Develop or Buy in Detroit

Detroit is similar to many cities that are experiencing blight, white flight, and gentrifications. All of these stages in a cities death and resurrection usually share the same results. In cities such as San Francisco, Dallas, Detroit, or Washington DC, there are rules of thumbs that developers use to determine what, when, and how much to build. This discussion will highlight some of the general rules of thumbs that a developer, investor, or buyer may want to consider before financially committing. We will use Detroit as our example.

Profits and real estate appreciating are two drivers in determining a developer, investor, or buyer's feasibility. First, profits, usually a developer, expect nothing less than 10%, which is shared between management and investors. Next, include approximately 11% for property taxes, plus fees at 5% for parks, roads, sewer lines, and additional city services. Additionally, the probable percentage for material and labor(construction expense) uses 43%. Once you total these percentages, you will have approximately 13% for land cost. Again, these are rules of thumb that can be used in your "napkin" calculations. Finally, market or buyer metrics need to be researched. Presently, properties in Detroit range from $50K and up, depending on location and property size. Also, the average income is $70k.

Assuming the above, a typical example of purchase and a develop/investor scenario would be as follows:

Purchase New Construction 

Affordability is based on a two-person household income of $150,000. At 25% debt to income ratio- $ 3,125/mon. This would services a $250K-$400+mortgage amount. However, due to Detroit's potential market, Table 1 illustrates a range of $150,000 to $350,000 sale price for new construction. It is known that the $150,000 home at 500+ sf is not marketable-due to size, option A. Also, option B, the 860 sf, is questionable, except in a Condo-Apartment type unit. In Detroit, units in the range of 1200+sf are marketable within a price range of $250K-$350K, option C. Most important, the cost to build at less than $180/sf is very challenging in Detroit. Unfortunately, many existing homes are larger and can be purchased for less.

Table 1

Purchase Existing Home + Renovation

In contrast to a new build, Table 2 illustrates purchasing an existing home plus moderate renovation. This scenario indicates that this is feasible to Develop/Invest or buyer purchase. What is significant in this approach is the difference between the potential sale price and cost. Additionally, the square footage in existing homes is much larger than newly constructed homes and is affordable within the present market conditions.

Table 2

The suggestions above ensure Detroit's future includes affordability for local citizens by keeping rents and homeownership within the means of average citizens instead of allowing property values to exceed pricing that surpasses 20 to 25 percent of average Detroit household wages. All options under Table 2 are doable and should be accessible to many first time homeowners, real estate investors and empty nesters.