To Buy or Not to Buy Detroit

According to a recent report released by RealtyTrac, income property investors should sell everything they’ve got and sink it into Wayne County, Michigan, real estate. Just kidding. The article didn’t actually say that. And while Wayne County is a beautiful place, and Detroit almost singlehandedly built the automobile industry, maybe we should rein in the enthusiasm for buying Detroit property a smidgin. After all, it wasn’t that long ago the city declared bankruptcy.

Before we bet it all on Detroit (and Wayne County), let’s take a look at the metrics of the report. What were the guys and gals at RealtyTrac actually measuring? It turns out that their method was to take the average of the 12 month rental income and divide it by the median sales price for residential homes in the county.

As was admirably pointed out in this article at Bigger Pockets, you might overlook a heck of a lot of very important factors using that process only. A few would include:

• Crime rates
• Vacancy rates
• Age/condition of property
• Landlord vs. tenant friendly laws
• Appreciation potential
• Population decline
• Vastly different rent-to purchase ratios within the county

We could write a book on each of these factors but let’s take just the last one. You cannot make a blanket claim about income property investment and apply it to such a large geographical area. Wayne County covers 672 square miles, much of which is NOT Detroit. Comparing a downtown fourplex in the middle of the city to a single family residential in the outer part of the county is bound to create an inaccurate picture for both. As we’ve been saying for years, all real estate is local.

A prospective income property investor needs to narrow down his or her prospective properties with a fine tooth comb. There are multiple markets within even a medium-sized city. To be profitable and cash flow positive you’ve got to drill down to the neighborhood level and even the street level. This micro-targeting of suitable rental properties is the best way to boost your chances of success.

Don’t be the poor schlub who sees the RealtyTrac reports and says, “Heck yeah! Detroit’s the place to be buying real estate these days.” And we’re not here to hammer on Detroit – maybe it is the place to buy and maybe it isn’t. You’re going to have to make that decision for yourself. Just remember – there’s been a lot of news about Detroit hit the presses in the past few years, and most of it has not been pretty. (Image: Flickr | Ann Millspaugh)

The JasonHartman.com Team
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