Detroit received bankruptcy protection back in December, and since then has announced plans to direct funds towards its neglected municipal services, lifting itself out of poverty and becoming once again “a city in which people want to invest, live and work.”
Investors all over the world have been quick to spot the opportunity, and Warren Buffet himself has described Detroit as having “huge potential.”
In the past six months, on average we have been able to offer housing in Detroit City for $45,000, a staggering 58 per cent below price at market peak, delivering rental yields of 12 per cent. We believe that the growth potential in this area is incredible; in Metro Detroit we saw house prices rise by 16.4 per cent in 2013, beating FTSE 100 which, despite reaching a 14 year closing high in February, grew by 11.97 per cent in the same period.
Once America’s fourth largest city and now its eighteenth, Detroit has lost over a million residents since 1950, leading some to doubt whether investors will be able to find tenants to fill the property so widely and cheaply available. But those people are missing the big picture: in the decade ahead, Detroit will dramatically improve living and working conditions that will attract people to the city, grow the local economy and push up today’s rock bottom house prices.
When investing in a complex area such as Detroit, you need to do your homework. There is a great divide between neighbourhoods, and the cheapest properties do not necessarily have the most upside.
Avoid information asymmetry and make sure you really understand the neighbourhood, the crime rate, whether the street lights work – these are all things that will matter when it comes to finding tenants and eventually selling the property. We would particularly advise those who are unable to assess the property in person to seek guidance from experienced consultants with local connections.
Overall, we believe that Detroit has sown the seeds for recovery and as the US economy and the city itself continues to improve, there are significant gains to be made for the investor who knows where to look.