Is there value in property markets unmoved for years?

The whole idea of investing in property is to build up a portfolio of quality investments offering cash flow and potential capital gains in the longer term. In the eyes of many, property portfolios are starting to take over the position once held by pension funds to help fund expenses in later life. However, there is a very interesting post on the property forum discussing the pros and cons of investment in Detroit where the market has been dead for many years.

Detroit

The forum post in question is titled “Detroit? Is it as Cheap & Worth the Gamble?” and starts with the following comment:-

“I was curious whether property in Detroit is as cheap as I’ve heard? I’ve heard you can buy homes for as little as a couple of grand, excluding fees & tax. Also, is it worth the gamble? I hear news about entrepreneurs investing and starting businesses in Detroit, trying to kickstart the economy.“

While it is still relatively early days for the thread, there is an interesting observation regarding rental yields in the region. A suggestion that they could be as high as 35% casts a very different light on these markets which have been neglected for many years.

Rental income

In theory, if we put costs to one side for the moment, a rental yield of around 35% would see a return of your entire investment capital in around three years. Even if we take into account running costs the timescale would not be overly extended especially when you compare this to traditional UK mortgages of 20 years or more. So, could this type of property market, which has been neglected and disowned for many years, replicate the prodigal cash cow that investors have been seeking?

Capital growth

When you bear in mind properties in areas such as Detroit can go for just a couple of thousand dollars the vast majority of us would spend more on a new car. If you can obtain a rental yield of around 35% would you be overly bothered about capital growth? Indeed, after three or four years you would have repaid all of your initial investment and still have a cash cow yielding 35% going forward. So where is the risk?

Accommodation costs

We can assume that because the Detroit property market is struggling that the economy is not exactly flying high. This would indicate a lack of employment opportunities and challenge the affordability factor to rent properties in the private sector. However, whether or not individuals and families in the region are able to afford accommodation in the private sector they will need to be housed somewhere. Some or all of the housing costs for those struggling would be taken up by the state thereby offering some backbone and some security for what are effectively buy to let investors.

Conclusion

On paper it looks fairly simple, acquire property at a rock bottom price, lock in a rental yield of over 30% and pay back your initial investment in between three and four years. Perfect?

Before you write the cheque and get in touch with a local Detroit real estate agent you need to do your homework. This is not as straightforward as it looks although for those with a longer term investment horizon there may well be opportunities. What if tenants are unable to afford the rent? What about damage to the property? Are these properties suitable for tenants without any further investment from a new owner?

The idea of acquiring property in areas such as Detroit and using the relatively high rental yields to pay down your initial investment as soon as possible sounds plausible. However, the devil is in the detail and you will need to do your homework before you jump in with both feet.