Snapshot Summary of My First Detroit Deal

Some investors prefer multi family properties as it's only 1 roof to fix and 1 vacant dwelling doesn't always mean no income.

The 1031 exchange allows investors to trade up, reinvest sale proceeds and indefinitely defer CGT.

 

I have all I can handle here in Oz with a business and a 9 month old and an already substantial resi portfolio that already runs at a substantial surplus .... but if I was tempted to be in the US market, it would require scale..... and I think the amount of time and effort required to establish a large holding there is being understated by some of the comments here. They arent telling you how they had partners at the start, who provided significant capital injections.... and how they piggy backed off that leverage. They arent telling you how tenant biased resi tenancy laws are.... how you cant just assume that if a tenant doesnt pay you have recourse.... They arent telling you how difficult it is to get finance.... it's why I dont believe large enough portfolios can be built in most cases, to make it worthwhile. It's also why I dont believe the yields quoted are reliably achievable over the medium to longer term without MASSIVE micro management of whatever team you put together over there. For those with the drive and enthusiasm and time to do those things- great. They can make a real go of it . For most people though, ability and ambition shouldnt be confused. It will likely disappoint.

It's why Id rather buy dual occs here that produce the same or better yields, but where I am protected by much more owner friendly consumer regulations., can access funding, etc... IMHO the only really really compelling reasons for being in the US is because you have run out of capacity here and have some cash which will get you started there, or as a currency play. Maybe growth.... but lets be brutally honest... the types of dwellings typically spruiked by the pro US gang are 40,50,60K properties . 50K invested there to make you 50K is still just 50K profit. Its presented as doubling your money, which may well be true, but its still just 50K. The same 50K of cash could be invested here , leverage used and you can get 50K growth on a 500K asset just as readily.

Im not at all anti US... I say go forth and make money if thats what you want to do.... especially if you have a lot of time to devote to it, can crack the lending issues and get reliable, ongoing funding. Then it becomes very attractive. But for most that's just not going to happen. That makes it a cash play for most..... and I just think that as a cash play, when you apply some forensic scrutiny, it isn't remotely close to being as impressive as people would have you believe. Lots of inflated numbers that just dont really hold water after taxes and expenses are applied.

 

tend to agree. Lowest National unemployment rate since 1969, tax cuts across the board for individuals and Corporations, another 120,000 new jobs in November (to add to the already over 6 million new jobs created since Jan, 2017, extremely low interest rates coupled with good GDP growth and low inflation, wage rises and very high Stock Market - the economic numbers are currently very good - good for re-election chances, and good for the housing market overall, I would think?

 

I'm not following the politics closely but quite a few friends of mine living in the US tell me ignore all the media bashing, many segments of the US are happy with how Trump is doing. The silent majority may just vote in this ol chap again. Wouldn't surprise me at all.

Side note:
Libs lost like 28 polls in a row, only to win by a landslide thank god shorten got booted.

 

Its all about who gets out to vote. Voting isnt compulsory there, and often a large % dont bother. If the hardcore base are the only ones to vote - like last time, he has a great chance of re-election. If the general population decides to get out and vote in numbers , he faces the prospect of a big loss.... just like what happened at the mid term house elections where the republicans ( the GOP) got stomped by the Democrats . That only happens when people get out to vote

 

Which leads me to think if the masses were not happy with him they would get out there and vote.

 

Actually; it wasn't a stomping.
If you compare Clinton, Obama and Trump's first midterms, you will see a result that most people miss, and the media never mention:
Clinton:
HOUSE - lost 54 seats
SENATE - lost 9 seats
Obama:
HOUSE - lost 63 seats
SENATE - lost 9 seats.
Trump:
HOUSE - lost 26 seats
SENATE - won 3 seats
Trump averts disaster: He is just the third president in 100 years to gain Senate seats in midterm election, but lose House seats

 

In Trump speak, a 26 seat loss is a stomping. A 1 seat loss would make anyone who isnt Trump a loser, if Trump was asked to comment. You can be certain of that. So 26.... stomping. We can argue about how BIG a stomping, but it is a stomping none the less.

 

You overestimate America and Americans. Every election cycle, both parties engage with rock starts and movie stars etc, to host "get out to vote" parties, etc.... and still, they get low participation. It just doesnt work like here. Not even close. Trump already lost the last election on raw votes. he lost on popularity. Where he won was electoral colleges, because bases control that. For him to be rolled, Americans who dont normally vote need to get out and make the effort. Elections arent on weekends like here- they are Tuesdays when people have to go to work. Only the very dedicated/hardcore bother to vote. If everyone was required to vote, he wouldnt be President right now. But everyone isnt- and he is.... so as I said, it will come down to who gets out to vote

 

If Trump is as terrifying for everyone as the media make him out to be, then this next election should have a record turn out and vote him out. That's not giving them too much credit, it's just common sense . Let's see how this election goes.

All I know is on presidential debate nights, I got my crew ready with some beer and popcorn to enjoy the show.

 

Again, overestimating America and Americans..... smartest nation on earth with the least wisdom. They just dont care about politics the way we do.

It will take a massive, massive, massive change in attitudes to voting for people to get out and vote

 

stick to the facts and the stats.

 

not according to the media, the Democrats, and the Hillary voters. They are still taking their politics and loss very seriously.
Fortunately, the result is what it is, and for places like Detroit, there is some hope for improvement now. They are seeing more jobs and industry.

 

There is a slight problem .....voters need a reason to vote
.... Dems dont have anything....?? They are too focused on impeachment, costly exercise, started this strategy as soon as Trump got into office

Voters only interested in results.... trump hitting goals..... bring on 2020....

 

Would you sell all your properties in Oz to pump into shares??

 

No I wouldn't

 

Its hard to give up something that has performed so well and move it into another asset class
Property will always require more work

 

Hi @C-mac any chance of an update of your US experiences? Thanks in advance!

 

Hi @Peppas It's been almost 9 months since the last poster on this thread!

I'm on the mobile so I won't write a huge amount here; if I were on desktop/keyboard I'd go into a lot more detail.

Your question was about my "US" experiences but this thread was on my Detroit deal specifically. I can speak to all three states if interested but I will focus specifically on Detroit for now. I mention this because I wouldn't want those who read some of my negative points below (and there are positives also!) to conflate Detroit with the rest of America. I.e. those who read this; are turned off by the sound of Detroit and then throw the baby out with the bathwater insofar as dismissing the other 49 states outside of Michigan altogether!

I mention this because I also intend to expand my position in 2021 in the USA.

But to focus on the Detroit stuff in specific and answer your question:

- It is true, Detroit is a very tough market to hold and manage properties in. But I knew that going in to it
- One property there has actually been quite amazing in a positive way. Tenanted from day #1; pays his rent on time; no major maintenance; it pretty much runs like clockwork (which is the deal I wrote on at the beginning of this post)
- The other property I acquired in 2019 in Detroit has been tough. Up until 2 months ago. Reason being is; it suffered prolonged vacancy as well as further rehab requirements. Finally tenanted with a stable tenant who works at the local hospital and has a great rental track record from living 2 streets over for the past few years
- Two things that didn't exist when I first wrote this post in 2019; but have both taken their toll on Detroit's economy: Covid, and then the central michigan floods (1 in 100 year event) 4 or 5 months ago. Both of these events in different ways has put strain on Detroit's public purse which has resulted in county taxes (aka council rates in AU speak) increasing substantially in 2020. Couldn't have predicated this; this time last year; but here we are. It eats into the high cash flow a fair bit
- In terms of values growth which I track monthly using three sources; neither of the properties increased at all for 6+ months. But oddly, about 4 months ago during covid, the values started growing. Now, this could be seasonality. In a VERY cold-climate city, the bulk of real estate transactions tend to get done in the 4-5 months of summer. So it could be a flurry of transactions has seen recent values growth. Not huge but both are reporting ~ 4-5% value growth since when i purchased them
- Many Aussie investors in Detroit are selling up and I can understand why; it is a tougher market and it's been said by many before, but property management - as in, good property management - is the most key thing to success and stability in this market
- Something else to consider is the age of most houses in Detroit. The city's boom days and expansion was really 40s to 60s, so much of the investment housing stock will be from this vintage. Old houses can be a handful to maintain especially in detroit. Without good rehab and maintenance connections, you can be ripped off easily.
- Whilst the houses are mostly pre-asbestos era; they are in the lead paint and lead piping prime. This is a problem because the city inspections could trigger your house not being compliant and more maintenance items required to bring it up to code. So, that's bad for cash flow
- But, it's good for the city. Despite covid, Detroit is kicking on with its 'Blighted housing removal' project as part of a multi year ambition to demolish abandoned and decaying houses and leave only the stable houses (and in fact, run programs to rehab houses to make them properly inhabitable again). Downtown revitalisation continues at full pelt including the Grand Central station restoration and new mixed use towers, parklands, and foreshore works. The city is still full of problems but at the same time they enacting plans to try to overcome them.

As for me I'm going to hold on to mine a while longer; for the foreseeable future.

My stuff in the southern states kicks the pants off of Detroit in so many ways; performance wise. Whilst the cash-flow (GROSS) yield "percentage" may be lower down there; the county taxes are cheaper; the property management team I use are legends; less city expenses; generally lower maintenance housing stock (I like the 70s to 90s stuff); no basements (well, rarely basements) and reasonably stable economies despite covid etc. Its relatively easy to find new tenants when old ones move out (in my experience, anyway).

Whilst there are still many unknowns in the us; election; covid resolution; general economy etc.; I am still bullish on the cash-flow opportunities that (parts of) the USA offers that I just dont think exist anywhere else in the english-speaking, digitised (remote investor management), world. And to pick up high cash flow/yielding properties for low entry point prices (the cost of the entire house is the same as your saved deposit on an AU IP - without the need to take on any debt/mortgage); is awesome. It means you can compound faster your earnings into number #2, #3 etc. Bring in other benefits including the AU-US tax treaty, the ability to easily store your income in USD in a USD-bank account that is yours to 'use'; but without having to actually be in-branch in the country to open one, negating the need for expensive WIRE transfers any more (thank you TransferWise and your wonderous USD-stream subaccount!); and only bring/convert USD back home into AUD at strategic times when the forex favors you in doing so; and US resi property brings benefits that you just can't get in AU.

Sure, you can buy 50K houses in AU in tiny-population; high risk remote areas (wherein; when you lose a tenant it can be near-impossible to find another within 6 months!); but in terms of finding bigger markets of say at least half a million people with diversified economies and employment-bases; well then that is harder to do.

Even finding units and townhouses in the lowest socio-eco, far-outer areas of Brisbane, Hobart, Adelaide and Perth; will still set you back at least $150K (oh plus ghastly upfront costs such as MASSIVE stamp duty - Something that in SOME US states, you dont pay a cent of..); is hard work. And often nightmare tenants to boot.

Don't get me wrong, Detroit and many affordable market cities in the US (say your USD $50K-$100K purchase price cities) are also full of nightmare tenants (think: Cleveland OH, Indianapolis IN, Memphis TN etc.); but in my very limited and short experience thus far; to me these places are a better proposition. They just offer variables and scale of opportunity that I don't think exist in AU. And all without having to fork out more of your cash flow to fatten a banks profits via interest payments.

I am NOT a seasoned pro in the US folks. Still amateur and still learning my way; mistake by mistake; success by success. But I tell you what; through my mistakes I am learning; and fast; and it's a wonderous thing; as I can compound these learnings into future further success