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The city located in the north-west of the United States of America guarantees good returns: supply, prices and areas which are convenient to obtain higher returns.
In the1950’s, Detroit, located in the north-west of the United States of America, State of Michigan, was the center of the automobile industry and the fourth most populated city in the country. But Asia and its cheap manpower emerged. The automobile companies were tempted and they were soon migrating and, therefore, forcing the migration of more than a half of almost 2 million inhabitants in the city. As a consequence of this demographic impact, thousands of homes were abandoned. A few more than 60 years were enough for Detroit to hit rock bottom. In 2013 it was declared bankrupt and the real estate market reached a limit. That was the moment in which top celebrities of the American business world started to get involved, such as Dan Gilbert and the Ilitch family who invested more than US$2000 million each and designed an economic plan so that Detroit could become a thriving city again. And they are succeeding: the restructuring of the automotive industry brought by Ford, General Motors and Fiat, among other giants, and the development of the technological sector, with the arrival of Google and Amazon, are attracting investments of more than US$9000 million and a key element for the real estate market: new inhabitants, which reduced a 26% unemployment rate to less than 10. With the crisis, only 500,000 inhabitants had remained in Detroit; today, they are almost 1.3 million and it is estimated that by 2020 it will be higher than 3 million.
Where opportunities can be grasped. “The reactivation is not temporary, it is confirmed. Those who invested huge amounts of money wouldn´t be working on a long term basis if they were not confident that the market will succeed”, as pointed out by Marcelo Schamy, CEO of Invest Detroit Group, a real estate investments company that has been working in the city since 2013. This revival has been driven by the development of more than one hundred real estate projects in Downtown and Midtown, the two main pillars of the recovery of the city. However, the most thriving business are single-family housing units located in the suburbs of the city
The zones. Detroit is divided into two big sectors, the westside and the eastside, where residential middle-class homes prevail. “The best business opportunities are today in these mass products”, as expressed by Mariano Capellino, founder and CEO of Inmsa, which has been operating the Detroit market for more than three years. “There is a wide offer of residential and commercial assets to be refurbished and possibly to be acquired at banks and auctions with important discounts, under the market value”, Capellino says. The westside is optimal for investment purposes; 60 percent of the surface is in good condition and most of the neighborhoods are organized. In the Eastside, instead, there is a high investment risk involved as more than 90 percent is deteriorated, with destroyed houses and high vandalism rate. In the westside, it is possible to acquire a 90-120 sq. m. property in good condition and without refurbishment at about US$40,000, approximately US$400/square meter; while a fully refurbished unit is about US$55,000 and US$65,000, approximately US$ 500/square meter. The location and the condition of the property defines the final price.
Profitability and rentals. The average rental price for this type of single-family units is between US$750 and US$ 850 per month. Less than US$ 600 is paid in more dangerous zones and for units quite deteriorated. The experts affirm that the annual net profitability can easily achieve 10 percent. “Rental demand is very high, with 5 or 6 percent yield” as detailed by Schamy.
Capitalization. Real property has started the recovery process at an annual 10% rate pace and there are several zones which have a long way to go after a decline of more than 70 percent from its historic value. In Capellino´s opinion, capitalization is still uncertain. “Detroit is still considered a red zone for the finance system, there are not many banks currently lending money to middle/low class people who are suitable for this type of property. In addition, there is an oversupply of housing units, even when many of them are not in good condition. If banks made financing more flexible, these types of property should go back to the amount of US$150,000”. It is estimated that their current value is 40 percent under their historic value”. “The price of these properties should double. Today, they are being acquired quite below their historic value and under construction costs as well. Appreciation is inevitable”, Schamy says. Capellino thinks that this business is ideal for individual high net-worth investors and for institutional investors as well. “Detroit is for sophisticated investors who know how to operate in the United States. In order to make up for the counselling and analysis tasks and to achieve efficiency as well, I´d suggest starting with an amount of US$500,000”, he warns. Schamy affirms that the basic number is US$65,000, as this is the cost of a housing unit. “The more units you have, the more you can amortize the initial costs. The most sophisticated investors start the business with 5 or 10 units”.
Counselling. Detroit is a market which must be handled with care. “You must understand it clearly, otherwise, it can be risky for foreign investors as they are today being tempted by brokers who acquire destroyed units at US$10,000 which are then poorly refurbished with additional US$15,000 and sold at US$70,000. Those units will eventually have problems and, therefore, this business will turn into a nightmare”, Capellino warns. “There is supply to buy at low prices, but acquiring a unit at US$ 20,000 is throwing money down the drain. Maybe you can rent it, but you’ll never sell it”, Schamy ends.