Why Detroit is the best and worse place to invest in real estate.
The real Detroit
Detroit; The real undiscovered country.
I was born, and raised in Detroit,Mi. I have been investing in real estate there for several years. I have an intimate knowledge of the people, economics, & the real estate market. I want to give the world a realistic idea of what is really going on in the city of Detroit. Everything I have read on the internet about investing in Detroit real estate is misleading. Either the content is overly pessimistic or way too optimistic. Before you even think about calling a real estate agent you need to read this hub.
Detroit real estate can be a gold mine for some investors, or a deep money pit for others.
Detroit, Mi hate it or love it. Its heavily segregated, a vast majority
of the residents have poor credit, the city is plagued with crime, the
local government is too corrupt, the school system needs improvement,
blight has invaded neighborhoods, and etc. I could go on and on, but
the city is still highly profitable for real estate investors.
By my estimates 70% of the cities residents prefer to rent oppose to owning. I have met landlords who have told me tenants have paid off their mortgages from living in their properties so long. Detroit does have several nicer areas to live. Sherwood Forest, Rosedale Park, & Palmer Woods to name a few.
The city has the potential to recover, but with all the racism in the Metro Detroit area many large companies do not want to do business here. Detroit is a very large city but it lacks the necessary industries to make it thrive. I have friends who live right next door to Detroit in Windsor, On. When they cross over to visit me they frequently complain how we have to drive so far to get to places. Its sad to say Detroit only has 2 major restaurant chain sit down restaurants, and there both on the edge of the city near the waterfront of the Detroit River.
There are no Fridays, Ruby Tuesdays, Chilis, Paneras, Max & Ermas, Red Robbins, outback steak houses, & etc in the city You have to drive into the suburbs to visit them. Detroit also lacks major shopping mails, major food chain grocery stores, fitness centers, 7-11, Tim Horton's, The Detroit Pistons don't even play in the city, and so on and so forth. Until these issues are addressed the cities growth will stand still. Despite the fact we have 3 hotels with casinos, new stadiums, and development occurring downtown. The traffic comes from the suburbs, and promptly leaves as soon as the show is over. Detroit has become a transient city.
Even though the city has more than 3 strikes against it. For some reason people like living in Detroit. Many have moved, but several hundred thousand have stayed behind. The most damming part of investing in Detroit, Mi is too many real estate investors are in Detroit. All investors want a good quality section 8 tenant, but there are only so many vouchers out there. The city now has a ton of nice rehabbed homes, but a smaller pool of high quality tenants to choose from. You really have to know marketing in Detroit if you want to survive. Because if you run out of cash, you run out of luck....
I have stumbled upon too many articles, and press releases ill advising investors about Detroit. They give you the impression that every rental property you buy will yield up to $1000.00 in rent. That is not a realistic estimate. If many Detroit residents could afford that, they would have moved long ago with the others. Check out the demographics of the city by visiting Detroit demographics there you can see what kind of income residents have.
By far the biggest drawback to owning rental property in Detroit are the taxes. Detroit has one of the highest millage rates in the nation. I am currently disputing an S.E.V(state equalized value) because the city raised the taxes so high it doubled the amount of the mortgage payments. I took the battle to the states tax tribunal, because Detroit rarely rectifies the problem. So once you factor in P.I.T.I. (principal,interest,taxes,and insurance) you may end up showing negative cash flow. And after you buy the property the taxes will go up again. Do the math before you make the offer on the property. The deal may not be as sweet as you thought.
Another major hurdle you have to overcome in investing in Detroit real estate is shrinkage. So many investors spend a lot of money rehabbing a house, and soon as the contractor leaves for the day the house is broken into. These burglars work very fast. They will steal every new window installed,kitchen cabinets,sinks,toilet,copper pipes,furnace, hot water tank,bathroom sink,vanity,security doors, and anything else bolted down. And they can accomplish this in a few hours.
Your material ends up on the black market, in someone else's garage sale, or in a hole in the wall mom and pop hardware store. The stolen material is then resold to a contractor, and for the most part they know its stolen goods. You may even end up buying back some of your own material if you don't pay close attention.
The neighborhood where your investment property is located is watching everything. Most of the time a neighbor has a hook up with someone, and lets them know about the vacant house full of treasures. Some of these thieves are crack addicts and will break in, and even try to steal the bathtub. One was so stupid, and petty they stole a vinyl downspout off one of my rental properties. This problem occurs all over the city. Even in some of the better neighborhoods.
Unfortunately this problem is so overwhelming the police does not have the budget or manpower to keep up. Last year in the summer Detroit had a huge rash of thieves stealing catalytic converters from cars. The thieves were getting several hundred dollars from steal yards for the catalytic converters. They stole my converter from my Kia Optima. When I filed a police report I learned the thieves even stole 35 in one night from the parking lot of the homeland security office. What was the police doing about it? Nothing except taking reports. They had more important violent crimes to deal with.
I stumbled upon a blog from active rain that mentions Detroit's latest attempt to suck money from property owners with boarding fees. There doing this because Detroit has a huge deficit, and they are desperate for money. For more info about Detroit's new vacant house rules
Flipping a house has become an extreme challenge in Detroit. Mortgage lenders have completely red-lined or blackballed the city. Its mainly racially motivated because Detroit has an 86% black population. Which they contribute to all the mortgage fraud,appraisal fraud,home inspection fraud, and violent crimes. To be successful you want to focus on lease options, private mortgages, and avoid land contracts or installment sales agreements.
Land contracts in Detroit are almost like renting a home. If the buyer defaults you have to evict them by going through the whole legal process. Detroit is known to have professional rent evaders. They will move into a rental property pay the first months rent, and try to live there for free as long as legally possible. Then move on to the next free home. Because Detroit's residents have the worst Fico scores in the State its hard for the average landlord to screen tenants. I developed my own unique techniques for weeding out bad tenants. I will include a whole chapter dedicated to "Ghetto Land-lording" in my new ebook "how to survive & be profitable in high risk Ghetto cities or neighborhoods.
I decided to write the book after reading dozens of real estate books, taking classes, and going to real estate seminars. No one was telling the whole story of investing in cities like Detroit. I don't believe any so called guru has the balls to tell you what's really going on. Especially since investing in High risk areas are very racially motivated. These people all want to be politically correct or are afraid of being labeled for telling the truth.
To avoid the ominous plague of burglary to your investment property follow these tips.
- Install security bars on the inside of the windows of the house, heavy security doors with motion detecting lights, and dummy surveillance cameras. This will stop the burglar cold after breaking out a window to get in. They will just move along to another list of targets they have.
- One investor I know places homeless people from suburban shelters in their properties. They don't use city residents because too many people in Detroit have poor ethics, and they don't care about others. A Detroit bum is more highly motivated to rob you blind.
- If your next door neighbor is decent ask if they will park their car in the driveway or in front of the house. Install lights on timers as well. This deception fools vagrants into believing its occupied.
- Avoid placing bandit signs or for rent signs out. This is a red flag to thieves that its open house to spoil, and plunder.
- Do not board up the doors & windows. This will attract squatters, vandals, and burglars. The city of Detroit has began fining property owners for not boarding up dilapidated houses. Its better to begin the rehab as soon as possible, and follow my tips above. If your property becomes home to squatters you have to go through the whole messy legal process to evict them, and that can sometimes be expensive.
The Detroit area told like never before.
For example one of Detroit's biggest issues is public transportation.
Many residents work in the suburbs. For those who don't drive riding
the bus to work can be tedious. I was without transportation once when
I was 21. I had to transfer from 6 different buses before I made it to
work. The whole trip took over 90 minutes. Several years ago Livonia
Michigan discontinued the SMART bus service in their city. Many people
considered this racially motivated. At the time Livonia, Mi was
considered to be the whitest city in the nation. It all started when
Wal-Mart wanted to open a store in Livonia. The city did not want it
there. The city councils view was Wal-Mart would bring crime, and peril
to the city. The truth is they didn't want ghetto "niggas" from Detroit
working there or shopping there.
Wal-Mart recently opened a super center in Dearborn, Mi a city next door to Detroit. Its the only super center in Michigan that's not open 24 hours. In fact it closes at 10:00 PM. They obviously don't want to make the same mistake K-Mart made in Detroit. K-Mart opened a Super K open 24 hours on Detroit's West Side several years ago. The store was very busy, but it had a huge amount of internal & external theft. A friend of mine worked as a manager there while it was open. He predicted the store wasn't going to be in business for long. When you have 65% of employees walking out the door with stolen merchandise every night your doomed to fail. It eventually closed, and Home Depot took over the building a short time after.
Hard Money Gets Soft on Real Estate Investors.
- They require higher Fico scores than before. Some as high as 700.
- They want full documentation oppose to traditionally going with stated income.
- Many are telling you where the house has to be located, and how its built.
- Some lenders want either 6 months of mortgage payments in a reserve bank account, or up to a 20k line of credit at your disposal.
- Even with a higher Fico score your still paying interests rates above 15%.
- They expect you to pay out of pocket for closing cost.
- Some lenders even want you to pay higher amounts for earnest money deposits.
- They have cut their LTV ratio as low as 40%.
- In my opinion these are not hard money lenders. This is what I call
new on the block rehab lenders very scared to lend money, and they have
to lend because money sitting still won't generate a profit.
Here is a list hard money/rehab lenders
Richman's Top Ten Do's and Don'ts to acquiring investment property in Detroit.
- Buy the neighborhood not the house. Some blocks are better than others, and many higher quality tenants would much rather live on the nicer block.
- Purchase a brick house oppose to frame. They will appraise higher, and many people prefer to live in a brick home over frame.
- If you buy a frame house install new vinyl siding on the house. Don't be cheap trying to paint it. The siding will also better insulate the house, lowering energy costs.
- Avoid buying a 2 bedroom house they are too hard to rent, and even harder to sell.
- Try to locate a home with at least 2 full bathrooms. A home with more than 1 bathroom will rent or sell significantly faster.
- Before buying with hard money make sure you can refinance the loan. You do not want to be stuck with a huge mortgage payment you can not get out.
- Look for discount real estate in near by cities like Southfield, Mi. Southfield has become a twin city of Detroit. Condos, houses, and townhouses are selling for dimes on the dollar.
- Be real careful hiring contractors to do work in your property. I have had equally bad experiences with contractors whether they are licensed or not. Ask other real estate investors who they have had success with.
- Never go into a vacant rundown house alone. Go with the contractor and agent. This way the contractor can give you a better cost analysis of what the repairs will cost. I would highly recommend you carry a gun while looking in these houses. You never know what someone in Detroit is using a vacant house for. Dog fights, drugs, prostitution, warehouse for stolen goods, and anything else you can imagine.
- To save time take a foreclosure bus tour. I met the founder of the company at a real estate workshop. The idea is spreading like a wildfire. Other cities have began doing it too. The benefit is there are usually other real estate professionals you can network with. Mortgage brokers, real estate agents, insurance agents, real estate lawyers, and many others.
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Bloomberg News Blames GM for Detroit's Blight.
Back in December of 2008 Bloomberg News wrote a press release blaming
GM for all of Detroit's Blight. Obviously the authors know nothing
about Detroit.Click here to read Bloomberg Blames GM. I replied back with the following email.
GM is not responsible for Detroit's blight. It's actually a combination of factors. Detroit started decaying after the massive white flight that took place during the 50's 60's, 70's, and early eighties. The city was left to a population full of disenfranchised blacks, most didn't have an interest in taking care of the city, and the few who did lacked the funding. Detroit is going to continue suffering until it is racially balanced again. Its over 86% black, and only 12% white.
Chicago and Atlanta both have more whites living in their cities than Detroit, and have the necessary industries for the city to thrive. I am a real estate investor in Detroit. I can tell you as fast as a home is rehabbed its broken into and all the new material is stolen. How can anyone financially try to keep up with this?
The city has no department stores, Wal-Mart's, Meijer's, Kroger's, Macys, JC Penny's, Sears, and etc. you have to travel to the suburbs to go to these places. What large US city do you know of that has similar living conditions? The businesses that are here are mostly owned and operated by Arabs. They own just about all the gas stations, liquor stores, grocery stores, and mobile phone stores. They saw an opportunity and made a fortune on the racial segregation that exists in Detroit.
A city that once accommodated almost 2 million people now only holds less than a million has a huge problem with dilapidated houses, commercial buildings, and vacant lots. The city doesn't have the financial means to tear them down. And even if they did, then what? The city would be reclaimed by nature, and look like a ghost town. I formed a group of investors last year to try and bring some of these franchised businesses in the city. I was told by every company's franchise representative I spoke to; that they have no interest in developing a market in the city of Detroit.
It's obvious these companies don't want to market towards a major black population. Although developers have spent millions renovating downtown they haven't spent any money trying to renovate the rest of the city. In fact that's the only time I see whites in Detroit is when I am traveling downtown. It has the largest police presence I have ever seen, and that's due to the fact whites hold a majority of the jobs located in downtown. And many of them live over an hour away from Detroit.
I have tried on several occasions to purchase commercial buildings in the city, but have been hindered by the city. They create so much red tape to cut through its almost as if they don't want the city to be revitalized. Taxes are too high in Detroit for businesses and property owners that's just another reason why Detroit continues to decline.
Let's take Southfield, MI as another example. Its heralded as being a twin city of Detroit. In the 2000 census it was more than 54% black, and as of today by my estimates its in the high 60's. In 2001 Southfield elected its first black female mayor. Property values have dropped dramatically since the mortgage bubble burst more than any other suburban city. I am in the process of buying a condo that was once worth 150k for only 10k (values similar to Detroit). As more and more blacks fled from Detroit to Southfield, more and more whites fled further out to other suburbs(Southfields white flight). I have noticed several business leaving the area, and some just closed their doors. Businesses that once had a diverse work force of people(from all different walks of life) have now been replaced solely by blacks. Auto Insurance rates are just as expensive in Southfield compared to Detroit .
The list just goes on and on. In 2 decades Southfield may be identical to Detroit unless someone steps in an puts the situation under control. My point is the metro Detroit area has too much racism. The end result of this lack of love & compassion is showing its ugly face in the form of economic decline. Until this unattractive issue is corrected things are only going to continue getting worse.
GM is having some impact on the cities economy, but Detroit was already in a Lurch long before The big 3's financial crisis took place.
Richman's recommendations for the city of Detroit's recovery.
- Large corporations should be investing in the city. Not the metro area suburbs.
- A local government that functions, and is not more than 20% corrupt. (we know corruption exist everywhere but too much of it hinders progress. Even Jesus had to deal with corruption with Judas stealing from the collection box.
- Whites moving back in the city. Too much wealth has left and needs to return.
- More small innovative businesses need to have a presence in the city.
- Special lending programs tailored to small business start ups whose home office will be located in Detroit.
- Attract foreign investors to invest in the cities economy.
- Legalize prostitution in the city. Detroit has a large amount of taxable income being loss to prostitution. Since the economy has taken a dive more women have turned to the oldest profession in the world to pay their bills. its legal in Canada, and they brought the casinos to Detroit to capture money that was going to Windsor. Since they have already legalized gambling they might as well take the next step.
- Massive tax cuts for businesses, and raise the local income tax 1%.
- Reform Detroit public schools. The administration is corrupt and incompetent.
- The state needs to use more of the funds generated by the lottery to fund Detroit public schools. The largest volume of ticket sales originates in the city, and Detroit receives the least amount of funding.
- Detroit loss millions of dollars of federal grant money when the population dropped under 1 million. This needs to be addressed.
- Initiate special neighborhood programs to help lower crime in the city.
- Detroit has some of the worst streets and roads in the state, they need repairing.
- Residents and suburban residents treat the city like a land fill. Detroit needs cleaning up.
- The city needs a recycling center, and should focus more on becoming green.