A major aspect of the Detroit real estate market revolves around investment and income properties.
Following the market crash, local and outside investors began to hunt out bargains on single and multi-family homes, as well as condos and townhomes, in areas that had a draw for the rental crowd. Whether it be a flip project or one they intend to use as an income property, investors have become an important part of the city’s real estate boom.
If you are contemplating joining the ranks of those who have invested before you, it’s important to have all of the facts, good and bad, laid out in front of you and taken into consideration.
Things to Consider
One of the first things you need to think about is the capital you have available for your investment. There’s no easy way to tiptoe around the issue – buying an investment property takes money!
If you are looking at buying a home in need of rehab, always know that the “best estimate” rehab costs will most always pave way to some hidden and/or unexpected costs. I currently have a multi-family property listed at $39,000, but it is one that will likely need $200,000 worth of work to transform it into an ideal rental property.
Make sure that you have a contractor that you know and trust if you will not be the one doing the rehab/reno work, and never be afraid to ask for detailed quotes before work begins.
You will also need to become knowledgeable on property valuation and assessments, and if buying in Detroit, have an understanding of the different types of NEZ tax abatements that are available or applicable to your purchase. You could also buy a property that as an expiring tax abatement, which could mean that there will come adjustments to the taxable value that will ultimately impact your ROI.
Property taxes are a necessary evil that all owners, individual and investors alike, must deal with regularly.
Remember, routine maintenance and costs for repairs can prove costly, and becoming a landlord is not for the faint of heart. Always be ready for the worst case scenario, and make sure your rainy day fund is prepared as well.
The 1% Rule
You will want to familiarize yourself with the 1% and 2% rules in real estate investing.
The 1% rule is used to determine if the monthly rent earned from an investment property will exceed the property’s monthly mortgage payment. Basically, it is there to help make sure the rental income earned from said property is more than or at least equal to the mortgage payment.
The 1% rule formula: 100 x Monthly Rent = Maximum purchase price
You should be multiplying the purchase price of the property plus any repairs by 1%, which gives you the baseline rent that needs to be charged. When you compare this to your potential monthly mortgage you can quickly understand a property’s monthly cash flow.
Remember: this is just a fast and simple estimate, and one that doesn’t take into account costs like insurance, taxes and maintenance.
While the 2% rule is similar to the 1% rule, it differs in that it finds a rental property to be a good investment if the money from rent each month is equal to or higher than 2% of the purchase price. This rule is an ideal one for cash flow investors who want to see a property’s potential to be profitable.
The 2% rule formula: 200 x Monthly Rent = Maximum purchase price
These rules can be used together – once you’ve figured the 1% aspect, then apply the 2%.
Examples at The Park Shelton
Currently, The Park Shelton can see rental rates ranging from $1,200 per month to upwards of $2,500 per month depending on the size and location of the unit.
Average rental rates for studios range from $1,200 to $1,400 per month, which includes all utilities (with the exception of cable and internet) due to the HOA fees paid by owners. Owners also pay an additional monthly fee if their property is being used as a rental. One bedroom units see rental rates from $1,400 to $1,800 per month. Two bedroom condos at The Park Shelton can range from $2,000 to $2,500 per month.
HOA fees and taxes are a part of the costs of owning an income condominium property, and must be taken into consideration by buyers. At The Park Shelton, the monthly HOA varies by unit size. For a studio that is 574 sq ft, much like my listing 1223, the rate is currently $352/month. For a one bedroom that is 644 sq ft, like 401 the HOA is $386/month. A larger 819 sq ft one bedroom unit, like 431, comes in at $438/month.
Here are some more examples of HOA by various square footage based off of my current listings in the building:
- 607: 1 bedroom, 892 sq ft, $522/month
- 921: 1 bedroom, 910 sq ft, $523/month
- 826: 1 bedroom, 988 sq ft, $592/month
- 204: 2 bedroom, 1,660 sq ft, $953/month
Important Formulas for Investors
According to Michigan Real Estate Principles and Practices (6th edition), the primary method used to estimate present value of properties that produce income is the Income Approach, or appraisal by Capitalization.
There are many different types of properties included in this category, such as:
- Apartment complexes
- Single-family rental homes
- Mobile home parks
- Office buildings
- Shopping malls
- Parking lots
- Leased industrial plants
- Any individual properties occupied by commercial tenants
The value of the property is estimated by converting the net annual income into an indication of present value by application of a capitalization rate. The capitalization formula is: Value x Capitalization Rate = Annual Net Income
The terms Gross Rent Multiplier (GRM) and Gross Income Multiplier (GIM) will be two that you’ll want to become familiar with
GRM is a factor calculated from comparing sales of income-producing property and the gross rental income of said properties for one-to four-unit residential properties. You can do this by dividing the price for which a property sold by the monthly rental income.
GIM is the same factor, but applied to all other properties larger than one- to four-unit residential properties, including larger residential, commercial and industrial properties. This can be calculated with comparable income-producing properties that have sold recently.
Interested in learning more about what it takes to be a successful investor in the city? Feel free to contact me and we can get the discussion started!