Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
Well well well.
Almost right on cue, right after I wrote the piece on $500 houses in Detroit, someone else wrote a piece on the five reasons they ARE investing in Detroit.
A young guy from San Diego no less.
If you’ve been reading my stuff for more than five seconds you KNOW that I can’t resist a challenge like that.
So let’s take a look at why Mr. San Diego likes Detroit, and then see if we can’t undo some of his spin and get to the real story.
His Point #1: Because “hipsters are on the way.”
He wrote that…
“…the much maligned, bike riding, mustache growing hipsters are a key demographic for real estate investors to watch. Before the renaissance that made Brooklyn a destination for upper middle class New York City residents, Its grungy streets were taken over by hipsters.”
“They biked, they sang, they painted, they opened boutique coffee shops and hosted live music festivals. They started small tech firms and made empty brick buildings with concrete floors into trendy apartments. They talked about new world orders and made kale smoothies -- and all the while transformed Brooklyn from a dangerous borough-to-be-avoided into the trendy $4,000-for-a-two-bedroom-apartment place that it is today. Hipsters did that, and they are moving to Detroit en masse.”
And…
“As was reported by Venture Beat News just days ago, major venture capital firms are dumping money into young startups that are finding a home in the beleaguered city. There is still time to be an early adopter of Detroit investment, but that window will close, it’s just a matter of when.”
My Response: THIS ISN’T NEW YORK!
Geez, how many times do we have to go through this? Harlem and Brooklyn were gentrified because the housing got too expensive so people looked to the fringes to be able to buy. And the fringes kept moving, which turned over large areas of previously undesirable areas.
Detroit isn’t like that. There is no upward housing price pressure forcing people to buy in the fringes. Far from it. The “hipster” crowd downtown is focused on two relatively small areas called Corktown and Midtown. That’s it. Remember that Detroit is 142 square miles, or about the size of 69,000 football fields.
The areas the hipster crowd is descending on is about two or three square miles in size. Max. There aren’t enough hipsters on the planet to turn over the entire city of Detroit.
I guess we should be happy about that.
His Point #2: “Buy low, then do not sell.”
He says that…
“…of course we’ll want to sell eventually, but there is no rush. Detroit’s recovery is starting now. That means it has miles to climb -- and many junctures along the way for us to cash in our investment.”
“For those willing to buy and hold, the potential for returns is higher than anywhere else in the United States.”
And that…
“Make no mistake, the city parks will be cleaned up, the fountains will be turned on, and major corporations will put their names on the city’s skyscrapers. In fact, when the Detroit Convention Center went looking for $299 million of investments to renovate its facilities, they received $922 million worth of bids within two hours. Renovations like that will multiply the value of our investments exponentially.”
My Response: He’s doing the pump and dump!
“Make no mistake, the city parks will be cleaned up, the fountains will be turned on.”
That’s his justification? Well it’s a bunch of crap.
A bunch of friends of mine have a group call the Detroit Mower Gang where they do a mass mob of mowers at a different park in the city every weekend in the summer because the city doesn’t have the money or the will to do it themselves. And post bankruptcy the city “leaders” are now bickering about giving big pay raises to city workers, who are already some of the highest paid in the country.
And the Detroit Convention Center bids? They were selling BONDS with a SKY HIGH INTEREST RATE. That’s why the offering was so oversubscribed!
What does the Oracle of Omaha say?
His Point #3: “Don’t follow the crowd, follow Buffett”
“I like to buy mispriced things,” Warren Buffett said during a visit last year, saying he would gladly buy a company in Detroit. The billionaire investor is well known for his uncanny ability to find bargains and then sell at the zenith of their value. If he has picked Detroit, that’s good enough for us.
My Response: This one actually got my attention!
I mean, who bets against Buffet? I sure don’t.
BUT – Buffett hasn’t bought anything in Detroit. Zip. Zero. Nada.
So while he may talk about how he “would consider” investing here, the bottom line is that he hasn’t. That’s good enough for me! LOL
His Point #4: “It’s an emerging market that takes dollars.”
His point is that…
“…most emerging markets are found in Asia or South America -- but some describe Detroit as an emerging market as well, it just happens to take dollars.
It is emerging in the sense that it is developing totally new industries and is rapidly winning investor confidence in what it can do. Already investors have spent over $1 billion to renovate tourist attractions like its Greektown Casino, downtown hotels, and restaurants. $650 million has been poured into a new sports arena and into renovating the arena district.”
My Response: This is just plain stupid.
An emerging market? Developing totally new industries? Fine – name one “new industry.” You can’t, because there aren’t any. And those renovations? Yeah they’re happening downtown. You know – in the same 2-3 square mile area that the hipster crowd is invading..
So are you getting the point that anything and everything that’s happening in Detroit that’s the least bit interesting is happening in that tiny little 2-3 square mile area?
Detroit is investor friendly? When did this happen?
His Point #5: Detroit is investment friendly.
He wrote that…
“To be sure, development plans will still have to go through standard city planning approval processes -- but Detroit is welcoming investors with open arms. Since they made it through bankruptcy proceedings, they have taken serious steps to invite the kind of investments that we’ve already described. The culture in Detroit is one where developers and investors and the city government are working well together. We are excited about being a part of a business friendly culture like that.”
My Response: I nearly spit out my coffee on my keyboard when I read this one.
Let me put this in perspective. I live in the Detroit suburbs. I’ve lived here most of my life. I’ve been investing here since 2004 and I’ve done dozens and dozens and dozens of deals here, both in Detroit and in the suburbs.
I’m also a rental property owner, and in addition to having done a ton of deals in Detroit, I also own rental property in the city.
And I can tell you, from firsthand experience, that Detroit is the most screwed up, dysfunctional, and investor-hating city that I have ever done business in.
Yes, I did say investor-hating. Because it goes way beyond dislike. Detroit actually goes out of its way to make life difficult for real estate investors in the city. It’s like a sport to them.
So I’m calling BS on Mr. San Diego. It’s like he’s never even been here. Because the Detroit he’s describing doesn’t exist.
It looks like Mr. San Diego is looking to pump up the value of Detroit real estate so once the prices go way up he can dump it at much higher prices. It’s the “greater fool” concept – playing out before your very eyes.
Beware!
Lemme Hear Ya
Got anything to add about Detroit? Feel free to agree or disagree with me in the comments section below.