Detroit Rentals: Still worth it?

If you own rental property in Detroit, you've probably heard rumors for years that enforcement is coming. Or maybe you haven't. In that case I'm sorry to be the bearer of bad news. The maintenance code that went in to effect in 2010 looks like it will finally come home to roost this spring.

The code was what I'd call "ambitious" because it included requirements never before seen in the United States. If you missed it here's a link. I'm referring to the requirement of having all rental properties inspected and cleared for lead hazards. Typical leasing and sales contracts had been entirely covered by a one-page RESPA disclosure that passes almost unnoticed in the closing packet. I'll save the full discussion on that for another post. But because there was really no enforcement, no one really knew about it, and no one really considered that cost when closing the deal.

You can bear the cost of annual inspections and, aside from the first time, the resulting light repairs and still cash flow. Throw on the LIRA and Lead Clearance, still doable, even with an annual Risk Assessment. But then you start factoring in lead abatement and possibly an annual lead abatement bill? Wow. There are a lot of properties that will not make sense to own unless you're changing from a cash-flow to an equity strategy. Since the appreciation for most neighborhoods outside the NEZs is still a huge ??? my guess is that about half of the professional investors will eventually leave.

As my very first post, I think it would be bad form to leave you on such a depressing note. There is hope for all you hardy investors with the wherewithal to see it through. Here it is: You'll immediately benefit winning all money judgments and quick evictions. Right now, tenants can trash a unit and tell the judge "see this unsafe slum I'm living in?" Judge says "sure do! I don't think anyone should pay for that and here's some extra time for you to find a new place..." The new world of a certified rental means the city has the record that your place is awesome. You'll get your back rent AND the damages. I know you're thinking they probably aren't collectible anyway. Another thing of the past! With a certified rental, you'll be in an elite group. The market probably can't afford much of a rent increase but you will get to pick much better tenants. Quality tenants with strong credit and great earnings put the "passive" back into the passive income. You're going to have fewer losses and a lot less headache.

If you're in the right areas, you can be bullish on appreciation too. In the perfect area, it could be meteoric. The changes happening downtown are very exciting and the momentum seems ever increasing. I believe the ultimate impact of this enforcement will be to shrink the rental market, push up the rents, and stop the rental merry-go-round. It's an engine to create gentrification and it's going to help stabilize, improve, and restore value to the housing market. For you stock traders, I put it like this: Detroit is a penny stock trying to become a small-cap.

So do you have whiplash? Believe me it's day-to-day around here....