Investor Blog Articles

Why Invest in Michigan Real Estate? Opportunity Amongst Negativity

As we sometimes do, Jerry and I would like to post an article relevant to our industry and discuss the current issues. Since I (Joe) live in California and Jerry lives in Michigan, we decided to write our own perspectives on this topic.

Jerry here. We sometimes hear negative comments about investing in Michigan due to the depressed economy. Yes, Michigan is a depressed market, everybody has heard the negative news in the media. Job losses, plummeting real estate values, foreclosures, blah, blah, blah. To be honest, I’m sick to my stomach when I hear someone complain and I have decided to not focus any energy on it. Zig Ziglar once said (and I’m paraphrasing), that he’s noticed all throughout his life that when the economy is strong, there’s a bunch of folks going broke and when the economy is bad there’s a bunch of folks getting rich. The point…don’t pay any attention to the economy, find a niche and make things happen! I’d like to show that despite the bad economy in Michigan, there is a niche and those that take advantage of it will come out very wealthy.

Despite the suffering Michigan economy (or maybe because of it), the rental market is strong and thriving. Let’s examine why this has happened, why this is an opportunity and how to take advantage of it.

The strong rental market is strong due to a few factors.

Former home owners are now renters:

Many of our current tenants are former home owners whose adjustable rate mortgages came due and unable to make their payments, lost their homes to foreclosure. They are working people who are now forced to rent.

Lower income and lower middle income not as affected:

While it is true that the main reason for the declining Michigan economy is the struggling automotive industry and it is true that those jobs also affect other jobs, it is reasonable to assume that it is the middle class that has been affected the most. The lower class, lower middle class and the upper class are not as affected. Let me illustrate: Our properties typically rent for $750-850/mo. The general rule of thumb when qualifying a tenant is that his/her net income should be twice their rent (depending on his/her bills). For argument’s sake, let’s suppose that a tenant is approved for an $800/mo rental and his/her net income is $2,000/mo. Assuming a 40 hr work week, that equates to approximately $14.00/hr before taxes. As such, there has not been a big influx of people of this income level moving out of the state. We specialize in the lower and lower-middle class neighborhoods. These are properties that only a few short years ago were valued at $80-$120k. Today, we are selling fully renovated for $40-$50k!

Section 8:

The government continues to give section 8 vouchers to qualifying tenants. This has also kept the supply of renters high. All of our properties are section 8 ready and we fill close to half of our properties with section 8 tenants. (To learn more about section 8, refer to our article).

Top-Notch Rehabs:

All of our properties are fully renovated. We go above and beyond to ensure each property is mechanically and cosmetically above par. For example, each property has hard-wired smokes (even though this is not mandatory). Each property has 2 tone paint. We replace carpet, windows, roofs, plumbing, electrical, etc, etc. We have developed a reputation in the community as investors who provide very nice and clean housing. As a result, tenants chose our properties over any others on the market and gladly pay average or above average rents.

All and all, a strong rental market combined with Equity Services, LLC. equals big profits!

Here’s the formula:

+Down market

+Fully renovated house

+Extremely affordable ($45k for a house that was recently worth $90)

+Strong rental market

+Positive cash flow

+Turn key (renovated, management in place, etc)

=Big profits.

There is a catch…you must be willing to ride the storm and wait for the market to turn around (which it always does). No one knows how long it will take Michigan to stabilize and then appreciate but in the meantime. collect some positive cash flow. At any rate, rather than listening to the mainstream media (which love negativity), look a little closer at the good things going on (see below a list of links of positive things happening in Michigan).

This article was written by Jerry Norton of Equity Services, LLC

Joe here. Warren Buffet said the following in an interview with Money Magazine in April of 2008. “You know, I always say you should get greedy when others are fearful and fearful when others are greedy.”

Following Buffet’s definition of greed, all of us “greedy” investors are buying up rental properties in places like Michigan and riding out the storm. With a little time and patience we will make a lot of money. While at the same time, the “fearful” are saying “Michigan is in trouble and the economy is depressed.” Like Jerry, I chose to see the opportunity and let’s face it, I’m a little “greedy” too.

I live in Southern California and it is interesting to see people’s perspective on the California real estate trends in relation to other parts of the country. Some think the decline in values here in CA has created a great opportunity to acquire property below value. For example, I recently spoke to someone who commented on the “great deal” he got on a property he bought for $700k that was recently valued at $1 mil in 2006. What he fails to realize is that same property was worth $400k in 1999. The price rose so fast only because of the demand and the demand was there only because of the loose mortgage terms (which we are finding out was not such a good thing). The lending industry has learned a HUGE lesson from this and it will NEVER be that loose again. Who’s to say that his $700k house won’t drop back to $400k?

Let’s look at this from a different perspective using square feet. An average 2500 sqft house for $400k equals $160/sqft. Just two years ago before the decline in Carlsbad Ca, you could buy a brand new house 5 minutes from the beach in the resort community of La Costa for $189.00 sqft. The point is places like CA that rose the fastest may also fall the fastest.

Michigan, on the other hand, never went through the huge appreciation like many other parts of the country. You can buy a completely rehabbed property from Equity Services LLC on average for $35-$45 a sft. Let me tell you something, you cannot build a house for less than $100.00 sqft. That is value!! How can you go wrong owning a fully renovated rental property purchased for $45k? I recently visited Michigan and was thrilled to see so many great things going on. For being such a “bad” economy, every upscale restaurant I went to was packed! Michigan has a lot of momentum in place to turn its economy around and create more jobs. Let all the bloggers keep talking negative while I’m laying the groundwork to be prepared for the turn-around.

I have listed several links below that will show you some of the things going on in Michigan to return it to the power house it once was.

This article was written by Joe Traficante of Equity Services, LLC

Click to see our list of available properties.

Informative links on rebuilding Michigan’s economy.

• $100M in hand, New Economy Initiative ready to invest. Full Story
• Congress is expected to act within the next few days on giving Detroit automakers $25 billion in loans to retool plants for alternative-fuel vehicles. Full Story
• A panel of the Michigan Economic Development Corp. was to consider tax incentives Tuesday morning for General Motors Corp. to support investment in existing facilities in Detroit, Warren, Bay City and Pontiac and a new $326 million engine plant in Flint. The projects total $838 million in total investment and would retain 3,723 jobs. Full Story
• Bank of America, which just recently finished its acquisition of LaSalle Bank in Michigan, is pledging $25 Billion in community development lending initiatives for Michigan. Although they have said that they will likely streamline LaSalle and lay off some of its workers, the CEO has made some strong statements about having a large new presence in downtown Detroit.
• Bank’s chief likes downtown
• Almost all of B of A’s regional offices are in downtowns around the country. I guess they see opportunity where others see despair. As one of the largest banks in the U.S. and possibly the world, it’s interesting to hear B of A’s take on Michigan. They don’t make stupid moves.

• Ford will invest 75-million dollars into the Michigan Truck Plant. Full Story

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