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Q: Is GM going bankrupt and what impact will the disintegration of the big three have on Detroit real estate?
A: GM may go bankrupt, but like the large banks, the government will not allow it to fail; GM's importance to both the current economy as well as military readiness is too great. Detroit will suffer jobs losses but real estate values are already depressed to the near bottom in our focus markets. We do not foresee further declines in value. We do however foresee additional inventory of distressed properties becoming available and the rental market strengthening.
Q: How can I invest in a market that I don’t live in?
A: Investing in a market far from your home requires the use of advanced information sharing technologies and a strong team on the ground in the target market. We use real estate agents and contractors equipped with small video cameras to help us evaluate properties and we employ property managers and contracts that we know and trust for ongoing management of the properties we decide to purchase and rehab. You can see a sample of pre-purchase videos here.
Q: Is Detroit safe?
A: Crime in Detroit, Michigan has declined by 23 percent from 2000 to 2004, but the city's crime-ridden areas have brought it notoriety. In 2006, the city had the sixth highest number of violent crimes among the twenty-five largest cities. Crime is unevenly distributed throughout the city. A 2006 study showed crime in downtown Detroit (CBD) is much lower than national, state and metro averages. The Detroit Police Department's Crime Analysis Unit has reported that crimes have dropped by 24 percent since the introduction of casino gaming to the city. Murders peaked in 1974 at 714 and again in 1991 with 615 homicides. By the end of 2007, the homicide count fell to 383 for the year, with an FBI estimated population of 860,971. According to a 2007 analysis, Detroit officials noted that about 65 to 70 percent of homicides in the city were confined to a narcotics catalyst. (From Wikipedia) You can search the past 30 days of crime data in Detroit at CrimeView.
Q: What happens if the market goes down? If interests rates rise?
A: We do not expect the further drops in Detroit real estate values because values are already at rock bottom. There may be short-term dips in value as the nation as a whole weathers the current economic storm, but we see this as creating additional opportunities to acquire and revitalize distress property. Paradise Valley insulates itself from interest rate increases by self-financing all acquisition and rehab costs. In the future, when lending on residential property normalizes, we may utilize fixed rate loans to expand our operations and remain insulated from interest rate increases.
Q: Why is real estate a good investment in a bad economy?
A: The best time to invest is when prices are low. In a bad economy there are more distressed properties available for fire-sale prices and an increased need for decent, affordable housing. Real estate investing is a long-term proposition and Paradise Valley's business model does not depend on appreciation to create profits. We focus on purchasing assets that generate positive cash flow immediately after rehabbing and occupancy. We have compiled a few articles that speak to this question:
1) In a bad economy, real estate still a solid investment
2) Real Estate Investment: A Wise Decision in Any Economy
3) I heard the economy is bad – is it a bad time to invest?
Q: What are the hidden costs?
A: Costs which some people do not take into account are: rehab cost over-runs, vacancies, costs to acquire tenants, property management fees, insurance and, especially in Detroit, property taxes.
Q: Why should I work with Paradise Valley instead of a real estate agent in Detroit?
A: You should always work with a real estate agent if you are not a sophisticated investor; they help facilitate a very complex process. But with a real estate agent you end up with a structure and some land. With Paradise Valley you get a performing asset, complete with tenants and management in place.
Q: Isn’t Detroit on the decline?
A: Like many other "rust-belt" cities, Detroit has been on the decline for more than 5 decades. The events that the United States now faces (the economic crisis, the climate crisis, the crisis in the automotive industry and the new administration) in combination with the inexpensive structures and availability of land (see photo) make Detroit uniquely position the lead the coming Green Revolution.
Q: How can I ensure that I’m buying properties in good areas?
A: Take a look at our Property Criteria Guide which details the properties we look for and our Property Qualifications Guide which we use when contracting with real estate agents.
Q: With the decline of the automotive industry, isn’t Detroit an unstable market?
A: No. Most of the value in the Detroit market has been lost to events in previous decades. The automotive industry, while headquartered in Detroit, is spread out over many states. The sub-prime mortgage crisis and resulting lack of easy financing has had more of an effect on the Detroit market than the decline of the automotive industry.
Q: What kind of people live in Detroit? Or, What kind of tenants can I expect in Detroit?
A: Our focus neighbors are 80% African American, 12% Caucasian, and 5% Hispanic. 20% of Detroit lives below the poverty line. All of our properties meet Section 8 requirements, which pays the remainder of the rent after the tenant pays up to 30% of their income, which means that most of our tenants are employed in service economy jobs.
Q: What do these prospective tenants do for work?
A: After the automotive (and related industries), health care systems and government entities (both federal and local) are the largest employers in Detroit. The city is showing success at tourism, but the employment numbers are not close to those of automotive, health care and government.
Q: How can I manage a property from out of state?
A: A strong property manager that you trust and is responsive is essential for successful out-of-state investing.
Q: Why are the property taxes so high in Detroit and is there any hope that will change?
A: Taxes in Detroit are some of the highest in the nation. There is some hope that will change with the new Mayor, but Detroit has an infrastructure for 2 million that must be paid for by 900,000 residents. Until economic vibrancy returns to Detroit, property taxes will likely remain high. We are developing a system whereby we can lobby city government for lower taxes but this is currently a hit or miss system and we cannot rely on any changes.