Invest In Detroit?

DetroitPic

A few years ago, the words “Detroit” and “real estate” were usually included in the punch-lines to jokes, but it seems that perhaps things are on the upswing in

What is your tolerance for risk?

Is now the time to go back to Detroit and start buying up land and abandoned properties for pennies on the dollar?  Or is that time further down the road, if that time exists at all?

DetroitPic

Remember the scene in Eminem’s “8 Mile” where they get drunk and decide to burn down an abandoned house just for fun?

The only danger in the scene has to do with Eminem getting out of the house as it’s burning, and never was there a fear that police would show up, or they’d be in any sort of trouble, or that they were hurting anybody.

It was just an abandoned house, in the middle of hundreds of other abandoned houses.

That was back in 2001 when things were getting really bad in Detroit.

Then in 2010, we all remember when the Pontiac Silverdome – an entire football stadium, sold for only $500,000.  Today’s football stadiums cost upwards of $1 Billion to build.

In 2012, the city of Detroit filed the largest-ever municipal bankruptcy in U.S. history, as they had an estimated $18.5 Billion debt.

Detroit’s history as a city is far too long to even delve into at this point, but let’s just say that it was at one time in the mid-20th century, one of the most important cities in the United States of America, and today it sits as perhaps one of the most troubled.

Perhaps all good things come to an end, but then by the same logic, don’t all bad situations eventually turn around?

A reader sent me THIS article from The Guardian last week and asked, “Know any good real estate agents down in Detroit?”  She was joking, but I was surprised to read the content of the article and see that foreign investors are “making their move” in Detroit.

From the article:

 


 

In September, the Shanghai-based developer Dongdu International (DDI) made its first move. In an online auction, it snapped up three iconic downtown properties, all built during the city’s early 20th-century heyday as an industrial powerhouse. DDI purchased the David Stott building, a 38-storey art-deco skyscraper built in 1929, and the former Detroit Free Press newspaper headquarters, a T-shaped edifice adorned with bas-relief sculptures of biplanes and locomotives. Later, it acquired the 10-storey Clark Lofts, an inconspicuous residential building with a manual, pre-second world war elevator – the oldest in Detroit.

Altogether, DDI spent $16.4m (£9.6m) on the properties, slightly more than a top-market apartment in Shanghai.

The company plans to transform the buildings into vibrant offices and upscale apartments, according to the CEO of DDI’s leisure branch, Peter Wood. “Once we’ve shown to the locals in Detroit that we’re deadly serious, then other things will happen,” Wood says, sitting in his corner office on the 10th floor of a Shanghai skyscraper, a dozen or so Chinese employees typing diligently in cubicles outside. “Detroit is planning for this area to come back. It’s all about rejuvenation.”

 


 

So maybe $16.4 Million is nothing worth getting excited about, but it’s something.

And somebody, at some point, has to be the “first” person to act, in order to start a trend.

I’ve never heard of Dongdu International (although I shouldn’t really be expected to…), and I can’t suggest that just because they invested in Detroit, that it’s time for the rest of the investor pool to make a move.

But surely Detroit’s time will come, no?

Personally, I would divide “Detroit real estate” into two categories:

1) Commercial
2) Residential

The market here in Toronto for single-family homes is so insanely hot that it’s all we talk about.

But in a market like Detroit, where there are so many abandoned single-family homes that are actually worthless, it’s the commercial real estate that will more than likely make a comeback first.

DDI purchased the Detroit Free Press building, seen here:

DetroitFreePress

This is a historical, commercial building, situated downtown, and there are far, far fewer of these than there are single-family homes.

It doesn’t come as a surprise to me that foreign buyers are purchasing buildings like these, and holding them long-term.  This building has been vacant now for 16 years, but even if the new owners don’t plan to fix it up and lease it out, it could be a good buy-and-hold.

On the flip side, we have something like this:

Detroit01

Here’s an entire 2-storey house, up for sale for $1,795.

Not for rent at $1,795, since that would be an exceptional price for a 2-bedroom condo in Toronto, let alone to rent a house.  But rather, this house is for sale at $1,795, as are thousands more like it.

I was on www.zillow.com browsing their listings, and many of the owners of these houses (most are financial institutions) are putting in the listing remarks, “Can purchase as part of a package of 50-100 homes.”

Remember what Warren Buffet said earlier this year?

 

 

So I suppose there is a way to “buy a couple hundred thousand single family homes” for Mr. Buffet, and there’s a way for an individual investor or a group to purchase, say, one hundred cheap homes in Detroit for next to nothing.

These homes – ie. the one I showed above, may sell for a few hundred or a couple thousand dollars, but the buyer must pay the back taxes to the city, as well as transaction fees.

But bottom line – we’re talking entire houses for a few thousand dollars, and if an investor has cash, and a long-term outlook, there’s a play to be had here.

How long-term?

That’s the question, and there comes the risk.

I’m sure that everybody reading this would rather have their money in the TSX, or even in lower-risk ETF’s, income funds, bonds, or what have you.

But somewhere out there is a person who, in ten, fifteen, or twenty years from now, we’ll be reading about in the paper, in response to the question, “So when did you buy your first single-family house in Detroit?”

5 Comments

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  1. joel says:

    I was looking into the housing situation in Detroit last year after I cam across a few articles talking about it. The hotest items there are converted lofts in the downtown core. Many of the houses that are available cheap are further out than the younger population that has taken over the core want to live.
    When I was reading the articles last year it was all about renting these properties as most of the conversions were owned by a developer and the tenants were not looking to buy. The pricing of some of the places were nearing Toronto levels and had very low vacancy, or in some cases waiting lists!
    http://www.theloftwarehouse.com/index.php?action=listingview&listingID=722
    Here is an example, so maybe the time to buy is now.

  2. Alex says:

    I always thought it would be cool to buy up a whole block of houses in detroit and host Apocalypse training, zombie camp, or giant urban paintball matches or something. You could rent it out to movie studios too to film any urban landscape they wanted, you’d just need to alter some houses to fit it. Or somebody like google could buy up a whole neighbourhood and basically create an artificial neighbourhood of the future or something. It just seems like there’s so much possibility for lots of cool things when you have what is basically an abandoned city. If I was the american government I’d use this opportunity to tech up detroit, with optical fibre networks to the entire downtown with free internet, and lots of open community areas for people to congregate and work together on. Make it the city of startups or something.

    1. Joe Q. says:

      I think that some people are trying to do what you propose (make it a city of startups) but at the end of the day it’s not really an abandoned city, but rather a partially abandoned and bankrupt city with an enormous crime problem (54 homicides per 100,000 residents in 2012, compare to about 2 homicides per 100,000 residents in Toronto). A lot of properties have unpaid back taxes that must be assumed by the buyer. The houses that remain are stripped of anything valuable (fixtures, copper pipes and wiring, etc.) More like the Wild West than an abandoned ghost town.

  3. Libertarian says:

    It is interesting to see how much Detroit and GM have fallen since their heyday. GM used to be the biggest company in the world and used that influence (with the help of other companies) to shape North American society – we can thank it for our love of the suburbs and the car. Now 50 years later, GM (and Detroit along with it) was run into the ground under brutal management, and governments all across North America are realizing that suburbs and cars are unsustainable and despised. Talk about your modern day Roman Empire.

  4. Joe Q. says:

    I shudder to think about what the tax implications must be for large commercial properties in Detroit.

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