So you have some extra capital laying around and you’re thinking you want to start investing in real estate instead of letting that money sit in your bank account and earn 0.03% interest. I don’t blame you one bit, so be sure to stick around until the end, as I’ll touch on real estate investment tactics, real life scenarios and what’s been trending in the metro Detroit real estate market, let’s get to it.
There’s so many ways in today’s world to grow your wealth and I think people overcomplicate or overindulge themselves in all the different ways to do so, and with how overwhelming it is, it leaves people taking zero action, because at the end of the day, investments take a certain level of risk, and it really comes down to how much of a risk you’re willing to take. Maybe you’re thinking about your kids, a future vacation, or retirement and it just keeps you at this standstill. If that’s you it’s okay, because that’s how a lot of people are. Whether you’re an experienced investor or just now dipping your toes in it, I encourage you to stick around because I know you’ll be able to take something of value away from this.
WHERE’S THE HOUSING MARKET AT?
Before I hop into the specifics, I want to take a little time to outline where the housing market is, and where it’s headed from an investment standpoint. And even if you aren’t looking to invest, this is a good depiction of the market’s outlook going forward. Home prices are high, that is absolutely no secret, it doesn’t matter what state, city, county or township you’re in, the real estate prices over the last few years have grown to new highs we have never seen before. With that in mind, the first thought pertaining to a real estate investor’s perspective is that it’s a terrible time to be an investor, you’ll break even on your rents, whether short term or long term, and find yourself in a big money pit you won’t be able to claw your way out of. And I would have to disagree. I have several clients who have invested in short and long term rentals within the last few years and are still glad they did to this day, because it has created an abundance of cash flow that they have never seen in their investing careers. I will agree though, There most certainly is increased hardship in finding a deal in this market, whether it is on the market or off the market.
Most seasoned investors take into account the “cap rate” or capitalization rate of a commercial investment property among other things of course, which is a strategy to calculate the rate of return based on the net operating income from the property’s market value. Most real estate sources out there will tell you a 5-10% cap rate is most ideal, but the higher the percentage, the higher the level of risk, but also higher returns. Of course, this equation isn’t the “tell all” to whether or not it’s a good investment because there are still limitations, as this cap rate keeps in mind a stable income, unless you account for vacancies, your rate could definitely lack accuracy. The basic calculation for a cap rate is taking your required rate of return minus the expected growth rate which would equal your expected cash flow divided by the asset value. Without spending too much time on this, there’s several “rules of thumb” in the real estate investing space such as cap rate that have been sitting far “in the red” for lack of a better term, since home prices have increased at such an alarming rate, so of course, when referring to your investment spreadsheet, no deal looks to be like a good one, but in today’s housing market there are other factors to keep in mind.
I have been seeing quite a bit from my clients who have purchased investment properties over the last few years that several comparable homes have hit the market recently at insanely high prices, and the homes didn’t have any extra bells and whistles to support the price tag. I do of course believe the prices are high, but lately, homes have been getting marketed as investments and are being priced for what they could be instead of what they are, and I’ll unpack this a little too. In a market where you’re seeing rents from let’s say $1,000-$1,300 a month, these new listings are not utilizing these homes as comparables when they are pricing their homes. They are listing with the mentality that someone will come in and add $20-$30,000 to the place and rent it out for $1600-$1,800 a month.
So with that in mind, sellers are capitalizing on what could be, and understanding the deal these investors are truly getting. In the metro Detroit market, rents have been rising 8-10% year over year and sometimes as high as 15%, which is absolutely insane, when your typical rent increase is 3-5% during lease renewal to account for the higher costs to maintain the home, the taxes, insurance, etc.
I have a client who purchased a home in a market that most people wouldn’t even think twice about investing in, it’s not in or near a college town, there’s no popular landmarks, or full of attractions. it’s just not in an area you’d typically expect, but since the demand for housing is so incredibly high, my client was able to rent his single family investment for $400 more a month than he initially thought, and being a first time investor, that’s quite a decent amount of cash flow to be bringing home each month. At the end of the day, with the prices increasing as they have over the last few years and buyers being priced out of the market with the interest rates rising, this massive pool of buyers still needs to find a place to live even if they can’t purchase, so that’s where they turn to living in apartments, condos, or multifamily units.
If you want to get the first investment under your belt, simply take action. Whether you mortgage the property, take out a home equity line of credit on your current home or get funding from a private money lender, just getting started is the hardest part, and if you continue to just wait on the sidelines for the perfect time, it will never come. The saying is, The best time to buy is always 5 years ago.
METRO DETROIT INVESTING
As you may or may not know, Metro Detroit is becoming a premiere space for real estate investing. The job market is strengthening, and continues to be home to several fortune 500 firms’ headquarters. The population is continuing to grow at an exponential rate, and the rental demand is completely off the charts, since around 50% of the population rents. This isn’t Texas, Arizona, New York or Washington where your price points are in or near the millions, you have the ability to scoop up several income producing properties at a low price point. Single family homes are so affordable in the area, that the barrier for entry for a new real estate investor is almost invisible. People are moving to Michigan every single day because of the low cost of living, I see it, investors see it and they are ALWAYS able to attract new tenants for their properties without having the fear of an extended vacancy. Metro Detroit, even in this very appreciating market, is still considered highly undervalued.
I have several friends and connections I have made over the years who solely invest in the Hazel Park and Warren area where the average sale price as of late ranges from $160-$175,000. Taking a look at this graph that shows these two areas progression over the last 3 years, you can see it has climbed at a drastic rate from being around $100-$120k in 2019 to being nearly $200K in 2022, it’s clear there’s some opportunity in these areas. Some properties were purchased, painted and rented for several hundred dollars more a month than the mortgage payment, while others were bought well below market value and needed $15,000-$30,000 of repairs, which increased the rental rates quite a bit more.
HERE’S SOME TIPS FOR INVESTING
Here’s a few tips to keep in mind when investing in Metro Detroit real estate and this goes for most markets. Firstly, finding properties in your price range. These points might seem obvious, but understand that keeping things simple will pave the way for a successful investing career. Think about the legendary Warren Buffett for a moment, he throws money into an S & P 500 mutual fund regularly and it’s paved the way for the inhumane net worth he has today, just by keeping it simple. The same goes for real estate as well. Understand how you’re going to finance the property, is it a mortgage, HELOC, private money lender or all cash? Are you looking to earn the highest profits possible in the Metro Detroit area? Awesome! Then look for the highest rent neighborhoods and understand you’ll have to pay more to earn more. Are you going to be hands on or hands off with your investment property?
Understand the pros and cons of utilizing a property management company, and be sure to crunch their fees into your numbers to see if you come out profiting enough for your needs. Realize that at a glance you may be making less on paper paying someone else to handle the leg work, but it frees up your time to be out there looking for more real estate deals which truly is a priceless activity. You can drown yourself looking at properties, drawing up the deal in the backend to calculate your Return on investment based on necessary repairs and comparables, which is a crucial money making activity which will allow you to jump on a deal as soon as possible, without having the excuse that you had to drive an hour to your investment property and change the light bulb.
Take time to do comparative market analysis on different rentals throughout the markets and decide which properties have higher rent potential. Study City and township plans to see how their 5, 10, and 15 year plans will positively affect the market you’re interested to invest in, and see where the dollars seem to be invested most. It never hurts to also get a real estate professional on your side to provide you with on and off market deals, because they are free for you to utilize, and most likely have several established relationships, and they may be able to take a load off your shoulders as you go through your personal underwriting process on a deal.
Understand that there are several ways to earn that title of real estate investor. Some investors utilize the BRRRR method, where they buy, rehab, rent, refinance, and then repeat that method over and over to continue to grow their rental portfolio, and that can be in the form of short and long term renting. Maybe you want to rent to tenants for 1-2 years, or maybe create an airbnb and offer several amenities that you can upcharge such as a pontoon on a lake, or maybe you simply just want to fix the property up and sell it. There are so many different routes to take for real estate investing. Find something you’re uncomfortably comfortable with and jump in with both feet. By no means, am I saying not to do your research, but be honest with yourself when you’re in that gray area of knowing enough and not pulling the trigger on an investment.
For those of you that are thinking about investing in real estate now or in the near future, what’s been the biggest thing holding you back? Drop your reasons in the comments.
Andrew McManamon is a licensed Real Estate Professional in the great state of Michigan. His philosophy to put people first has paved the way to his extraordinary real estate career. Born and raised in Brighton, MI, Andrew acquired a bachelors degree in business management and marketing from Cleary University in Howell, MI. The combination of his experience and education allows him to take a strategic approach towards every transaction and help his clients make more informed and confident decisions.