Detroit Area Investing – The City versus the Suburbs
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.
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.
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?
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.
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):
City of Detroit
Detroit area Suburbs
|$10k+ Acquisitions (need work)||$20k+ Acquisitions (need work)|
|Turnkey Rentals for $25k-$40k||Turnkey Rentals for $30k-$45k|
|Cash-on-Cash Returns 24-38%||Cash-on-Cash Returns 20-34%|
|Large Supply of Homes||Rental Rates Increasing|
|Lots of Wholesale Demand||Lots of Owner-Occupant Demand|
|Many Areas to Choose From||Appreciation more likely than in Detroit|
|Ordinance Officials Overwhelmed*||Overall Safer than Detroit|
|Large Section 8 Tenant Base||Less Property Stripping|
|Lots of Affordable Brick Homes||Insurance more Affordable|
|Philanthropic Investment in Detroit||Lower Millage Rates|
|One Block can make a Huge Difference!||Not as many Brick Homes|
|Aggressive Lead-Based Paint Ordinance||Aggressive Code Enforcement|
|Tenant Biased Court System||Smaller Supply of Homes|
|Property Stripping a Big Problem||More Frame than Brick Homes|
|Extremely High Insurance Rates||Crime is up in Affordable Areas|
|City Services being Continuously Cut||Rental License Fees Increasing|
|High Crime, Unsafe Neighborhoods||More Owner-Occupant Competition|
|High Property Taxes & Millage Rates||Higher Tenant Expectations|
|City Income Taxes||Harder to Wholesale Properties|
*An observation only, we do not suggest ignoring city ordinances.
The list shows that investing in either obviously has its pro’s & con’s. Can you think of more?
The real challenge for an investor is figuring out:
- 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
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.
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.