Detroit is both the love child and butt of many real estate investing jokes. Ever since the city endured scandal, bankruptcy, and $1 houses, it’s been on everyone’s mind – and not always in a good way. But Detroit has endured and now investors are wondering if 2020 is the right time to invest in Detroit, MI real estate.
Midwest Real Estate Investing
Detroit is located in the American Midwest, where many investors go in search of healthy returns and solid cash flow. And rightfully so, the midwest is home to unpretentious cities that have excellent affordability. The midwest is also known as “flyover” country. This phrase insists that there isn’t much interesting or of note between the east and west coast. Ironically the lack of drama and attention is exactly what makes this region ideal for real estate investment.
The midwest comprises Ohio, Illinois, Indiana, Michigan, Wisconsin, and North & South Dakota. These states all have affordable home values, strong rent rates, and steady, consistent appreciation over time. No bells, no whistles, just boring rent payments you can take to the bank month in and month out.
Investing in Michigan Real Estate
Michigan is a landlord-friendly state, which is good news for real estate investors as there are many markets to choose from. The largest cities in Michigan are metro Detroit, Grand Rapids, Lansing, and Flint.
Michigan is actively working to shake its rust belt-turned-car hub persona as the state’s economic development office is pushing to diversify the industries prevalent in the state. Sectors on the state’s radar include medical devices, cybersecurity, healthcare, defense, aerospace, and composite materials. Each new sector stands to benefit Michigan as the USA population ages and commerce become increasingly more reliant on technology to keep us connected.
What makes Michigan particularly attractive for real estate investment is that the state’s cost of living is 10% below the national average. What’s more, the population has an intelligent workforce of more than 130,000 engineers and 250,000 skilled workers. Lost cost of living, highly skilled population and active economic development means large pools of qualified tenants with steady employment prospects.
Why You Should Invest in Detroit Real Estate in 2020
Detroit, Michigan, also known as the “Motor City” is a city with character, charm and steady cash flow. The city has a storied past and in some ways a storied present also. The Rise of the famed Motor City and its real estate developments along the way has been expertly detailed by Stanford University.
Today, Detroit is the largest city in Michigan and 24th in the United States with a population of just over 667,000. Detroit’s population has been on the decline for the past 60 years, but it finally appears to be leveling off, as the 2019 values showed a declining at a rate of -0.40% annually (2018 Net negative migration of -1,630). This is a -6.52% decrease from the 2010 census, where the population was more than 713,000 residents.
Still, the city that sprawls over 143 miles has more to the story. It isn’t entirely clear if people are merely leaving the city of Detroit for the suburbs (remaining within the Detroit-Ann Arbor MSA) or leaving the area completely. In any event, the 667,000+ residents balloon to over 4.3M for the Detroit MSA, and the Detroit area has a GDP of over $203 Billion.
Detroit Makes for Great Investment Property
Overall, Detroit residents are not struggling. The median household income is $46,755 with median home prices at $129,000 according to Forbes. Meanwhile with median rental costs is about $798 per month, and the city’s cost of living rated 11% below the national average, Detroit is an attractive market for renters and property owners alike.
Interestingly, Detroit seems to be aware of how much of an anomaly it is. The world-class city openly benchmarks it’s positive attributes to metros of Seattle, San Francisco, Chicago, Washington DC, and Brooklyn. The eclectic, edgy independence that is so quintessentially Detroit makes these cities worthy comparables.
Detroit has strong employment and job growth, leading the region with major employers like the University of Michigan, Ford, Chrysler, GM, and Quicken Loans. According to the Bureau of Labor Statistics, trade, transportation, and utilities added the largest number of jobs from March 2019 to March 2020, up 4,500 in the Detroit area. Furthermore, the local area employment in the trade, transportation, and utilities supersector increased 1.2 percent over the year. The growth is a promising addition to the healthcare, manufacturing, and retail industries. It should be noted that this figure outpaces the national employment figure of 0.4 percent.
Owning rental property in Detroit, Michigan
Not only is Detroit a bustling metropolis but it also delivers consistent cash flow. Business Insider ranked Detroit the 8th best place to buy a rental property. Mostly because a property is so affordable for renters and homeowners alike. The affordable housing crisis highlights the disparity between housing prices and standard wages. Detroit stands out as a major city where middle-class families only need to earn $27,000 per year to afford their own home. Detroit is one of the most affordable cities in the country. As stated in the article “ The other most affordable cities in the country were Rochester, New York; Dayton, Ohio; Buffalo, New York; and Pittsburgh, Pennsylvania.”
According to Redfin, the key benefit of living in places like Detroit is the cost of living. “People who live in places like Detroit, Pittsburgh, and Cleveland tend to earn lower salaries than people in expensive coastal areas, but in many ways, the midwesterners’ quality of life is better,” Redfin chief economist Daryl Fairweather said. “Even though they may make less money, it’s easier to purchase a home and build equity while providing for a family.”
The story rings true for tenants in Detroit as well. Detroit residents need to work the least of the other 25 top cities to afford their rent. This is good news for landlords and welcome relief considering how renters in other markets struggle to pay rent based on prevailing wages. The SmartAsset study found that to afford an average monthly rent of $836, a worker would need to work 41.6 hours per week if they earned an hourly wage of $20.25. This is one time where coming in the last place means you are a winner. (embed image from SmartAsset) Of the top 25 largest metros, Detroit ranked #25 – indicating that it was the least expensive of the major markets. It came as no surprise that coastal and high flying cities like New York and Austin TX were some of the most expensive.
The prices in Detroit are so sound, in fact that it is poised for growth. Rental property in the Detroit MSA is still a value play as Detroit saw a significant increase in 2019. Detroit saw the 10th highest rent increase across the USA as rents increased by more than 13.2%. And that’s not all, the entire state benefitted from an upswing with an increase of 15.6%. The home values themselves rose 20% year-over-year. The largest increase since 1997. This is not only significant from an appreciation standpoint but pivotal for the city as it also marks three years of growth after 17 consecutive years of declining home values.
What You Need to Know about Investing in Detroit Real Estate
Here’s the summary: Properties are undervalued and appreciating quickly. Which means the window of extreme opportunity will not last forever.
The market is largely stable, too. On-the-ground data suggests a strong Detroit rental market that produces stable returns with healthy average rents above $1000 and consistent year over year increases, all signs are positive. The remaining opportunity is likely a result of a severe shortage of quality housing in the area even with population decline, COVID-19, and other headwinds.
Verdict: Is Investing in Detroit good or bad? And Should You Invest in Detroit if you live out of state?
Detroit has the second-highest rent-to-value ratio in the country at just over 8.5%. This means that investment properties in Detroit have enormous potential to pay off the initial investment quickly and turn into profit streams. Like most things, the important thing to remember is to do your research. Being a Detroit property owner is not for the faint of heart. The city does have strict regulations that landlords have to follow, including annual rental property registration.
You can still buy homes within the city for less than $40,000 and with a vibrant local economy, there is much to like about the Motor City. Investors on a budget will find lots of options to purchase property as well. Because the home values are low, traditional mortgage financing is few and far between. Homeowners and investors both seek alternative financing options from land contracts to auctions and buying in cash.
Detroit is an excellent choice to invest in real estate as long as you have a solid plan in place before you get started. To brainstorm ideas and have a community of other investors supporting you on your journey, consider joining the HJV Membership Community.