How do you mitigate risk while investing in Detroit?

Question

For any investors who are heavily invested in Detroit: I would love some insight on how you mitigate risk as much as possible when investing in the city as it relates to tenant screening, neighborhood selection, vacant property security etc... Thank you!

Joe Hammel · Answer

Metro Detroit has what 99% of Real Estate Investors want. Couple hundred bucks a door monthly cash flow, solid ROI, and yes plenty appreciation. (#1 appreciating city 2023)

I personally make well over $100k/yr cash flow from 21 properties here. All of which, I’ve purchased within the last 4 years.

There are 2 types of people who dog on Detroit..

1. People who don't actually own property in Detroit

2. People who did it wrong and weren't able to execute.

If you do it right, it’s arguably the best market to invest.

Purchase: $80k-$130k

Rent: $1100-$1500 (no rent control in MI)

1% rule: .9%-1.4% rule deals

Coc ROI: 4-12%

Total ROI: 20-40%

Cash flow: $50-$250/door (after all expenses and budgeting for maint, capex, vacancy)

Appreciation: 3-10%+ (has been double digit for a decade)

Location: C+, B-

These numbers are based on the “sweet spot” in Metro Detroit. These are largely in the suburbs and some markets within the city. You can find higher ROI (on paper) here and probably in other cities…but the probability of actually collecting rent significantly decreases. Where these numbers are found, there is a very high rate of rent actually being paid.

We have over a dozen Fortune 500 companies just in Metro Detroit with huge Healthcare, Auto, and mortgage industry National footprints. Ford, Rocket mortgage, Beaumont hospitals and more. All complimented with Amazon fulfillment centers, google, and more tech manufacturing jobs.

The bad reputation of “Detroit” comes from OOS investors wanting sub $40,000, D class properties in poor condition, because they pencil out to 2-3% deals on paper. We don’t buy those. That’s step one to mitigating risk in Detroit. Since Detroit varies so much on a block-by-block basis, it’s important to have a strong team in your core four who know the area and can help coach you into the best strategy for your needs.

We have found what works and repeat it as much as funds allow.

Detroit has one the highest rent to price ratios in the country…and we focus on the best balance of price/location within the area.

Here is a picture of my portfolio if you/anyone is curious.

Jeff Roth · Answer

Hi Natalie from Detroit, MI-

You asked about mitigating risks when owning investment property in Detroit.

While no investment is risk free, you certainly can reduce risk by educating yourself and working with an experienced local team.

Probably the two most important people on that team are your local investor friendly Realtor and property manager.

They will make sure you are buying in the best areas and make your investment as passive as possible. The property manager will have their own maintenance team or network of preferred contractors to make sure your property is maintained and tenant turnover at a minimum.

To Your Success!

V.G Jason · Answer

Mitigating risk is almost the same as any city in the country. Obviously, some have more favorable laws towards landords and some have less, STR regulations, etc.

You need to risk at look differently than what the normal BPer subscribes to; fomo buying, $5k reserves, minimum down in shitty neighborhood, and underwriting for the best case scenarios.

The risk can be mitigated through a function, among others, in no order:

1) What you pay(entry price)2) Exit optionality(any entry needs to be evaluated about how you can exit)3) Proper insurance and legal coverage(LLC, HOI, lawyer, etc.)4) Delegation of systems(property manager, handymans, gardeners, etc.)4a) If rehabbing-- delegation of contracted work and actual contracts in place to protect you.5) Financial strength-- If you don't rehab the place, you need to have 100% of capex reserves set aside, plus 3-6 months vacancies, and 1-2 months of lead time(to lease). If you rehab it, take capex reserves down to 50-75%.  5a) Debt. How much debt is in the deal is a strict function of the risk you're taking. Make no mistake about that, as much as others try to do as little debt as possible and bank on appreciation. Money is not just math, it's behavioral too. If you don't believe me, watch how you behave when you are about to get your first property--emotional.

I didn't take out things like location, and some other necessities, cause they are all functions of the 1-5a above. Your exit optionality, for example, is a heavy basis behind location.

Amanda Rechsteiner · Answer

@Joe Hammel This is good! Thank you for sharing! I'm in the Howell area but invest in Howell/Hartland (LTR) and Lansing (mainly MTR). I've stayed away from Detroit after only hearing bad stories but you're making me rethink...

Isaura Orellana · Answer

Hi Natalie! You asked about mitigating risks when owning property in Detroit..

The biggest factor to help mitigate risk in Detroit for property owners is hands down without a doubt to find TRUSTED BOOTS ON THE GROUND to help you navigate, minimize or eliminate risk. And this goes triple for Out-Of-State investors. Let those with established expertise and learned and earned know how steer the ship for you or with you. My husband and I ran into all sorts of low risk, medium risk and high risk situations buying, rehabbing, tenanting section 8, managing and owning and selling close to 100 properties in the passed 6 years. We actually started off wholesaling and doing BRRR’s out of state from California and then moved to Birmingham (20 min from Detroit) and than Darren my husband would drive to and from Detroit every day working 16hrs a day 365 days of the year for 1/2 a decade owning, building, managing section 8 tenants while I helped him on the other side of things and together we weeded through all sorts of risk over the years. All this gruelling work , commitment and consistency though has groomed us into advanced or highly experienced Detroit section 8 property investors/owners/sellers/turnkey providers, operators, managers and BRRRRer’s that has enabled us to see risk coming a mile away and than wether we need to steer clear of it all together or perhaps wether it’s worth entertaining that risk for reward.

Your welcome to send a message if you need any other advice on risk in Detroit. Cheers!

Joseph Bui · Answer

I have 8 doors in Detroit and it can be tough at times. I work with my PM to get a minimum credit score (650 or so) and income requirements (3x the rent). Don’t be in a hurry to place a tenant because it much more trouble to place a bad tenant than to keep it vacant. When a property is vacant, I board up all the windows until it’s rented again. Happy to connect and knowledge share.

Drew Sygit · Answer

@Natalie Allie your covering a lot of issues with your questions!

Probably best to DM us and set up a chat:)

Drew Sygit · Answer

@Amanda Rechsteiner nothing on Joe's portfolio list is in the CITY OF DETROIT.

They are all in the Ring Cities - inner-ring suburban cities around the City of Detroit.

The Ring Cities offer investors mostly solid Class B neighborhoods that make great rentals.

We've got a color-coded map on our website that may be helpful:)

Amanda Rechsteiner · Answer

That is true... I just looked at it. However, I do like the purchase prices compared to where I live. Better for cash flow for sure. I have been investing the other way though, around Lansing. Thanks for pointing that out!

Audrey X. · Answer

@Joe Hammel

$2800 rent in Farmington Hills? That's ambitious. The ARV seems high in my opinion, but if you're cash flowing positive on your portfolio, good for you. Good luck.

How do you mitigate risk while investing in Detroit?

Most Popular Reply