4 Reasons NOT To Invest In Detroit Real Estate

I write a lot about why you SHOULD be investing in Detroit real estate. I even have a cornerstone blog post about why now is the best time to invest in Detroit.

But I spend a lot of time on the phone with prospective clients talking about the risks of investing in Detroit.

And I realized I haven’t written much from that side of the table.

The reality is, Detroit can be a fantastic market for real estate investing but it’s definitely not for everyone.

Unfortunately, many people will sell you on all the positives… the low entry price points, the cash flow, the appreciation story that’s unfolding, etc.

They lean into all of those things but fail to mention the drawbacks.

And the results aren’t good.

Some ill-prepared investors jump right in and almost as quickly jump right out, largely because they should have never been investing in Detroit in the first place.

So this post is dedicated to highlighting some of the downsides to investing in Detroit or similar markets. These are risks every investor should know before they decide to buy property in Detroit.

So let’s get right into what I see as the four biggest risks of investing in Detroit today.

Tenants Are Higher Risk In Detroit

Your typical Detroit tenant is generally more high risk than your working professional in a city like New York, Los Angeles, San Francisco, Seattle, etc.

We may have different views as to what exactly makes them high risk, but I bet we’d agree that however we get there, our conclusion is the same.

In Detroit, and similar markets, you’re more likely to have late rents or non-paying tenants. That means the likelihood that you need to evict is higher than a less risky market like the ones I listed a bit ago.

If this scares you, ask yourself why.

An eviction in Detroit will take 3 – 4 months. It’s easy to do the math on that and understand the costs. It’s also easy to mentally prepare for that potential reality. 

Yes, it sucks.

And I’ve been through a handful of Detroit evictions myself, but it is by no means the end of the world.

Now, if I had a $4,000/month mortgage on a rental property in California and it took me a year and a half to evict a tenant… that could very well be financially devastating. 

While the odds of eviction in an insanely tenant friendly state are lower, the pain is far higher.

So for me, understanding tenant risk in Detroit and knowing, if I stay invested there long enough, I will eventually have to go through an eviction is just part of my investment plan.

Older Housing Stock Means More Maintenance

I also understand that the homes I’m buying are not newly constructed. 

In fact, some of the homes I own are nearing 100 years old!

People like to tell you how difficult it is to maintain older homes. It’s partly true but also a bit overblown. 

A typical Detroit bungalow is extremely simplistic and easy to maintain even though it’s likely built in the 1950’s. 

On the other hand, a much larger 100 year old home will probably be a bit more work.

When you’re investing in older homes, the most problems, in my experience, tend to come from the plumbing. 

A roof is easy to tear off and replace, even if it’s cedar shake. Yes, it’s a big expense but once you do it you shouldn’t have to do it for another 20+ years.

Electrical wiring is generally pretty easy to replace as well. And the smaller, less complicated the home is, the easier this is to do.

But plumbing can be a pain and it’s not limited to the stuff you can visually see. Much of that in Detroit has already been converted to PEX.

Problems tend to arise with the drain lines, the house trap, and the main line out to the city sewer. This stuff is, quite literally, buried in your basement and outside your home.

It’s expensive to replace and disruptive. 

And, with the age of these homes, if you aren’t dealing with these issues today you will most certainly be dealing with them at some point in the near future if you plan to be a long-term investor.

For me, I don’t mind doing these things because I know once I do, I’ll likely never have to do them again. They are, for the most part, in my control.

Potential For Break Ins & Theft

Something that is less in my control is the risk for break ins and theft. 

It is not uncommon to “lose” a furnace and water heater in Detroit. This is especially true if your property is left vacant for any extended amount of time.

Yes, you can board up the house (not foolproof) or use DAWGS (more foolproof), but again… invest in Detroit long enough and odds are you will be a victim to break ins and theft. 

In my experience, most newer folks do not take this seriously.

They ignore advice to secure a house because they don’t want to spend the money. This is being penny wise and pound foolish.

Replacing a furnace and water heater is far more expensive than the cost of boarding a home or securing with DAWGS. 

If the idea of going through this, mentally or financially, terrifies you, Detroit (and similar markets) are likely not a fit for your risk tolerance.

I simply take precautions when I know a home will be vacant.

Still, I know that I cannot prevent 100% of theft and I’m ok knowing that. I’ve gone through it before and life goes on.

I also tend to keep my properties slightly below market rent so that I can avoid turnovers (when break ins tend to happen). And if this is something you’re REALLY worried about, you may consider focusing on duplexes over single family homes.

The reality is, while theft is a risk, there’s a lot here that you can control even if there’s a big chunk that you can’t.

Being proactive, understanding the risk, and preparing for it is part of the game.

Bad Appraisals Are A Real Risk In Detroit

Something you really can’t control though is appraisals.

Now, this is only going to apply to those doing rehabs and BRRRR’s in Detroit. 

While I firmly believe this is the best way to build and scale an investment portfolio, it’s not without appraisal risk.

You can be super confident in your comps, understand the area and market, and do everything right.

But you can still get a crummy appraisal. 

This is the nature of Detroit today.

With a market that’s undergoing major change, you can almost always find comps to justify a wide range of prices. 

An appraiser that comes in from the suburbs and has a negative view on Detroit is going to favor comps that fit his bias. 

An appraiser that understands the city has drastically improved and is only getting better is going to favor comps that fit her bias.

Usually you get the latter, but not always.

I’ve personally been “victim” to this and I’ve had a handful of clients get stuck with bad appraisals as well.

Still, there are things you can do to safeguard against this like showing up with a printout of your own comps, appealing an appraisal after the fact, or switching lenders as a last resort.

While the first suggestion likely isn’t an option for out of state folks, the other two absolutely are.

The best thing you can do is be prepared for the potential of a low appraisal. What will you do if that happens? You need to have a plan!

Investing In Detroit Is Risky & Rewarding

When I started investing in 2019 I didn’t understand all of the risks of investing in Detroit.

But it didn’t matter.

I was determined to make it work no matter what. And that decision has been literally life changing for me.

That doesn’t mean it is a good decision for you.

But if you understand what you’re getting into and are prepared for the turbulence, both financially and mentally, chances are you’ll do well.

The folks I see fail in Detroit are the ones that can’t stomach the difficulties they are guaranteed to face. They end up selling after a year or so of ownership and almost always take a loss as a result. 

Unfortunately, a lot of agents, property managers, and investment companies will tell you about all the positives of investing in Detroit or other similar markets.

They don’t mention the drawbacks and it’s incredibly misleading, especially to those that, if they knew the challenges, would choose not to invest.