration of Detroit real estate, there are still under a million people in a city built for 2 million. This gives the City of Detroit’s real estate industry a unique, hyper-supply situation, where there are a lot of empty and cheap houses. This is the reason why many investors are confused yet interested in the City of Detroit’s real estate industry—a city now home to many fabled real estate myths.

3 common rental myths about City of Detroit

Knowing what’s real and what isn’t about the City of Detroit can help you understand the market better—opening you up to investment opportunities you otherwise wouldn’t discover. Here are 3 misconceptions about the city that need serious fact-checking:

1. Metro Detroit and the City of Detroit are the same real estate market.

Although their names are similar, don’t lump the City of Detroit in with Metro Detroit!

Geographically, the City of Detroit is part of the Metro Detroit area. However, the hyper-supply problem is largely unique to the City of Detroit itself.

In fact, the cities surrounding the City of Detroit—which we like to call “Ring Cities”—are playing an entirely different real estate game. In the Ring Cities, you can get a pretty strong rental return if you buy wisely, while avoiding most of the risks that may come with investing in the City of Detroit. We’ve written more about this in our Verdict on Detroit article. We’ve also created a Deep Dive series that tackles each neighborhood in the area to help you choose the right places to invest in.

But, if you need more guidance in investing in either the City of Detroit or Metro Detroit, you can always reach out to us directly for expert local tips.

2. There are “good” and “bad” zip codes to invest in.

People usually want to invest by zip code - stick to the desirable ones, and you’ll be setting yourself up for a relatively safe investment, whereas if you buy in an undesirable zip code, you’ll likely encounter more problems when managing your rental business.

In most markets, this approach is fairly solid. But, because of how complex Detroit’s real estate market is, there’s a lot of variation in terms of neighborhood, properties, and tenant demographics even within the same zip code. Just walk a few blocks, and you can go from a B+ to a C- neighborhood - a difference which matters a lot when you’re calculating risk and expenses for a rental investment.

With our experience operating as a property management company in the local area, we’ve created this list to get you started with the “better” neighborhoods in the city. Checking our Deep Dive series will also show you how we categorized and differentiate “good” from “bad” investment areas, and breaks down each neighborhood, so you can know what to expect from within each zip code itself.

Good areas for rental investment:

• 1. Grandale
• 2. Grandmont
• 3. Boynton
• 4. Chandler Park
• 5. Castle Rouge
• 6. Virginia Park
• 7. Chaldean Town
• 8. Forest Park
• 9. Poletown East
• 10. Milwaukee Junction
• 11. Brightmoor

Not-so-good areas for rental investment:

• 1. Chaldean Town
• 2. Forest Park
• 3. Poletown East
• 4. Milwaukee Junction
• 5. Brightmoor

3. Buying turnkey is always a safe bet when investing in Detroit rental properties.

You might have come across articles talking about how you can buy affordable, “turnkey” rentals in Detroit, which come fully-renovated, tenanted, and managed by a turnkey provider. This is true. You can find these turnkey properties, which are ideal for investors just getting into the property market, or for landlords who live out-of-state.

However, not all turnkey investments are made equal. Some turnkey providers and properties are a fairly safe bet, and if you screen the investment opportunity thoroughly, you can get a fully-renovated home with solid tenants in place and a high level of property management provided. But if you don’t screen the turnkey property or provider well, you can also end up making a bad investment.

One of the most common things we see is a landlord who bought a turnkey rental and was told it was a Class B, when in reality, it’s more like a Class D. Some of this is linked to the zip codes myth - they think it’s in a strong neighborhood, when in reality, even great zip codes in Detroit can still have some blocks which aren’t worth investing in (and that’s where their property happens to be located). In other cases, the property hasn’t been fully renovated and still requires costly repairs, or is managed by a lax property manager who drives down the profitability of your investment with poor oversight.

So, if you’re planning to buy turnkey in the City of Detroit, make sure you understand exactly the type of property, area, tenants, turnkey provider and property management company you’re dealing with, first!

Conclusion

Is Detroit a great place to invest in? Certainly. The city boasts interesting opportunities for real estate investors—both in the City of Detroit and the rest of Metro Detroit.

To become successful in a housing market as wildly complex as Detroit, make sure to conduct proper research first. Be aware of all the realities—risks, rewards, and truths—that come with investing in the area. Prioritize quality property management as well, especially if you’re not confident enough to take on the challenge yourself.

What other myths have you heard about Detroit? Anything you’d like us to bust or confirm?

link to BP blog

Image courtesy of Binyamin Mellish