A mayor in handcuffs, a bankrupt city mired in poverty, unemployment, and soaring crime: 10 years ago that was Detroit’s legacy. Today, it is a real estate success story.
Early investors—to quote one of Motown’s most famous songs—are dancing in the street. Developers are pouring billions of dollars into its business district, luring the likes of Ford, Quicken Loans, Blue Cross Blue Shield, and more to take up office space. There’s even a Gucci store—the city’s first. The spillover has resulted in booming residential home prices—up 40% since 2020—and revitalized neighborhoods.
Vacant Buildings to Residential Space
Detroit’s tale is one that other cities such as Pittsburgh, Washington D.C., New York, and San Francisco, experiencing the post-pandemic downtown doom loop of empty offices and increased vagrancy, could do well to emulate. A total of 40-plus major construction projects have been completed or are being completed downtown since 2018, and thanks to new construction and repurposed former vacant buildings, there will be 9,567 more residential units in 2024 than in 2021.
Preserving and Repurposing Historic Buildings
In this respect, Detroit has succeeded where other cities have failed, in part because many of the city’s downtown office buildings are almost a century old, with small floors and stylish architecture that convert well into residential buildings—unlike the 1970s and ’80s glassy towers in other cities.
Spearheading this conversion is Dan Gilbert, a Detroit native and the billionaire co-founder of home lender Rocket Mortgage. This pioneer moved his company to downtown from the suburbs in 2010. He told the Wall Street Journal, “We really had three options: Extend the leases, go to some farmland and build a campus—which wasn’t really attractive to us—or come downtown and fill up some of these beautiful old buildings that we really loved.”
Making Downtown a Destination for More Than Work
Gilbert’s companies bought more than 130 properties downtown, spending billions on revitalizing the city and encouraging other companies to take advantage of cheap office space in gorgeous buildings. Ford Motor Company, always synonymous with the city, is spending $900 million to redevelop Michigan Central, the city’s abandoned train station—opening in June—and surrounding properties. Start-ups are streaming in.
However, to make Downtown less office-dependent, casinos, sports venues, and revamped aging theaters have added a vibrant nightlife appeal. Developers have responded to generous tax breaks to build, and the knock-on effect has been increased condo and apartment prices.
“Best Investment in America”
Residential property values in the city climbed an average of 23% last year, marking the seventh straight year of growth. Values rose 31% in 2022 and 8% per neighborhood from 2021 numbers. In total, all 208 of the city’s neighborhoods saw increases.
Mayor Mike Duggan gleefully called the city the “best investment in America.” Some neighborhoods, such as Campau/Banglatown, New Center Commons, DelRay, and Carbon Works, saw their values increase by more than 50%. A strategic plan to keep real estate taxes low has helped.
“Since 2018, Detroit property values have exploded, not your tax rate,” Duggan said in a statement. “It stayed down here, and today, the average Detroiter is being taxed at half their assessed value.”
A Haven for House Flippers
As such, in recent years, Detroit has been a haven for house flippers and new residents. Duggan said about 15,000 homes, as well as parks, streetscapes, and streetlights, saw improvements. He also mentioned the Detroit Land Bank’s declining inventory, which has gone from 45,000 abandoned homes in 2014 to less than 5,000 today.
Today, Detroit remains extremely affordable. According to Realtor.com, the median listing home price is $89,900, and the median sold home price is $79,000. Although the current 4,236 homes for sale cover a wide range of prices—everywhere from $750 for a lot to $8.6 million for a 36,000-square-foot multifamily property—investing and raising a family in a decent Detroit neighborhood is extremely achievable.
Rents have also increased in the city, making it a profitable place for out-of-town landlords to invest. They often buy houses for cash. The same amount of money would only pay for a down payment elsewhere.
“Market sales are 58%, and distress[ed] sales are about 42%,” City Councilman Coleman A. Young II told the Detroit News. “That’s one of the first times that we’ve had more market sales than distress[ed] sales in the city of Detroit.” In 2013, 90% of Detroit’s homes were sold for cash, as borrowers could not obtain a mortgage.
But There Are Still Issues
Despite the massive new development and rising house prices, investing in a Detroit fixer-upper is far from a cakewalk, as this New York Times article reveals. Finding a quality, honest contractor can still be tough, and nefarious characters are around, ready to steal tools and worse. “Welcome to Detroit” is a phrase often used by jaded police officers when out-of-state investors fall victim to crime.
All this means that out-of-town investors still have to pick and choose neighborhoods to buy in carefully, and having the help of knowledgeable real estate investors and property managers in the area is a huge benefit.
Other Cities Like Detroit Where Investment Makes Sense
It’s hard to find cities like Detroit, where house prices are still incredibly low, and yet tremendous development and appreciation have occurred. That’s because Detroit scratched its way up from bankruptcy when the loose change in your pocket could have bought you a home there a decade ago.
Other major cities experiencing downtown problems are still too expensive to invest in, whereas other affordable Midwestern cities, such as Indianapolis, Minneapolis, and Cleveland, have been losing workers in their downtowns, resulting in a loss of residents.
However, several Midwestern cities, such as Canton and Akron, Ohio; Omaha, Nebraska; and Springfield, Missouri, have emulated Detroit, reinventing themselves with new businesses and attracting new residents. These cities are ripe for investment. Beginning the investment journey here means comparing house prices, rental rates, and talking to real estate agents and property managers.
Final Thoughts
As an experienced investor, I have learned that the bodybuilding adage of “no pain, no gain” also holds true for real estate. To achieve the best returns, you have to be prepared to endure a degree of discomfort. Riding an equity/appreciation wave as a city transitions from bad times to good means catching the wave during the dark days and all the ills that come with it.
Early pioneers who invested in Detroit 15 years ago undoubtedly have their war stories but are sitting pretty today. However, the house prices are still low enough that investing here still makes sense.
Looking at the projects planned for a city’s downtown area can often indicate how the surrounding areas will operate: What new businesses are moving in? Are they future-proof? What are the development plans? Are there new coffee shops, art galleries, and artists in the neighborhoods? Are residents arriving rather than leaving?
These are the early signs of any city on the move. Making a downtown livable and a place to congregate safely outside work hours is another strong sign. So far, Detroit seems to have checked all the boxes.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
