This is a unique and exclusive equity capture play with no emphasis on cash flows.
- Property Address: 18204 Cherrylawn, Detroit, Michigan 48221
- Acquisition Date: August 23, 2024
- Acquisition Price: $177,000.00
- Capital Expenditures (CapEx): Minimal, currently rented.
- Current Rent: $892/mo. on Section 8
- Future Rent: Will apply for an immediate increase to $1,200 – $1,500
- Comparables: $300,000 (conservatively). See Comp 1, Comp 2, Comp 3, Comp 4
- Future Cash-On-Cash Return: at $1,400 a month, the property should be able to break-even.
- Future Equity Growth Projections: Estimated $100,000 capture at purchase, with annual growth projection of 5.5% on the starting $300,000. This translates to 9.73% against the initial investment in the first year. The property will hit an annualized return of 10% against its initial investment amount by the third year. 10-16% is our fund’s annual goal.
This property is located in the culturally rich Bagley district. In the 1960s, music icons like Marvin Gaye and Stevie Wonder lived and recorded in the area. Today, Bagley has experienced significant revitalization, making it one of Detroit’s most desirable neighborhoods.
The seller has been renting this 4BR 2.5BA stately home for a long time to the current no-hassle Section 8 tenant, but never submitted paperwork to obtain timely rent raises. Market rent comparables for this 2,377 sq ft property are now likely in the vicinity of $2,200 a month.
At the cash purchase price, the property also holds a substantial amount of equity. To unlock it, the owner will need to remove the tenant, renovate the property, and then list it on the market.
The absentee seller accepted the MTMA Team’s all-cash, quick-close offer, believing it to be their best option.
Our strategy is to buy and hold. The Team’s property management company will negotiate a higher rent with Section 8 immediately after the closing.
In any rental situation, tenant turnover can be extremely expensive, so the Team is deciding to work with this tenant, who has proven her ability to keep the property in good condition. A subsidized renter with a long history is ideal in that we can count on full occupancy and full collection.
The Team is hopeful for a rent increase to $1,200-$1,250 immediately, and from there on, a large raise every year until the rent can catch up to as close to market as possible.
While most of our SFR acquisitions are structured to generate a good balance of healthy equity growth and of strong cash-on-cash returns, this property’s purchase has been underwritten with primary focus on equity capture alone.
Although the property does not cash flow positively in its current state, we have, at the current purchase price, already locked in substantial equity, and expect its growth to lead the portfolio.
The Bagley area has experienced a much higher appreciation than Detroit’s average historically, and the Team believes the growth will continue.
One major driving force behind this popularity stems from its proximity to the exclusive neighborhoods such as Palmer Park, Detroit Golf, and University District.
Small niche communities within the Palmer Park and Detroit Golf neighborhoods boast multimillion dollar residences; however, not many can afford these luxury mansions.
That is the reason that the University District right next to these premier communities have enjoyed a high median home value of $320,000+ for the past several years. We also notice that the appreciation within the University District may have started to plateau.
The spill-over effect explains the price growth that occurred within the Bagley neighborhood during this time.
Bagley started as a neighborhood with many distressed properties left behind from the 2008 Great Recession, but since 2016, Zillow shows that average home prices tripled from less than $50,000 to $153,000 in December 2024. During this time, the University District homes grew from about $170,000 to $348,000, or only doubled in price.
The Team believes that future incoming homeowners will continue to support the Bagley area, allowing it to outpace growth in more exclusive neighborhoods, until the price gap further narrows.
Homes comparable to the size of 18204 Cherrylawn, namely, 4Br 2.5BA with a large yard, will often sell for above $500,000 in the University District. This is where we see the long term future for this property to be.
Looking at the granular characteristics, the subject property offers proximity to the below convenient locations, making the property exceptionally family-friendly:
- 3-minute walk to the Bagley Elementary School
- 3-minute drive to the Northwest Activities Center, one of Detroit’s recreation centers that offers sports and cultural activities to the general public
- 3-minute drive to Home Depot on Meyers Road
- 3-minute drive to the nearest fresh food supermarkets, Savon and Mike’s
- 3-minute drive to numerous restaurants and shops alongside Livernois Avenue.
- 5-minute drive to DMC Sinai Grace Hospital
- 7-minute drive to the Palmer Park and the Detroit Golf Club
It is of particular interest to note that the Livernois Avenue between 7 and 8 Mile Roads has been named the Avenue of Fashion and is now an extremely popular attraction to tourists and locals alike. Many more stores have popped up further south toward the corner of McNichols at the the Savon Supermarket.
The gentrification is spreading from Palmer Park, to Livornois Avenue, and further toward the east. This property is right in the middle of a straight line between the extended shopping street on Livornois Avenue and the Northwest Activities Center. The above amenities around this property, its stately size and nearby atmosphere, allows the residents of this Detroit home to enjoy a suburban quality of life.
One downside of this equity play is that, after our purchase, the city will have an opportunity to revise the tax value of the property, and we estimate the property taxes to reach as high as $11,000+ annually.
We will need the rents to be in the mid-$1,000 for the property to pay for its own expenses.
Although this is a prohibitive tax rate for anyone, a homebuyer expecting to reside in this neighborhood can apply to participate in the Neighborhood Enterprise Zone Homestead (NEZH) program to abate tax burdens to about 30% of the non-homestead rate.
This city program allows certain districts to enjoy stability and remain popular among homebuyers, which is an important part of the Bagley area’s value growth projections.
For an individual investor with a small property portfolio, this property is likely a challenging acquisition to hold. However, as a property fund with a long-term vision, we are well-positioned to embrace the unique investment thesis of 18204 Cherrylawn.
Our fund aim is to provide:
- An annual Preferred Return of 8% to our investors
- An annualized total return of 10-16%
Based on current projections, it may take a few years before this property’s annualized returns will hit our goal of 10% p.a. against the original investment amount of $177,000. Once the rents are at a place where it can pay for all of its expenses, the likely above-average equity growth on this property at 5.5% against the ARV will bring over 10% growth by the end of third year.
The fund will also consider a cash-out refinancing of this property to enable further reinvestment.
At that time, leveraging 50% of the ARV should allow the fund to recover most of its initial investment.
By reallocating the recovered capital to a typical value-add SFR, the cash-on-cash returns on the reinvested capital could increase to the mid-10% range, while effectively resulting in ownership of this property without much remaining capital tied up.
If the renter decides to leave, we will also be in a prime position to consider a full “fix-and-flip,” a renovation project for capital gains.
Regardless of the direct we may choose to take on this property, the Team is confident that our scale, cumulative experience, and our proprietary algorithm will lead us to achieve a highly desirable opportunity.
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December 30, 2024 Update
MTMA’s property management team successfully overdelivered by securing a substantial rent increase approval within weeks of property acquisition.
The new rent is now $1,400 per month, effective October 1, 2024.
Since the purchase, the property has received minimal repair requests from the resident and is now self-sustaining, covering its own expenses.
Looking ahead, the Team has the flexibility to invest in renovations and sell for a substantial capital gain, or withdraw the original investment amount through refinancing, and hold this property for long term capital growth.
For now, the property is performing well and operating smoothly, staying on its projected course.
For an individual investor with a small property portfolio, this property is likely a challenging acquisition to hold. However, as a property fund with a long-term vision, we are well-positioned to embrace the unique investment potential of 18204 Cherrylawn.
While this property falls outside our typical underwriting criteria of achieving annualized target returns of 10–16%, our analysis and strategy demonstrate our ability to act opportunistically and capitalize on diverse opportunities that enhance the fund’s portfolio in more ways than one.