I talk to a lot of investors each week and everyone I talk to knows about different types of investing for different markets. For the most part if you’re investing in California, or some other high value highly appreciating (at times) area, you are investing for equity. If you’re investing in a low price point area that hasn’t seen a run up in appreciation in the past few years, you’re investing for cash flow.

This seems pretty intuitive because rents in hot areas in California, like San Diego, don’t move on a linear path with the value of the home. In other words, the value or price of the home goes up much more than the increases in rent can cover. Many people find they’re in a negative cash flow situation in these areas but they have significant equity that they can realize so it’s a good investment.

In areas like Detroit, the rents cover much more than the low price points that you can buy houses at so you experience something hard to find on the coasts, monthly cash flow. Now you will hear people tell you that you can’t buy for cash flow in California or you never buy for equity in Detroit. Not only should you not listen to people that give you a definitive statement like always, can’t, or never but you should also look to see what everyone else is passing by. I’m now going to show you how you buy for equity in Detroit, how you buy for cash flow in Detroit, and why you should be investing in both.

Cash Flow
Investing for cash flow is the most basic form of investing for most people. You buy it cheap, fix it up, then rent it out for more than your expenses (Principal, Interest, Taxes, Insurance (PITI), management, vacancy, maintenance) and get your $200-$300/mo. cash flow. It has been proven time and time again that cash flowing rentals are the way to true wealth and Detroit is bursting at the seams with these types of opportunities. When we’re investing for cash flow we’re talking strictly numbers.

In fact, I don’t even want to see the house. I want my contractor to tell me how much it costs to fix it up and I want my property manager to tell me how much it can rent for and if it an be rented out easily. Besides the numbers, that’s ALL I want to know. Don’t let emotions get tied up with a cash flowing properties because it’s all the numbers. Is it not as sexy as what you want? It doesn’t matter because you know how much it costs to fix and your property manager says they can rent it out. Some of my best cash flowing properties are sleepers in my portfolio. You might look at the house and tell me how ugly it is or how plain looking it is but all I see is how it always stays rented and how I’m stuffing hundred dollar bills in my pocket each month.

On cash flow properties, you need to be especially aware of the taxes and purchase price. Your taxes are too high or you’re all in at over $40,000 and you’re going to have a tough time getting cash flow (counting all expenses including PITI, management, vacancy, and maintenance).

Equity and Future Growth
I like to call these properties my early retirement pay checks. Like we talked about before, when you’re investing in Detroit, you’re always looking for some cash flow but how much? Is it always the $200-$300 a month? I say no. What if I told you there was a beautiful brick colonial built for the upper class that you can purchase, renovate, and rent out for a little cash flow each month (less than our cash flow properties)? Well, that alone doesn’t sound like a good deal but what if I told you that the current conservative appraisal value of the house was a good $40,000 to $60,000 higher right now and that you have the best chance of future growth on this type of property? It’s sounding a little more interesting isn’t it?

While these properties have higher taxes and price points right now, they also are in demand for renting and will mean big paychecks in the long run. Making these investments a part of your portfolio mean that when equity becomes easily realized in Detroit and we, dare I say, see modest appreciation gains, you will cash in big on these types of properties. While you shouldn’t completely disregard taxes, your taxes will be higher, which will eat into cash flow. Plan on this. The main points to consider on these houses are the aesthetics of the house, the demand for the area, and the possibilities for future growth for the area.

You may be sitting there thinking, “I want to invest in cash flow properties so I build up a great passive income and get that steady monthly paycheck” or you may be thinking, “I want to invest in equity and future growth properties so I can cash big checks in the future for my retirement.” but why not do both? I have to tell you, I love my cash flow properties. The monthly passive income in the form of checks in my mail, the tax benefits of depreciation and passive income, and the low price points but my portfolio doesn’t fully consist of these and I don’t recommend you only having these. The passive income is great because it will keep going and only get better as your tenants pay off your mortgage but shouldn’t you capitalize on some future growth as well? Most definitely. Passive income is great but so are large chunks of money. We have the opportunity to buy houses cheaper than they have ever been and cheaper than they will most likely ever be.

Buying for equity and future growth (as long as the numbers work now), is a great way to give you big pay checks in the future. I like to see a 75% to 25% ratio on cash flow to equity and future growth properties for a strong portfolio but it all depends on your needs. I have clients that like to make it a more 50/50 split. This is something for you to decide. The main point of this is to get you thinking about that ratio, different ways of investing in Detroit, and getting you away from the 100/0 or 0/100 type of split.

Remember, you don’t have to know all of this information down pat on areas, types of houses, and viability of neighborhoods. Talk to the investors that have been doing what you want to do in Detroit and that have the knowledge. We’re the Detroit Experts because Detroit Investing is what we successfully do day in and day out. We’re always available for questions.

Jared Pomranky
Detroit Market Expert

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