It was the largest city bankruptcy in American history, and Detroit owed an estimated $18.5 billion to approximately 100,000 creditors — including retirees, banks, and bond insurers.
At the time, one of the biggest questions and concerns was what would happen to the real estate market as a result of the filing.
It was well-known that the city was in decline. The unemployment rate was soaring at 16%, which was twice the national average. The median income was scraping by at USD $27,862. And between 1950 and 2012, the population of the city had shrunk from 1.8 million people to only 700,000, which left over one hundred thousand homes vacant or abandoned, and there was a rash of foreclosures. In some neighborhoods, one in 310 homes was in foreclosure.
We could see the perfect opportunity in Detroit because the houses were at a deep discount.
The houses in Detroit were undervalued, which is one of the best things to look for when you follow a value investing strategy.
We seized the opportunity and bought 32 houses. Their average price was $33,500 for a three-bedroom single detached house. We put an average of $12,000 worth of renovations into them. They are now worth between USD $45-60,000 and are producing rental income every month for our investors.
We were making a big bet that Detroit would have an economic comeback. We had to trust that people would move back into the city and it wouldn’t continue to be full of blight but instead be a place of rebirth.
Why did we buy 32 houses in Detroit?
A little background… BG Wealth’s founder, Craig Dunkerly, has been buying real estate since he was 25 years old. He did what is now often referred to as “House Hacking.” He bought his first house, rented out the basement, and used that revenue to pay his mortgage.
Within a couple of years,Craig had enough for two more duplexes.
He said. “It’s like the Robert Kiyosaki model where you duplicate and duplicate. You start by buying one house, and then after three to five years, you refinance, take out some equity and buy another one, three to five years later, you buy another one using the same strategy. You are acquiring more income producing properities by leveraging the ROI you create from each previous property. Every time we complete this process, our partners and investors profit right along with us.”
“We look for properties that have gone down in value, but show clear evidence that their value will again go up”
We’ve actually condensed the process down to shorten the time between buying each property,” said Dunkerley. “The reason is that I am also a follower of Warren Buffett, and I believe in value investing. I believe you find something that is an area that’s cheap and buy cheap.”
By “cheap,” we mean, it’s gone down significantly in value. The important thing is to know is just being cheap doesn’t mean it’s a good deal. There’s got to be a reason, clear evidence as to why it’s going to come up in value.
After successfully investing in Detroit, BG turned our attention to other locations, particularly in Canada, where there is growth with less volatility.
Finding these opportunities and making them work takes experience
When we started to buy properties in Owen Sound, Ontario it was basically an undervalued downtown area, and we found some great properties that were very inexpensive. At the time, the average rent for one bedroom was $700, and within a year and a half, we had raised our average rent up to $1,300. And then, we did the same in the commercial units.
One of the reasons that this worked so well was that we bought properties in an area that the city is already working on. So the area was already going to come up in value with or without our help. And then we layered on the improvements and renovations, and the value went up even more.
We bought a building in March 2019 and paid 500,000 for it, and then we got a valuation appraisal at the end of November of the same year for $1.5 million!
This is all possible when you have the right mindset and find the right properties.
Warren Buffett has a piece of advice that we follow all the time: You don’t make your money when you sell something, you make your money when you buy it. That’s because the price you pay for it is going to determine how much profit you can make off of it.
We will continue using this strategy as we launch our next fund in the U.S.
Our acquisitions team is heading down into the US with the launch of our BG Wealth Group Real Estate Fund
Step one: Buy a good product cheaply with a reason for it to increase in value.
Step two: Prioritize properties that actually need some work so we can put a little bit of love and care into the building and attract the right tenants.
Some people see the numbers of our returns and find it hard to believe. We see returns anywhere from 29% to 56%. The Detroit project brought in a return of 34% for its investors.
It is not too late to be a part of projects like this in the early stages. Contact us today to schedule a consultation.
