Real World Returns vs "Projected Returns" when Detroit Real Estate Investing

Perhaps my favorite topic. I receive countless calls from investors who have "run the numbers" and are convinced that they will make 30+% returns by investing in the actual City of Detroit (read my previous blog post about the difference between City of Detroit, and Metro Detroit). Generally, a hour long conversation ensues, and in the end the investor makes the decision to have us put their money into Suburban Rentals.

A few basic things to consider. Rent Income, Taxes, Insurance, Vacancies, City Fee's (rental registrations), and repairs. When most people look at these numbers, they do it in what I call, a vacuum. They don’t take the realities of the local area into account. The City of Detroit is a rough place. The vacancy rates are higher, the insurance is higher, the taxes are higher, rents are lower, and the damage………boy can I tell you stories about the damage. The average Detroit rental costs roughly 3-5K to repair when a tenant moves out. That number comes from the experience I have, doing over 100 Detroit properties. Generally a total repaint of the home is required, flooring needs to be replaced etc. That’s best case. Often, the mechanicals are missing, walls have damage, etc. And your insurance will not cover those repairs. In the suburbs, a turn over costs 500-1500 on average.

Now, in the suburbs, you receive more rental income. In Detroit, a typical three bed, 1 bath bungalow, will bring you 750.00. Same house in the suburb, 900.00

Insurance, if you can even find it, will run you 800-1000 in Detroit. Suburbs, 400-500.

Taxes on a typical 3 bed in Detroit, 2800-3200. In the suburbs, 1800-2100

Average Marketing time for a Vacant in Detroit, 90-120 days. In the Suburbs 7-21 Days.

Average time to evict in Detroit 90-120 days. In the Suburbs, 14-21 Days.

Start adding all of these factors together, and it quickly becomes evident, over a 5 year period, the Suburbs are a much better return on your dollar. And that’s not even taking into account one of the biggest factors. Capital Appreciation. In the “City of Detroit” you will see NO appreciation over 5 years. You may very well see depreciation. The suburbs are of course a different story. In my next blog, I’ll go into the population shift the city is seeing. But, in  the 1^st quarter of 2011 prices are UP 8-15% in the suburbs. And the number of available homes is down 30%. Those are clear indications, the bottom has been reached. And over 5 years, one can expect to see asset appreciation, as well as an extremely healthy Return on Investment.

Next we’ll cover the population shifts from the city to the suburbs. After that, we’ll go into why Real Estate is safer and more profitable to invest in, then Stocks, Bonds and Commodities