By John P. Schmoll | January 01, 2016
On July 18, 2013, Detroit declared Chapter 9 bankruptcy, which allows protection for municipalities from creditors. Detroit became the largest city ever to declare bankruptcy. What was once the proud home of a bustling auto industry and an iconic music studio was now mired in $18 billion of debt. Rising crime and pension cuts left few residents unaffected by the fallout of the city’s decision.
One particular repercussion of the bankruptcy was real estate prices. People lost jobs and fled the city, which hurt the city’s real estate environment. The bankruptcy was relatively short lived — Detroit exited it in December 2014 — but the question remains if real estate in Detroit can ever recover. (For related reading, see: Exploring Real Estate Investments: Introduction.)
The Cause of the Bankruptcy
To understand the state of real estate in Detroit, one must know about what caused its bankruptcy in the first place. There were many factors, but these are some of the most critical:
Detroit was pretty reliant on a single sector: the auto industry. Through a chain of events, the industry lost tens of thousands of jobs over the course of a few decades.
Multiple city leaders made poor financial decisions, sometimes ignoring problems altogether.
Poverty ravaged the city, with 36% of people living there placing below the poverty line.
At 16%, Detroit’s unemployment rate was double the national average.
To make matters worse, citizens were leaving in droves. The population of Detroit went from just under 1 million residents as of the 2000 Census to under 700,000 as of December 2014. All of these points had an impact on the real estate market. (For related reading, see: Tech Startups Can Save Detroit—Here’s Why.)
The Real Estate Outcome
Given the societal and economic issues swirling around Detroit, not only were residents unable to make mortgage payments, they were leaving their homes. Forbes reports that one out of every 764 homes faced foreclosure.
All totaled, more than 100,000 homes and 78,000 buildings were vacant. The price of homes in the Detroit area was down 35% on average from what it had been just a few years prior. It would be easy to look at these bleak numbers and believe that real estate in Detroit is doomed today, without the possibility of ever coming back.
Pain Equals Opportunity
But in the pain of the bankruptcy, something was born: opportunity. The market bottomed out during the bankruptcy and is now rising, bringing keen real estate investors along with it. “As values continue to bounce back, there is a great opportunity to capitalize on higher return rates,” said Albert Benaderet, co-founder and CEO of Crystal Homes Inc. “When compared to major markets like New York City and Los Angeles, investors expect capitalization rates of 4% to 7%. In Detroit, if you have a prime location, you can receive capitalization rates of 10% to 15%.”
Rates of return such as these are bringing speculators and investors to Detroit. Home prices have fallen to such a low level that opportunity now exists to buy homes at very reasonable prices and see the highest rate of return in the nation, when looking at average rent level.
Opportunity is not found in one sole area of the city, either. Benaderet adds: “While many investors are focused on downtown Detroit, there are opportunities to receive great returns in the Metro Detroit area as well. Property in Oakland country, for example, continues to rise, with some properties expecting to increase 30% to 40% over the next few years.”
While there are some things to consider with some of the homes in Detroit—think higher refurbishing costs—value is usually present thanks to lower prices.
The Bottom Line
The real estate market in Detroit has faced lots of challenges; there is no denying that it has taken a significant hit in recent years. For the shrewd investor, however, there is plenty of opportunity for a higher-than-average return. (For related reading, see: 6 REITs That Pay Dividends Monthly.)
Read more: Detroit Real Estate: Doomed? | Investopedia http://www.investopedia.com/articles/investing/010116/detroit-real-estate-doomed.asp#ixzz3wPDwEahg
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Investopedia.com, January 1, 2016