Snapshot Summary of My First Detroit Deal

Hi folks,

As some of you know, I've been active in the US market for a little over a year now. I'm still growing my position and am active in three states so far. I have learned so much already and continue to learn every day.

So I thought I'd write up and share a summary of my first deal Detroit, MI. I wanted to wait until several months after the property had settled ('closed') and had proven itself as a rental-income machine.

My aim here is to share a warts-and-all summary of my experience (spoiler-alert though - overall it has been an incredibly positive experience and a successful one already, and I'm already seeking out my next deals as a result of success in this one); so you can see on balance, how this deal went down.

I must preface this by adding the following pretext:

• I've been an investor in the AU market (4 states) for about 12 years prior to jumping into the US
• Motivation for dipping into the US market: to balance my AU portfolio that had seen solid capital growth over time; but growth has strained and yields are generally rather lacklustre (comparatively to parts of the US residential markets; AU residential property markets compare very unfavorably in terms of yield); making me realise that I won't expedite my departure from the full-time workforce any time soon (any FIRE-bugs out there?? Holla!! I'm 100% on the FIRE train and am active in that community as well); due to the paltry yields necessitating me to stay full-time PAYG employed to support/supplement my AU portfolio
• My primary goal/KPI for my US deals is not capital growth ('appreciation'); but rather yield ('cash-flow'). Any appreciation I treat as cream on the top. The deals I've done have always been spreadsheeted-out during research/due-diligence phase with this primary KPI of yield in mind
• Every time I use US-speak for something I'll put it in brackets and then in quotation commas, following the AU-speak version of that verbiage, just so I don't lose anyone with foreign words/terms
  
• The deal below is not my first US deal, but rather my 4th. Reason for selecting this and not my first is, it is my fastest, simplest, and most straightforward, due to it being the only deal where I didn't do any upfront renovation ('rehab'); but more on that below...
• I'll produce all of the below in AUD currency (since I rate-locked the costs at the forex rate of the day, in my mega-spreadsheet already so I can supply these numbers), since I wanted to highlight this in AUD terms to make it easier to digest and compare in an AU-context

The Deal Itself (the 'buy'):

• 3-bed, 1-bath, 1-car garage house ('single-family-home'), 12 miles west/22-minute drive of CBD ('downtown'), in a B-class suburb ('neighborhood'), on a good size block, roughly 650sqm (4,356 sqft)
• Raw purchase price: AUD $50,497.65
• Total of purchase costs (includes all of: LLC setup, Forex fees, Facilitation fees, Legals to close, Water Certification, Winterization, Property MGMT deposit/upfront fee): AUD $6,363.18
• Total all-in upfront cost: $56,860.83

Approx. Operating Costs:

• Annual Total running costs - includes: Property MGMT, County Taxes/maintenance (@ 2 weeks of rent per year), vacancy (@ 2 weeks of rent per year), Annual Michigan LLC Reporting Fee, Landlord/building insurance, Detroit water etc: Approx. AUD $400 per month total (= AUD $4800 per year)
• Taxes: Hard to speculate as IRS tax will get paid out by ATO via tax treaty then get added to my AU ATO tax submission; very hard to calculate that but let's assume 37.5% of this property's income (remembering that some of the above costs, just like in AU, are claimable against the property's income..., but lets call it 37.5% as a worst-case tax scenario, knowing it'll be lower than this when deductables are factored in): $12,300 income @ 0.375 = $4612.50
• Total (worst-case) Net-yield = $12,300 - $4,800 - $4,612.50 = $2,887.50 cash-clear each year (and that's without any annual rental increases)

Performance Thus Far:

• Existing tenant rent: AUD $1,025.00 per month (AUD $12,300 annually).
• Gross rental yield based on purchase price + buying costs amount of $56,860.83 = 21.63% gross yield
• Net yield (post tax, post expenses) on worst-case tax scenario above = $2,887.50 / 56,860.83 = 5.07% Net. AU Residential properties seldom even get this in GROSS, let alone net!)
• Does it mean the 1% rule? YES! 1025 / 56,860.83 = 1.8% (phenomenal)
• Appreciation: didn't expect ANY growth and haven't really had any. As-at today which is just 3 months since taking ownership (and drawing an average of the Trulia and Zillow reported values which is a fair-values-average to use since lenders will typically take the average of public-portal valuations for most houses in this price range...); the purchase price of AUD $50,497.65 has increased to an average-value of AUD $51,020.20 (so about $600). And yes, I applied the same Forex rate as 3 months ago to try and remove that variable from muddying this result. So, $600 is nothing, sure, but it hasn't gone backwards and, with no rehab done, its increased slightly in only a few months. Who knows, where appreciation will go to. But that yield is great
• Tenant rent payment: reliable and consistent, just like my AU properties thus far.

Negative points/learnings:

Ok, none of the below have *yet* happened to me for this specific property (touch wood!), but I found these issues in many of the houses that "john west rejected" (I.e. john west being yours truly, in this case lol):

• Northern states houses will have basements. Basements suck. Mould, concrete cancer issues, wear and tear, sewerage leak issues, furnace repair
• Furnaces, full stop. In the cold states you'll need one to heat the house, expensive to maintain
• American rooftops are mostly dreadful. Cheap and nasty shingles will need replacing every 5-10 years, need to factor this in to medium/long term buy and holds. Aussie roofs use tiles which - though they get covered in bird poo and look ugly/corroded - actually last a lot longer because they are tougher
• Detroit winters are brutal and marketing a rental during this time is harder. It is also harder to survey prospective deals due to thick snow masking roof and other lot/ground/crack issues from view.

Positive points/learnings:

• With a bit more investment upfront, you can get a house in Detroit (and other cities) to be "Section 8 ready", enabling you to seek "section 8" tenants. This is where the gov guarantees/pays the tenant's rent because the tenant is on a hardship-program where the government pays this to assist them. Section 8 rents are usually higher than market rent which increases yield. But, some section 8 tenants will require you to also pay utilities (elec, gas, water) from your higher-rent. BUT, some do NOT have this requirement whilst still earning you the higher yield. Due to already having a tenant in place, no section 8 for this deal for me
• Whilst Detroit winters are a negative, solid/cheaper buying opportunities present, around Christmas time in this rising market = opportunities for cheaper deals for those brave enough to get a building/pest inspector out who cannot draw a conclusive report due to snow coverage of vital house-parts.
• The yields. Seriously. Do the math, how many of these deals do you need to do to replace a basic AU salary? This is achievable in my opinion and even 10 of these deals bought over a few years, could see you be able to transition to part time or for some with no dependents, even possibly leave full time work altogether.
• Rising market opening the door to BRRR opportunities if you can get a US bank account and keep 30% in the deal when you get the mortgage on top (a LOT more to this strategy for us foreign aliens, but it IS possible)
• Rare as hen's teeth; but compounding these returns is the possibility of duplexes and triplexes which can offer solid income off of one title/dwelling to physically maintain and pay county taxes on
• You need a good accountant in both countries. Whilst this seems like a negative (due to paying fees to 2 x accountants, not just one); its a positive because you can ensure you have a system in place to divvy up US incomes over two AU fiscal years, and understand your tax position clearly. Also, the AU-US tax treaty makes this easy/advantageous to ensure no double-taxing!

I'm keen to hear any comments or questions on this thread. Please publicly
Or, reach out to me in a PM if you want to know specifics, or (and even though I'm far from an expert on this!) if you have any questions for your own journey/ambitions that I might be able to help with.

This deal was incredibly lulcrative for me and I'll be going again in the Detroit market because after further study, it has slowly moved into an upswing market-cycle after seemingly forever in the doldrums, so there's plenty of opportunity here to take advantage. Because, its not just values that are slowly incrementing upwards, but yields in desirable (but still affordable-to-invest) suburbs ('neighborhoods') are also incrementing upwards too.

So where to, next, for me? I want to attempt a BRRR as a foreign alien. No mean feat, and will likely require me buying a cheap Jetstar return trip to Honolulu so as to open my bank accounts (KYC laws require physically being there) and open/sign some loan docs. I have AL and GA state properties where capital can be harvested via BRRR @ 70/30 LVR, so I might investigate that and rip out as much of my own money in those deals as possible, to grow further.

C-mac

 

Great write up. On the rehab deals, would you expect even higher net yeilds?

 

In the markets I've rehabbed in so far, yes, the advertised-rent increases for rehabbed property. Also, and as I'm learning... the rehab increases both the rent and the general value. Both of these attributes combined, help to incrementally increase the value overall. Which is where BRRR strategies could come in.

 

I'm not being cynical. After all, you asked "how many of these do you need to replace a basic AU salary" but if you generate say $2887.50 per annum from each property, you'd need 30 of them to generate 86.6K per annum . Or 40 of them to generate $115,500 per annum. And that's if you don't suffer any major issues such as tenants not paying or repairs, which are both quite common in the US. These are old homes, in low income areas of a city that is under 6 foot of snow for 3-4 months a year ... the chances of being low maintenance is, I would say ...



So chances of your $2887.50 being reliable as an income source to replace your AUD salary is , I would say .... see above

I say this only because I know other investors heavily into the US who face these issues on their properties constantly All of them. Without exception. They either have payment issues or ongoing costs for rehab and repair . They aren't necessarily huge issues, but they are enough to make a 2.7K surplus disappear partially or completely. And if you cant access finance, you will need to have over $1.705 Million to buy 30 of them at $56,860 a piece.... or $2,274,400 to purchase 40 of them. All for 5.07% NET? Dont get me wrong. It's a strong yield for sure, particularly when compared to vanilla resi in Australia , but it's only strong if you can keep maintenance and repairs expenses down , keep tenants paying and if you actually receive that income. I would have thought you could do the same or better without the headaches and hassles associated with 30 or 40 properties , in the stockmarket , surely....?

I can buy 3 Dual Occ's here with cash for less than 2 Million, and generate 120K per annum GROSS . With 15K of depreciation and 6.5K of expenses per property, I'd reduce 120K Gross to less than 57K taxable, for a total tax liability of @ 10K, netting me @ 90.5K ( 120K minus 19.5K running costs and @10K tax) . You need between 30 and 40 properties in the US to achieve that...

But because I can access funding in Australia, if I put 2 Million to work here and leveraged it , I could actually purchase significantly more than 3 dwellings - subject to borrowing capacity of course. But let's say I leveraged that $2 Million at 50% LVR only, and bought 6 Dual Occ's for @ $4 Million inclusive of stamps and legals and construction interest etc... . 240K rent minus interest costs of @ 72K, minus running costs @ 39K would leave me with @ 129K surplus. Then I can offset @90K of depreciation against that to reduce it to an assessable amount of @ 39K. I'd pay @ $4200 tax on 39K, so I'd be running a surplus of @ 124.8K

Of course, if I chose to reinvest that in debt reduction and paid the loans off over the next 15 -20 years or so, and rents went up 50% in that time, I'd be unencumbered and earning 360K rent at the end of that rainbow. I'd still have 10-12K of running costs per property ( x 6) , so 60-72K of expenses. That would reduce the income to @ 290-300K Gross. And I'd still have 5 or 6K of depreciation on each property ( x 6) , which would reduce the taxable income to @ 260K

That would net me @ 170K . Now that, it seems to me... would replace the AUD income nicely without needing to buy 40 old properties in a snow covered city half way across the world....

$2 Million pumped into LIC's or ETF's would probably do very well, also.... over the next 15-20 years...leaving you with a handsome income stream.....

So am I missing something ?

PS - I want to point out your honesty in quoting net numbers not gross. Just about all the Detroit fanboys here have pushed 20% + yield figures for the last few years and never admitted they were grossed up, pre tax figures that fell off a cliff when expenses and taxes were applied. Because 5.7% is not the same as 20,21 or 22% .... So, kudos to you for your honesty. well played

 

If I had 1.7m in cash and seeking passive cash flow....I'd dump it straight into the stockmarket.

 

Great Post C-Mac. Thanks very much for taking to time to put this together.

Was wondering if you wouldn't mind sharing your research process that you followed to arrive at your chosen Detroit property? Did you use a Buyers agent for your purchases or conduct your own research, sight-unseen, on-the-group, etc? And finally, if you could give some top-tips for conducting your research in this market - perhaps your most useful research tool.

Cheers

 

Hey Euro,

Thanks for your detailed reply and for the considerations you've raised!

To start; I fully agree with you - there are many ways to use an asset-class such as property to help you get to a financial-freedom objective. I love what you've outlined as possible in Australia with those Dual-Occ deals.

I won't/can't comment much on those (Dual-occs aren't something I've any experience in personally; nor have Ieven done any research on, so it'd be inappropriate for me to attempt to add any specific commentary on dual-occ deals than saying that they sound like a great option based on the numbers you mentioned in your example).

What I can do is speak to some of the points you raised re: the scalability/velocity of a US-residential strategy in terms of moving into a financially free position.

Its not that I'm a Detroit 'fanboy' per-se and in fact I'm more established in other US-states than Michigan right now. Michigan is new for me.

The $2887.50 figure is a worst-case scenario on this particular one property @ my current AU income tax rates. Just like an AU-property in my AU-tax return, for any US-properties in my AU-tax return I can pick up the same holding-cost deductibles (which in my personal scenario if I have AU properties that are negatively-geared; can help to bring balance to that portfolio with the positive-income from the US properties).

Accordingly, the figure for this specific property is more likely to be in the ~ $3,500.00 range after expenses. And remember: this is just in year #1, and for an unrenovated, already-tenanted property. I just didn't want to over-inflate the deal-analysis with 'likely' number and instead went with a 'worst-case'. Remember: I'd factored in both some vacancy and additional maintenance costs in the analysis I built (though I don't deny a big project like a HVAC, new roof, or driveway; could blow the cap off of that in any given year. That just goes back to buying well and ensuring you are using your building inspection to focus on the 'bigger-ticket' items in the pre-buy inspection report, instead).

Gross-rents get higher if some light-rehab is done first, prior to placing a tenant at that higher-rent-rate. As I said, this is the only deal I've done whereby no upfront-reno was done. The virtue of course of doing upfront reno (and to pick up on your points around ongoing high-volume/cost of maintenance items on US properties): you can get a lot done, very cost-efficiently in the US, during an upfront Rehab project, and benefit from the higher rents thereafter. This helps to mitigate those 'mission-critical' costs (e.g. roofs, basements, HWS/HVAC etc.) to then help keep costs lower over time.

So you are right; at that 86.6K NET AUD income per year, at this single-example's "current" return (let's pretend that rents never go up each year for a moment! Even though across a multi-state-diverse US-portfolio you'll have several each year where rental increases will effect); would take a lot of properties to get to.

But the thing is; even $86.6K after-tax is a lot for say a single person. Once you get to around $40K-$50K it is then a "keep the lights on", BASIC salary, if you will. From there, you have options with how you want to spend your time. I don't think you need 30 US deals to get there, no. I'd say 10-15 good deals done in the first 3-5 years; then the compounding of rental-growth and minimal debt-outlays plus smart re-investment of returns; can get you there.

The number won't be the same for everyone (and by number I mean both the volume of properties number and also the Net-income goal/amount that would make them 'happy' to leave their full time/PAYG job).

Re: Detroit specifically; it offers me a balance to my overall US portfolio. The southern states offer (usually) no basements, and much milder winters, yes (definitely cost-saving benefits to that, sure), and I've already had some great appreciation/capital growth down there already. But Detroit does have particularly strong yields albeit with a slightly higher risk-profile than some other states, yes. Its all appropriate for me in my personal situation based on my risk profile and the multi-country/multi-state diversity I already have.

Which brings me to my next point... the BRRR strategy. You can expedite the velocity of growth by introducing this strategy. Now I haven't done the last two "R's" of this strategy myself yet; but my aim is to do it to ramp up growth and holdings. All with a minimal debt-volume.

Don't get me wrong; I love the income potential of your AU Dual-Occ strategy; but for me personally I don't want to take on that kind of debt volume to get that level of income. Why? Trust me, I'm NOT debt-adverse by any means but; it annoys me that AU cannot write me 15-year or 30-year fixed-rate mortgages at sensible interest rates. I don't like the insecurity of knowing my rate can only be locked at 5 years at a time, for potentially a 30+ year hold. Fluctuating interest rates and the huge mortgage $$$ amounts associated with them for me; is a high-risk strategy in and of itself. That high-gross yield can be eaten away quickly should rates jack up on a rather large mortgage-size that is securing the dwellings.

Your example of $2Million cash to buy those assets; not many investors have $2Million in cash to get going. And even getting leverage for that requires massive deposits.

Oh and while I'm at it.... the entry, holding, and exit taxes costs in AU are terrible! That was a main motivator to pursue selected states of the US. The taxes are nowhere near as severe (in fact in some states, some of the taxes just plain don't exist at all!) and by not wasting money on taxes; I can put that money to better/higher purpose in expanding a faster-growth holding/portfolio. Yes, some states are horrific when it comes to taxes, I know (E.g. CA, IL, WA etc. etc.); but I don't play in those states.

In AU we're struck with:

• Massive state-based stamp duties up front on the way 'in' (In the US states I play in, $0 stamp duty. Doesn't exist!)
• Council rates throughout ownership (same as US County Taxes, on this one)
• Land Tax per state should you reach the threshold (I don't pay this in AU as I have diversified across 4 states; but still; a consideration for AU)
• CGT on the way out (yes, a 50% discount but still a massive whack; and is payable even if you want to roll the proceeds directly into another investment; something in the US you have better options with via a 1031 Exchange)

PS I should at some stage write up a deal-analysis on some of my post-rehab/higher-rent properties in the US. Post-Tax income on some of these is substantially higher. But I didn't want to "cherry pick" my best deal and "showcase" it here, which could be seen as deceptive if that kind of huge post-tax yield % is not the 'norm'.

I love the Dual-Occ strategy; but for me; I know there's risks in all strategies (both your dual-occ one, and my US-one). For my personal risk profile; I value the security of building a larger portfolio of assets that can be BRRR'd and compounded/grown quickly; without massive debt-exposure to do so; because as you get deals cash-flowing; you can quickly pour these into more deals which; reduces the amount of 'cash' you need upfront, for every new deal thereafter. Plus, you are less beholden to increases in interest rates (that's a topic for another time, macro-economics wise!!), affecting you, over the longer term.

Anyways, many ways to get to your goal with property as an asset class. This strategy for me personally; has dramatically improved my position and edged me closer towards (the option to!) exit the workforce entirely; in the sooner-future rather than the later-future.

 

@C-mac I think the part Euro is missing here is you were able to do this for 50k. You really can't do anything here in Australia for 50k. Here in Australia, that'd only just cover the stamp duty, let alone the deposit on a 90% LVR house.

What other states/cities do you have property in? Are you back in Australia now, maybe I'll just call you tomorrow

 

Hi @Steven_S yes I use buyer's agents (better to call them 'Facilitators' because their scope of work/employ is a bit wider than a typical Australian Buyer's Agent's scope of work is!) in all of the states I'm active. I couldn't do it without them, TBH. There's just too much to do on-the-ground to seek deals and ensure there is minimal risk to expensive big-ticket items requiring repair (or if there are; you know this upfront and work it into purchase-price for the deal).

You could invest in a return-trip and accommodation to 'attempt' to do it on your own, but the cost of this + the disadvantage of NOT being able to access the MLS (multi listing service) properly yourself, and risk of being taken by 'sharks' on the ground all adds up to simply paying a professional for their time/effort/management etc. There are many more benefits to using a facilitator than I've mentioned here, too (namely; they can connect you with managing agents, rehab teams, in-state legal etc. that they know and trust and have proven themselves time and again, etc.).

In terms of my research process... there's a lot to that so I won't write an essay here. Basically I looked at 5 x major criteria that mattered to me most. Doing this whittled away over 30 of the 50 states, straight off the bat. As I then optimised on best performers against my 5 most important criteria, it really came down to less than 10 states that I had (and still do have) an interest in pursuing. I've only purchased in 3 of these. I may never purchase in all of them, of course. But a confluence of the macro and micro research (same usual variables you'd consider in AU based locational research, really), and the specifics of the deals the facilitators are able to source usually = my decision to jump on a specific property/deal.

 

@D.T. Yep I'm in AU. Property wise I'm currently in:

NSW
VIC
QLD
SA

Alabama
Georgia
Michigan

 

No, no, no... I get that. I was specifically referring to those who have come before you, talking up 20,21,22% yields in places like Detroit, who resented being questioned about said yields. It was sad...they could have been honest and presented the real results like you have, rather than trying to present grossly inflated yields and then attacking anyone who dared find the holes in their numbers through fair scrutiny

Almost 57K, and the rehab hasn't been paid for yet..... That's getting very close to 10% deposit on a Dual occ @D.T.

And I was responding to the claims of replacing Aussie PAYG income - I stand by the fact it would require 30 or 40 of these , which means 30 or 40 x 57K.

As I said...it wasn't a criticism at all. I applauded @C-mac for being honest with the numbers ... the only US investor I've read comments from on this forum , who presents transparent, real numbers, rather than grossly, grossly inflated numbers with no consideration for running costs or taxes. I was just pointing out that without access to borrowing, the amount of capital it would require to generate a genuine replacement to your AU income is sizeable, and that amount could be placed into the markets or other resi property here without anywhere near as much hassle, for similar or slightly superior NET returns.

 

Noted!

And that's where BRRR gets exciting if I can access US lending which I think I can. There's nuance to it and a max 70/30 LVR for foreign aliens. Most importantly, the house-value the lenders can consider (if one waits enough months of ownership per-property, that is), is the higher post-rehab/post-higher-actual-rental income.

Euro I urge you to read up on bigger pockets on the BRRR strategy to better understand how one can grow/expand quickly in the US and scale to the level needed to ramp up income.

PS I also FIRMLY disagree with folks calling it 'passive' income! It is not! Rather, I call it 'semi-active' income. Truly passive income is probably an etf or index fund.

 

Great post, good detail, balanced analysis, realistic numbers. Thanks for sharing.

Not to be sneezed, particulalarly on a worst case basis and without considering capital gains, rent rises and add value options. Good luck.

 

Thought about it, but I can’t get the same net yield/return I get from my US properties.

What’s making it so attractive is the currency play USD vs AUD, tack on 49% on money when bringing it home.

 

I understand the BRRR strategy but not sure its going to be as effective for foreign investors. Why? Higher interest rates, costs associated with setting up loans... and risks associated with this strategy dependent on US market you are playing in and when you jumped in.
Lenders also will look at State and analyse risk and comes down to property valuation coming in.
In saying this I know a foreign investor who had 7 properties valued recently and valuations came in much higher, but his been in Detroit market for a few years now and buying in B grade areas, higher entry price points

Another strategy that is interesting is looking at multi units where you can increase value by increasing returns and on sale. Then again you probably need to be on ground for this and this is very competitive as US investors go nuts on this one as it can be so lucrative

Just my opinion

 

I have been living off US rents since 2011

Just continued growing my portfolio, but its certainly not passive investment

I have three property managers, 20 properties, no finance

I have two contractors/builders and 2 hvac technicians all on whatsapp, always contactable, so they do my repairs and PM just collect my rents and advises via email on work orders. They get paid using zelle, electronic transfer, this took a while to sort but its brilliant. You gotta pay your contractors on time and develop trust and good working relationship

This way I control money in/money out

Atlanta is a walk in the park, Detroit is a totally different beast. This has required more work to get my portfolio stabilised and performing.

I doubt I would be financially free today if I was dependent totally on cashflow from Oz properties

 

True, but I'd settle for a lower return vs potential/probable headaches.

 

Yes I am sure shares are set and forget, very nice

I am concerned about jumping into shares now, timing??? I just don’t know enough about this

When you get it right in US in terms of property mgt, contractor etc its very similar to Australian property. Talking Atlanta here, a tad early to say this about Detroit, give me another 12 months

 

But you pay 49% more to purchase so the exchange rate doesn't change the yield for anyone purchasing now.

You obviously purchased at a better exchange rate though?

Willy

 

Most of my properties were purchased when AUD was on parity or higher than USD
AUD was 1.00-1.10

During mining boom our AUD was very strong

I have also used 1031 exchange to buy in Detroit so I have USD