Detroit is one the best places to invest in turn-key homes in the world. Both national and international investors are flocking to Detroit because of the great returns that can be made on cash flow properties. However, with great opportunities, there are also great risks. Because the opportunity is so great, scammers are lining up to take advantage of novice international investors. The following is a list of 5 Major Keys to consider when investing in Detroit properties so that your international investment dreams don’t die:
Key #1 If it sounds too good to be true, trust your instinct, it probably is. If you are offered properties that promise returns that exceed 20%, there is probably a problem. Yes, there are outstanding opportunities in Detroit. However, the average annual returns that you should expect should be between 12%-18%. Based on rental rates in solid areas, you will probably be paying $38,000-$52,000 per property. Homes that are less than this are likely in much less desirable areas that you should stay away from. They aren’t worth the headache.
Key #2 Factor in a vacancy and maintenance rate. Unlike investing in the stock market, homes require physical maintenance and sometimes even well screened tenants don’t work out. Both of these things need to be considered when you are factoring your returns. Even with a great tenant and a well rehabbed home, you should still factor a vacancy and maintenance rate into your monthly expense margin. Some investors are very conservative and factor in as much as 20% of gross monthly rent for vacancy and maintenance rates. Others establish a vacancy and maintenance reserve when purchasing the home and replenish it with annual profits if either is needed. Whichever you decide, just be sure to factor this. This way, if you have to spend additional money for any reason, you can use your reserve. And, this reserve is regularly being replenished by funds that have already been accounted for. When adding a vacancy rate, annual returns aren’t as high as many companies may advertise online, but the returns are still solid and it just makes good business sense.
Key #3 No investment is guaranteed. While there are ways to increase the likelihood of realizing the returns that you expect, there is no guarantee. Yes, there are government programs such as Section 8 which pay the major portion of the rent for tenants, but even this is not guaranteed. A tenant can still move. Although it is unlikely, it is still a possibility. There are many companies that offer first year rental guarantees. If these companies are legitimate, they should escrow these funds with a licensed title agency. But, please know that you have paid for this in the form of a higher priced investment property.
Key #4 Protect yourself from liability. If you are going to invest in Detroit properties (or any properties), you have to establish the proper legal structure and maintain the proper insurances. This is a business. And, like any successful business, you want to have things structured properly. It is much easier to establish things right the first time. There is legitimate liability involved in owning investment properties. And, you can still make great returns while establishing the proper legal structure and maintaining the proper insurance coverage.
Key #5 Choose the right local investment partner. If you choose the right local investment partner much of your investment risks can be avoided. They should have a team of local experts including, but not limited to, the following: Attorney, Accountant, Licensed Real Estate Broker, Licensed Property Manager, Licensed Title (Escrow/Closing) Agency, Insurance Agent, and a Banker. This team will help guide you through every detail of the investment process. If you are new to investing in Detroit and plan to purchase multiple properties, you should strongly consider visiting with your local investment partner. There is no substitute for establishing the right relationships. So, if you are serious about investing in Detroit cash flow properties and don’t have a strong referral from a trusted source, it is worth taking a trip to ensure that you are making the right investment partner decision.
At all costs, avoid companies that seem to be too interested in quickly selling you as many properties as possible. Too many international investors are being taken advantage of by scammers who pressure investors into fraudulently purchasing properties which have resulted in major financial losses. If you are an international investor who doesn’t want to experience the death of your investment when purchasing Detroit cash flow properties, please consider the keys mentioned above. Detroit is one of the best places to invest in the world for informed investors with the right expectations and team.
Ian Watts is a Real Estate Investment Broker who built a multimillion dollar real estate portfolio by the age of 26. Ian is a trusted advisor and helps national and international investors achieve their financial goals through real estate investments. He helps his clients invest in fully remodeled, tenanted and professionally managed properties in Detroit, Michigan, USA.
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