First, let me suggest you go to the Investing Lessons section of our web site. (http://www.detroitrealestateinvesting.com/investing-lessons/)
You’ll find several video’s there about investing, projects, and what to expect when buying a rental. You can follow us on twitter, by clicking follow on the right side of this page. I often send out pictures, and updates about what we’re working on during the day.
Also, be sure to look at the About Us section (http://www.detroitrealestateinvesting.com/about-us/), so you can see how and what we’re doing, is truly different from any other company in the area. Unlike virtually every other company offering to assist you in building a portfolio, we do not sell Turn Key houses. We’re a fully licensed and insured Real Estate Brokerage in the State of Michigan. The only fee’s we collect are from the Sellers in the form of Standard Real Estate Commissions, and a standard commission for on going Property Management (view more on our management services at www.MetroDetroitRentals.com).
Companies selling “Turn Key” properties will not have your best interest at heart. They are merely looking for the quickest profit. We partner with all our clients, and will only put a client in a house we ourselves would purchase. We also offer guarantee’s to further mitigate any potential risks.
Why Detroit? Well, let me start by saying, we never purchase homes in the City of Detroit. The vast majority of people in area will tell people they live in Detroit. But the reality is 60% of Metro Detroit’s population lies outside of the city limits of Detroit. Oakland, Macomb, Monroe, Wayne, Washtenaw and of Lenawee Counties all make up Metro Detroit. As the “City of Detroit” as we often refer to it, suffers from unique issues, the Suburbs are quiet solid and do not suffer from the same issues as the city proper does.
We purchase in “bedroom communities” all over the Metro Area. While we do accept Section 8 Tenants that is by choice, not necessity. We receive just as many “cash” applications from working families, as we do from government assisted tenants.
Also, national studies have shown that the pool of renters is increasing, and should continue to do so for several years. Why is this? Several Factors.
Renting is Easier then Owning- There is 76 Million aging baby boomers, and an estimated 44 Million people in the generation that follows them. We’ve seen this play out in our own business. As people age and the kids move out, it becomes harder for them to maintain their house. However, they know the area, and don’t want to leave their neighbors. So they come to us in search of a rental property. Renting allows them to stay in the area they raised their children in, and gives them the advantage of not having to do the upkeep and repairs on the property. As part of the management service we offer, tenants can contract our services for maintenance they are required to do in their lease, such as snow removal and lawn care.
Mortgage Laws have Changed- It used to be, you could purchase a property for no money down, or at worst 10%. Now lenders are requiring a 20% down payment. This is pricing several people out of the market. Furthermore, federal guidelines have been instituted that mandate the fee’s a mortgage broker can charge for originating a loan. These new fee’s are structured, so that a broker actually loses money if they write a mortgage for less than 40,000.00 Take into consideration the minimum 20% down, and the smallest loan most people can receive, is 48,000.00. This is why we target certain price points in the market. People can no longer afford to finance “starter homes”. Creating a gap in the market place. People starting out are now forced to put off buying their first home for a number of years. However, starting a family in an apartment is not as attractive an option as a single family home is. Thus, young families are by far the largest segment of the population we supply homes too. Not only do they receive the experience of starting life in their first “Home”, they get to do so with the safety net of a maintenance crew.
Underwater on current home- Just because someone has made the choice to let their house go to foreclosure or short sale does not mean they are unable to pay their bills. The market crash left many people drastically underwater on their mortgages. In past years, the typical foreclosure was due to people unable to pay their notes due to job loss or other financial hardship. However, as the market decline continued, we began to notice the profile of the typical person to default on a loan changed. It became a financial decision made out of choice, not force. Many people have taken stock of their lives and financial situations, and realize that they can save thousands of dollars a year by walking away from their property, and renting a house in the same area. In many cases, they save hundreds of dollars a month. In the first 2 quarters of 2011, our office had 42 people come to us looking to not only rent a house from us, but also contract us to handle the Short Sale of their current properties. They were not walking away because they couldn’t pay the note. They walked away because they had come to the conclusion that the amount of the note they owed, far outweighed the value of the asset. Therefore it was in the best interest to put their money to work in other ways, rather than putting good money after bad. This leads me to my next point
Real Estate is often sold as the “single largest investment a person will ever make”. And this is true! It IS the largest investment they will make, but often, it’s the worst performing. Most people’s largest asset is their personal residence. However, even without the recent price collapse of housing, a person’s primary residence is not a good investment. This is why the government offers as many tax credits as they do for homeowners. The average person finances 80% of their property. When you signed your loan papers, there was a form showing the total payments. The average 225,000.00, on a 30 year mortgage, at today’s rates, of 5%, will really cost a person $483,139.46. Consider property taxes, repairs, etc, and it becomes clear, that a primary residence does not actually increase a person’s worth. Money is a tool. If it’s not working for you, it’s useless.
Now let’s look at rental properties. We have been fortunate to assist investors with more than 150 new homes in the last 3 years. The typical home is 3 Bedrooms, Living room, Dining room, Kitchen, with a Basement. Purchase price for this type of home is 23,000.00. The average rehab is 7000.00. Bringing the total initial investment to just 32,500.00. Of course, some projects are slightly less expensive, some more. But over the years, we’ve seen these numbers are a very solid bench mark.
The least expensive rental we have is 850.00, and rates are on the rise. At 850.00 per year, a property will Gross 10,200.00. Property taxes average 2100.00 per year. Property insurance, 500.00. Management fee’s 1020.00, and as a safety net, we set aside 1000.00 per year for repairs and maintenance. Bringing the average yearly net to 5580.00 or an 18.6% return on investment.
Those are just the rough numbers. The market has already begun to show signs of improvement. While prices overall are obviously still declining, the bottom of the market has already started to rebound. We’ve seen a 10-15% increase in prices at the low end of the market for both Macomb and Oakland County.
Make sure to watch our instructional video on the difference between Scrap, Cash and Mortgage Values. I explain the different ways homes are valued, depending on their use, and the purpose of the valuation.
When we consider the outlook for the market, it is reasonable to expect all real estate, especially in the price point we purchase properties at, to appreciate over the next several years. When adding capital appreciation to the annual return on investment, there is no other investment that out performs real estate.
Insurability is also a factor. Investors, who choose to place their capital in almost every other form of investment, do so without any insurance or recourse. Whether investing in Stocks, Gold, Commodities, or even a small business, there is no insurance policy or security provided. Real Estate however, does come with some assurances. First and most obvious, is Property Insurance. What happened to all of the people who owned Enron stocks? Or General Motors? Or any other company that was considered “Blue Chip”. When the company collapsed, their investments were wiped out. With property insurance, your initial capital is secure. If your investment suffers a fire, flood, or other catastrophic damage, you will receive your initial capital back! Not only that, but thanks to “replacement value” in most cases you will actually show a profit!
In addition to property insurance, we hold a security deposit on all leases. As you’ll see in other sections of our site, we only purchase properties in popular suburban neighborhoods. This not only ensures a strong rental market, it gives us the advantage of a strong court system. In the even we do have a bad tenant, we are often able to evict the tenant, and place a new tenant, in the very same month. Meaning the security deposit covers the lost month’s rent, further insuring your returns.
Tax benefits. If considering investing in any type of real estate, consult a CPA familiar with property investments. They will be able to direct you to all the tax advantages available to landlords and multiple property owners. Some of the benefits include, Depreciation (you can depreciate your investment over 27.5 years. Are you allowed to take a deduction for the Microsoft Stock you purchased?), You can deduct travel expenses, Repairs, Legal Fee’s, Insurance, Home Office, etc. If structured correctly, most investors pay much less (if any tax) then they would with, Stocks, Bonds, Commodities, etc.
And finally, one of the biggest advantages, is a principle called “Compounding Returns”
What Does Compound Return Mean?
The rate of return, usually expressed as a percentage, which represents the cumulative effect that a series of gains or losses have on an original amount of capital over a period of time. Compound returns are usually expressed in annual terms, meaning that the percentage number that is reported represents the annualized rate at which capital has compounded over time.
In plain English, an investor with 10 homes will return on average, 55,800.00. Or enough to add two houses to their portfolio. The following year, they would earn 66,960.00 and would be able to add 3 houses. The following year 83,700.00 etc etc. As the profits are invested back into the portfolio, the return rate quickly moves from 18-20% in the first year, to 23% in rear two, 28% in year three, etc. All without any additional capital infusion. Again, this rapid rate of compounding returns cannot be achieved with a CD, Commodity, and Stock etc.
If you have questions, you’re welcome to contact Bill by email at William.email@example.com or give us a call at the office 313-405-7368
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