Multiple media outlets have named Detroit “the Comeback City.” With the recovery of the economy in full swing now is the time to invest in Detroit. Several key factors make investing in the Detroit rental market a wise investment. Some of these factors include a low entry requirement, high rent to value, economic growth, and a large tenant pool. Recently a surge in private capital investment has also contributed to a surge in the economic comeback of the City of Detroit that supports the smart money landing there.
LOW ENTRANCE REQUIREMENT
The Detroit Metro housing market is extremely diverse. In a market where homes come in such a large range of prices and actual values, it is possible to enter the housing market for less. Compared to markets where the homes are consistently priced near their actual value Detroit is a great market for those who want to turn a small amount of initial investment capital into cash flow income. According to Zillow Detroit home values have increased 22.7% over the past year and they will rise 7.0% within the year. Home values are increasing in Detroit but are still very low compared to the rest of the country, the entry price to a single family home is less than $60,000 in most cases. This opens the door for investors to own cash flowing properties where they otherwise would be out of luck in their local market.
HIGH RENT TO VALUE RATIO
While home prices have fluctuated with market pressures rent has stayed steady in Detroit. The crash saw home prices plummet and we have seen these homes regain value over the last 10 years. While home values have fluctuated rent rates have stayed constant. According to BiggerPockets’ annual real-estate market review, “Detroit has the second highest rent-to-value ratio in the country at just over 8.5%”. The rent to value ratio is calculated by dividing the gross yearly rent by the home’s sales price. For example, a home that rents for $800/month and can be purchased for $60,000 would have a rent to value ratio of 16%. This means that investment properties in Detroit have enormous potential to pay off the initial investment quickly and turn into profit streams. The cost of living in Detroit is also very low. According to the Council for Community and Economic Research (C2ER), the Detroit region’s cost of living is 4.7 percent below the national average. Compared with other major metropolitan areas throughout the United States, the Detroit region is a very affordable place to live.
LARGE TENANT POOL
The housing market in Detroit was hit especially hard in 2008 by the real estate market crash and when combined with the crash of Detroit’s auto industry a perfect storm was created. As homeowners lost value in their homes and their ability to pay the mortgage a large pool of tenants and new rental properties were created. Now jobs are returning to Detroit and families are back to work looking for affordable quality housing. Recently the population in Detroit began growing and there are now more renters than homeowners creating a high demand for rental units.
Detroit is in the top 10 nationwide in construction job growth (Associated General Contractors of America, May 2017). Investment in downtown Detroit by several private and corporate investors has been increasing for several years with small and large scale developments being announced regularly. Businessman and founder of mortgage giant Quicken Loans Dan Gilbert announced in September 2017 details of a massive $2.1 billion plan for four downtown Detroit developments that could create as many as 24,000 temporary and permanent jobs. In summer 2018, construction of the new Gordie Howe International Trade Crossing begins. This bridge will provide another link to the import/export of goods to and from Canada creating 10,000 new construction jobs. Also in 2018 several hotel and office building development projects will begin alongside an increase of greenspace in the downtown area. All of Detroit’s professional sports teams are now based in the “Arena District” downtown. In the Arena District all of Detroit’s new professional sports stadiums are within walking distance of each other and are connected via the new QLine streetcar system which began operating in 2017. These downtown investments are creating jobs and opportunities that are spreading throughout the entire metro Detroit area.
We all know the auto industry’s “Big 3” corporate headquarters are located in Detroit alongside 9 other Fortune 500 Companies. There are also several other large corporations that also have headquarters or major office centers in Detroit. Some of these companies are Quicken Loans, Penske Automotive, Ally Financial, Little Caesars, HP, Ernst & Young, OnStar and Blue Cross Blue Shield. This list continues to grow as young technology companies are finding a large workforce and vacant office space abundant in Detroit.
Here are additional links to articles of interest:
Detroit State of the Region 2017-18 Updated and detailed report on economic progress and indicators in the Detroit Region
12 Development Projects Set to Transform Detroit A list of development projects in and around downtown Detroit set to begin in 2018
How JP Morgan Chase is Investing in Detroit An example of how neighborhood walking communities are developing in Detroit