“You will never find a more wretched hive of scum and villainy.”
~ Obi Wan Kenobi
I’ll bet you thought that old Obi Wan was talking about Mos Eisley, right?
Well, he wasn’t. It’s a little known fact that when he said that, he was actually referring to real estate investing in the City of Detroit.
You wouldn’t think so if you’ve been here.
Not only have I been to Detroit, I live here. Believe me, when I say that the parts of Detroit that I’ll actually venture into make the Mos Eisley Cantina look like a day care center.
And that’s on a good day.
Do not Enter – for Real
This is me being completely serious. As a heart attack. Stay away – for your own physical safety and financial well-being.
Trust me on this. There are areas on the East Side that the cops won’t even go in to.
I bring this up because of the brain donors at CNNMoney.com.
Once again, one of their ilk stumbled upon a mere speck of information and then wildly extrapolated that microscopic speck into what they consider actionable intelligence.
But in fact, it ended up neither actionable nor intelligent. But because they’re CNN, they didn’t notice.
The piece I’m referring to is titled: “Want to make money as a landlord? Try Detroit.”
It’s so riddled with inaccuracies that it’s hazardous to your wallet to even read it.
So, let me save you the trouble and give you a run-down of what the crack-smoking author actually came up with:
1. Investors who buy homes in the metro area can expect a 30% gross annual return from rents. That’s triple the national average of 10%.
WRONG. You don’t get 30% in the “metro area,” because the metro area includes the suburbs. You get 30% in a few neighborhoods in Detroit. Neighborhoods where you need to carry a Glock and wear body armor when you visit your rental properties because you can’t get anyone else to manage them. You EARN your 30% on the mean streets of Detroit. And you hope you live to enjoy it.
2. Homes are easy to rent. In and around the city’s central business district, the occupancy rate has hit 98%.
Not so much. The City of Detroit is 142-square miles. That’s almost the size of 69,000 football fields. So it’s “big.” The city’s “central business district” is a few blocks wide by a few blocks deep. Maybe the size of 20 football fields. That translates into “tiny.”
Occupancy is off the charts good in the tiny “central business district.” But much of the rest of the 142-square miles is section 8, empty lots and burned out neighborhoods. I know former rental-house owners that simply walked away from their Detroit rentals because they couldn’t keep them rented.
3. While many of the older homes in Detroit are well-crafted, brick buildings with hardwood floors and leaded glass windows, many lack some of the essentials — like plumbing and heating.
Translation – Any home that has been vacant for three days and not secured is going to be gutted by thugs and missing all plumbing, electrical wires, furnace and hot water heater. So you can automatically add $5k to your rehab right off the bat if you have the cajones to do a rehab here.
And those leaded glass windows? While they may look pretty, they’re the worst possible windows to have in the winter as they offer no insulation whatsoever. Your tenants will scream at you to replace them.
4. “We’ve got some steals here,” said a real estate agent and immediate past president of the Detroit Association of Realtors. “There’s a six-bedroom, 6,000-square-foot home in a historic district selling for $65,000.”
Really? Leave it to a real estate agent to put a shine on the turd. Yes, it’s $65k, but it’s next to a war zone. The nearest grocery store is seven miles away. The nearest church is four miles away. You can’t venture out on a walk with your family more than two blocks from your house without the real risk of getting jumped, and there’s not a single private school anywhere nearby to send your kids to because you’re certainly not going to send them to the Detroit Public Schools. But, oh sure, it’s a steal!
5. Investors are flocking to Detroit and the city has become one of the top places for Chinese speculators.
It’s great that the Chinese are flocking here, but they’re probably going to get their butts kicked dealing with the “scum and villainy” who are selling turn- key properties to foreign investors.
I’m working with some Japanese investors who are trying to salvage the rental houses that they bought as turn-key investments several years ago when the Brits, Aussies, and Japanese “flocked” here.
They bought homes in some of the worst areas of the city for an average sales price of $50k, when the actual value was around $25k. They got their butts handed to them because they believed what they were told and didn’t verify anything. And now the Chinese are following in their footsteps about to repeat their mistakes.
The Bottom Line
Listen – the point of this piece is not to run down the city of Detroit. It does a fine job doing that to itself.
My point is that you need to watch what you read from these national “authors.” They pick up on some interesting point, they talk to a couple of people about it, then they write about it like they’re experts, but they never spend the time to really understand it.
And that makes them dangerous the result of which is serious misinformation.