The average cost of rehabbing a home bought for $1000~$2000 say is $50,000. Have a look at the website:
The 'Rehabbed and Ready' (http://auctions.buildingdetroit.org/RehabbedAndReady) homes demonstrate the transformation from a $1000 to a $50000 property.
To my eyes this approach closely matches the 10% target described in the article, and seems to be a smart way to build a tax base.
A street in Detroit can go in a downward spiral within months. All it takes is one bad apple (home) that gets boarded up or goes down in flames near your investment and your purchase becomes a super high risk gamble, most probably with a very unhappy ending.
Add the high property taxes, completely out of touch with the current values of the properties in such neighbourhoods. And don't forget the back taxes from previous owners that you're often required to pay.
You lure people with a limited income, attracted by the low auction prices, force them to invest a significant sum to renovate a property to code within a limited time frame, saddle them with a mortgage and then you slap them with high taxes.
I'm not saying investing in such properties in Detroit is a bad move, you can make a lot of money with it, but it's not for the inexperienced or someone without a buffer to overcome setbacks!
You can make a decent profit on these, but not in a home flipping sense. You have to become a landlord. You are in it for the cash flow from renting it out.
My father in law does this in Baltimore. He'd make a lot of money if he wasn't so bad at rehabbing the places. He spends too much, makes them too nice, and can't rent them out for any more than the going market rate. Best house in the ghetto isn't worth shit. If he just did the bare minimum he'd be doing pretty well. And if the area ever gentrifies, he'll make a fortune.
One trick is to get Section 8 housing vouchers. That makes sure you are always getting at least some of the rent.
The downside is that you are basically a slum lord. He has to go and knock on doors for rent.
It's definitely not passive income--like renting a condo to working professionals can be.
We don't live in Detroit but bought 3 properties for 40k each with about 18-20% yields. The renters aren't the best (they're paying 800 in rent because they can't afford an 8k downpayment), but they're great investments.
There's a reason why the value op the property, including home and land, cratered to $500 or a few thousand dollars. It's the state of the neighborhood that dictates the value and it can change rapidly, faster than in regular neighborhoods.
It's not an investment I would recommended for inexperienced investors or people with limited savings who put all eggs in one basket. And sadly, the low prices attract quite a few of them.
When I suggest real estate investing of any kind, I usually hear a wall of objections about risks, and a lack of interest in how to counter those risks. It's part of the reason I like it.
(Not that I'd invest in Detroit, I don't have a rationale for it. Some people do)
Here's a good example how a lot of the $1,000 homes, and the surrounding neighborhoods, really look like: https://youtu.be/IuJFLJ0JApA . In the description there's a link to a follow-up video 3 years later. It's not a pretty picture. But then again, who buys properties on auctions without inspecting them first?
It seemed there were some distressed properties and that some work was done on them... which tells me nothing. Were the houses rehabilitated, is work still in progress or were they ultimately re-abandoned? Can any conclusions whatsoever be drawn from this?
It's definitely sympathetic to the plight of the very low income tenants but not unjustly so; anyway I found it fascinating and worth recommending here:
Regarding the notion of 'high risk' neighborhoods. See above point - risk is proportional to occupancy. Occupied structure, reduced risk. Rental unit with fallow periods - high risk.
The elephant in the room here is also Race. Race does not correlate to risk or a 'High risk neighborhood' - this notion is perhaps the most insidious and hardest for Capital to overcome - if it ever will be - in which case these supposed 'High Risk Neighborhoods' or 'Bad Apples' will always be labelled as such and avoided. (Incidentally I see this paradigm shift - to be the core argument of the article - albeit approached obliquely)
Regarding neighboring houses - A street in Detroit, if it can go in a downward spiral, typically already has, the city is currently in the process of demolishing blighted structures, and a property owner has a reasonable expectation that if a nearby house has-gone or goes 'galley-west' the city will take it down and offer the lot to neighboring property owners or list it for-sale on the website linked in the original comment.
The taxes correlate to the assessed value of a property, these are slightly unpredictable. However, the city is reassessing property values this year, working under the supposition that realistic valuations that people can actually pay are a better approach. Basically - I agree, lack of confidence in tax-rates is a bad thing, and it's a good thing the city is working to deal with this.
The average investor rarely" knows what they are doing".
The program is basically just a mechanism for a bunch of buyers to signal intent.
While it worked in some parts of the city, other parts of the city had entire blocks bulldozed. Kind of like what happened in SF when they blew up buildings to stop the fire.
Looks like the argument the article is trying to make relates to zoning, traffic design, and density - which I don't think is changeable by people taking advantage of this house flipping program.
That could be quite a large amount depending on the back-taxes and liens that could have been placed on the property.