It’s been a bit more than three months since I wrote about our first “full circle” Detroit rental property. We now have four that have gone full circle, that’s to say purchased and refinanced (technically delayed financing). But I’ve been waiting to write about each one until they are stabilized with a solid tenant. That usually takes a few months.
Our property on Greydale Ave. was the first house we offered on way back on April 19th of this year, but it didn’t close until July 11th! The closing was delayed multiple times because the seller lives in France and there was a lot of work to do getting documents through the Embassy.
But the house was worth the wait. It’s a beautiful 1,800 sq. ft., brick Tudor that ended up having one more bedroom than we thought it had. I love the house and the location. It’s a stone’s through from a newer Meijer, a lot of other conveniences, and one of the Detroit police stations. There’s a community center and park half a block away, and the house is in fantastic shape.
That said, it does need a roof in the next 1-2 years and the windows will need replacing eventually. Those are some hefty expenses. But there was also a clear value add here. Let’s take a look at the data:
By the numbers
The house was initially listed for $55,000 on the MLS. We offered $45,000 and it was accepted almost immediately. That made me nervous. Knowing what I know now, I’d have happily paid more for the house. But back then, this being our first purchase and first home we’d ever looked at, I really wasn’t sure if it was a great buy or not.
Here’s how the final numbers broke out:
- Initial purchase price: $44,000
- Closing costs: $803.00
- Property taxes: $1,106.56
- Closing credits (prorated rent & security deposit): $1,224.52
- Initial cash invested: $44,685.04
You’ll notice the purchase price listed here is $44,000 rather than the $45,000 our offer was accepted at. We asked for a $1,000 credit for the delay in closing and received it without issue.
The home appraised for $48,000 which was lower than I’d expected. But seeing as it was still higher than we paid for it I wasn’t too disappointed.
We were able to take out 75% of that value immediately, up to our total purchase price plus closing costs on a 30-year mortgage at 4.99% interest. Here are the quick numbers on the mortgage:
- Loan amount: $36,000
- Closing costs: -$2,035.75
- Other costs: -$618.35
- Payoffs and payments: -$137.10
- Closing costs financed into the loan: +$1,083.40
- Total cash received at closing: $34,292.20
So all said and done we were left with $10,392.84 in the deal. But that doesn’t include the rent we’ve collected since then, rehab expenses or mortgage payments.
Here are those numbers:
- Rent collected: +$4,160
- Total rehab expenses: -$300
- Mortgage payments: $386.08
So as of today we have a total of $6,918.92 in cash tied up in this deal. Here’s a look at all the above data in chart form:
Raising rent
You’ll recall the tenant was paying $730/month when we purchased the home. This is pretty low for the area, especially considering the size of the house. I knew we’d be able to raise it.
The existing tenant is section 8, and we almost immediately put in a request to have it raised. They require 60-days notice. Our request was approved for $900/month which did up the tenant’s portion from $166/mo to $321/mo but I spoke to her beforehand, and she said she’d be comfortable with it still. That was important to me because she kept the house clean and tidy. I didn’t want to lose her.
So we collected two months of rent at the $730/mo rate and the last three have all come like clockwork at $900/mo. Our tenant hasn’t ever been late with her portion. She’s fantastic.
Not really rehab, rehab
As previously mentioned, the house really didn’t need any immediate work. That said, I noticed the tenant did not have a washer and dryer. She’d been living there a couple years, too. I saw this as a great opportunity for some good will, especially with the rent hike.
When I asked the tenant if that was something she’d like, she was super excited. It cost us $300 for a used set, delivered, and installed. That’s a win-win in my opinion.
Mortgage and monthly expenses
Our monthly mortgage payment is a whopping $193.04. I’m pretty sure I could go panhandle for that if it came down to it.
Now, that does not include our property taxes, because we don’t escrow that. But that’s only a little over $100/month on average.
We also have property insurance which runs $45.70/month. That puts our grand total for fixed expenses at about $350/month. That leaves $550/month to set aside for repairs, capex, and cash in our pocket. Not bad.
Most folks I talk to that don’t own property in Detroit site the “extremely high” taxes and insurance. They’re surprised when I share mine with them. As a percentage of the home’s value, taxes are high, sure. But as a percentage of monthly rent, it’s not at all bad.
Conclusion
Knowing what I know now, I’m extremely happy I ended up following through with this purchase. Again, it was our first, so I didn’t yet know what I didn’t know.
I don’t expect us to truly start turning a profit from this house for 2-3 years due to the roof and windows that will need updating. But that’s really true for all the houses we’re buying.
Houses in Detroit have been neglected for years, if not decades. There’s a ton of delayed capex that needs to be addressed with almost any purchase. I’m well aware of that and have a long-term mindset. So it doesn’t bother me. And I still firmly believe it’s a great time to be bullish Detroit. We’re going to look back in 5-10 years and wonder how we bought such great houses for so cheap.