JF1357: Identify An Emerging Part Of A Down Market, Invest, & Make Money with Brent Maxwell
Brent is an investor in Detroit, MI. That’s right, Brent invests in, makes money, and helps other investors make money in Detroit. The trick is finding emerging neighborhoods before they become “hip”. We may focus the conversation on Detroit today, but a lot of these tactics are applicable across the country. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Brent Maxwell Real Estate Background:
- Real estate investor whose personal and professional stories align with the recovery of Detroit
- Has a passion for the “limping” sections of Detroit and helps people buy into a piece of the city’s recovery
- Based in Detroit, MI
- Say hi to him at http://www.ipsrealty.com/
- Best Ever Book: The One Thing by Gary Keller
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Brent Maxwell. How are you doing, Brent?
Brent Maxwell: Hey, Joe. I’m doing great.
Joe Fairless: I’m glad to hear that. A little bit about Brent… He’s got an interesting approach – he has a passion for the “limping” sections of Detroit, and helps people buy into a piece of the city’s recovery. He’s based in Detroit, Michigan, his company’s website is IPSRealty.com (that’s in the show notes). Brent, with that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Brent Maxwell: I’d love to. I’ve been in real estate investing in Detroit for going on 15 years now. I’ve started in 2005 with my first duplex, and just been running it at full steam ever since. I lived through the great run-up to the great crash of our generation.
Joe Fairless: What type of investor are you?
Brent Maxwell: I like to be a value investor; I do added value purchases, we invest for cashflow, but with long-term upside potential as a secondary criteria.
Joe Fairless: What does your portfolio look like today?
Brent Maxwell: Single-family residentials, small multifamily, small apartment buildings. The only time we’re dealing with anything really commercial is if it’s mixed use. For example, we bought a 32-unit building which four of the units were storefronts… But other than that, it’s all at this point in time residential income property.
Joe Fairless: When I mentioned your bio at the beginning, I said you’ve got a passion for the limping sections of Detroit and helping people buy into a piece of the city’s recovery – can you elaborate on that?
Brent Maxwell: Sure. So for limping – we like buildings that are limping, and by that I mean for the apartment buildings we like them with some occupancy, ideally with bad management or neglect, but with some people in the building, so that the building has functional systems, even if they need to be updated, or at the end of the use or life, or even functionally obsolete; at least they’re operating… Either there’s some people in the building, typically not paying rents, or paying below market, that sort of thing.
As far as the areas that we like to invest in, I like what I call “the edge of hip.” The areas that are on the cusp or the edge of where the hottest areas are, or areas that are just starting to hit that gentrification curve.
Joe Fairless: Let’s pretend that you weren’t from Detroit and you didn’t live in Detroit, and you lived in Indianapolis. If you were to invest in Detroit, how would you identify the edge of hip?
Brent Maxwell: There’s two ways to do that. One is to utilize a local expert like myself that knows the city and lives and breathes the city. The other way to identify those areas would be to look at all the data and go from that. I think that our approach — both of those support each other. So it’s not a gut feeling, it’s backed by science and math and the markets.
Joe Fairless: What data do you look at?
Brent Maxwell: Sales data. Also, we look at — from a planning standpoint, I buy for cashflow. So everything we buy is based on what’s it gonna cash-flow like, what’s the ROI gonna be when it’s rented now? But we have that secondary criteria of “What’s it gonna look like when this area has recovered?” and that isn’t just current sales data. The current sales data tells us what markets are hot, and you can see that from the streets as well, but from looking at just numbers you can tell prices are increasing in this area, versus other areas that are still flat.
But what we look for is — the city has 50-year land use maps; they have long-term planning. So the city doesn’t determine the market. People buy what they wanna buy, and the city is putting on a map and is saying “This is what we wanna have happen.” It doesn’t necessarily make that happen, but if you have the government behind what you’re doing, whether it be through tax breaks, or added attention to neighborhoods, bringing in NSP dollars or stabilization dollars from the Feds…
The city of Detroit just created a plan to do 12k affordable housing units with 250 million dollars in a fund – that money is gonna be targeted at areas that are in our target areas, and it was part of the reason we picked them, because of things like that. So even if we’re not participating at that fund, for example, if they develop the area that we have holdings in, it’s gonna help pull ours up… You know, a rising tide raises all the boats. And even if we’re not participating in government money, which has its own downsides and caveats to making it that useful, we still can take advantage of the fact that the government is putting a lot of money into certain areas of town.
And other areas of Detroit – large areas of Detroit – are vetted and planned to be farmland (they call it Innovative Ecological and Innovative Productive). So farmland, or factories, or small assemblies… They’re not gonna be building [unintelligible [00:05:47].07] and doing large manufacturing in the city anymore. It’s not something that really makes sense for anywhere in the States based on the cost of labor, but we still have plenty of opportunity for manufacturing and other types of industry… So that’s what the city is looking at.
If you look at the city of Detroit, it’s 139 square miles. 2.1 million people lived here at one point in time. Now you’ve got a third of that, so you’ve got a huge quantity of land. I’ve seen drawings where they’ve taken San Francisco and Boston and put them in the city of Detroit, and there’s still a huge amount of city left for another city to be put in there. It’s got a lot of land. So we don’t have enough people living in the city, or enough demand to fill that, so I think that there’s a plan to do the agricultural and production in the city; that’s where it’s headed. And hopefully in our lifetime we’ll see all of Detroit experience the recovery that a small portion of the town has already seen.
Joe Fairless: I have a follow-up question on the population being a third, but I’ll get to that in just one second. First, the 50-year land use map…
Brent Maxwell: Sure.
Joe Fairless: How or who does the Best Ever listener talk to to obtain that?
Brent Maxwell: I’ll actually be putting a page coming up soon on the website with all my slide deck of maps on it, so it’ll be there… But you can get it if you just type in a Google search and look at the 50-year Detroit land use; the maps or the programs should come up where you can see what they have going on.
Joe Fairless: And then they can apply that same approach for Indianapolis? Apparently, Indianapolis is on my mind. I don’t know why… Or other cities like that?
Brent Maxwell: Well, the Indy 500 is in a month, right?
Joe Fairless: There it is, maybe that’s what it is.
Brent Maxwell: But as far as applying that map to other cities – no.
Joe Fairless: No, no, I’m saying applying that approach, the Google search of Indianapolis 50-year land use map… Searching for that and then coming up with the Indianapolis–
Brent Maxwell: I think this is a Detroit-specific thing. I don’t know if Indianapolis has that.
Joe Fairless: Okay, fair enough.
Brent Maxwell: But obviously, you can get all kinds of information about any of the competitive Rust Belt, Snow Belt cities like Indianapolis, or Milwaukee, or Cleveland, what have you. I think the advantage with Detroit over those markets is while they all have and can generate pretty strong ROI numbers and cashflow numbers, the housing stock, if you really compare… A city that comes up a lot is Buffalo, New York – if you look at the housing stock in Buffalo… No offence to Buffalo, but if you look at the housing stock that’s available for low-end, low-income rentals, it’s mostly frame in smaller houses, and if you look at the housing stock that’s available in Detroit, there’s plenty of quarter million dollar replacement value brick houses that you can have fully renovated for 20k-50k price points. So that’s something that all these other cities don’t have available. They just don’t have that high-end housing stock that’s so affordable.
Joe Fairless: Let’s talk about the housing stock, and in particular the one-third of the population that used to live there and now lives there. As a real estate investor, you need residents to pay the rent, so that you can at least break even, and then hopefully make money… So when you look at a city that has a whole bunch of land, but not as many people, wouldn’t that be the opposite of what you typically want?
Brent Maxwell: Well, I think the key there is to not look at the city, because I don’t invest in Detroit, I invest in certain areas of Detroit. So as I’ve said before, you could fit Boston and Seattle and San Francisco in Detroit and still have land left over… So for the investor, the idea is to find the specific areas that you want to invest in. There are plenty of areas in the city of Detroit that are experiencing strong transitional housing trends, as well as some areas that are experiencing somewhat substantial population growth.
If you break it down in our target areas, the population is either stable or growing, and the demand is increasing, and the demographics of the potential buyers and renters is also changing. Those are the areas in flux that we target.
Joe Fairless: Will you give us maybe a case study of the last deal, or a latest deal that you did, just so we get an idea of what you’re buying?
Brent Maxwell: Okay, so there’s a neighborhood called Jefferson-Chalmers, which is on the East Side of Detroit on the river, by the border of Grosse Point, which is an affluent suburb of Detroit; it borders right on it. Jefferson-Chalmers is right on the water, and it’s about a 10-minute drive from downtown. It’s certainly Uber-able and it’s bicycle-able. [unintelligible [00:10:16].26] it’s a nice neighborhood, lots of great houses, and we recently purchased a 4-unit at the end of the block on one of the side streets off of Jefferson, which is the main road that runs down along the East Side riverfront.
We purchased this property, a 4-unit building, right around the corner from the coffee shop next to the new used record store, right by the bike lanes that the city is putting in. Those things are really strong markers for an area that is attractive and attracting millennials, and experiencing some recovery and gentrification for sure.
Coffee shops, and certainly used record stores don’t open in neighborhoods that aren’t hip.
Joe Fairless: The record store recently opened?
Brent Maxwell: Yes.
Joe Fairless: Oh, my… Okay.
Brent Maxwell: Yeah, 12-inch vinyl records, you know? Old record store or new record store, whatever…
Joe Fairless: [unintelligible [00:11:04].15]
Brent Maxwell: Yeah, it’s been a couple years now, but it’s been there. So we purchased this 4-unit, and it had some capital improvements, some cap ex needed, and some deferred maintenance; we’re putting a roof on it. We’ve purchased it actually end of last summer, we’ve started to turn the units, and when the people move out, we’re turning $450-$500 per unit for these two-bedrooms into $750 rents. We’re absolutely capitalizing on the change in the demographic of the renters in the area.
Joe Fairless: When looking at your portfolio to date, and taking into account the value that’s been added through both forced appreciation and just natural appreciation, so regardless of what you do it just went up, what percent would be allocated towards forced, and what percent would be allocated towards just natural, because you’re picking the right edge of hip areas, as you call it?
Brent Maxwell: What percent of — can you clarify the question a little bit?
Joe Fairless: Sure. Your properties increase in value.
Brent Maxwell: Right.
Joe Fairless: What percent would you allocate towards you having a hand and forcing that appreciation through renovations or whatever else, versus you just — it’s not luck, but you’re finding the right area and it’s just naturally increasing, regardless of what you do to it?
Brent Maxwell: Right, so let me take a shot at answering that. Basically, all of the properties we buy have some built-in equity potential, some ability for forced appreciation, with rare exceptions. We do buy some that are fully stabilized, but being local and able to add that value, it just makes sense to buy properties that are at least a light project, a turn of some kind, or some form of distress that we can take advantage of, and add some leverage to our purchasing in that fashion.
And then all of them for sure are purchased with appreciation potential being a key component… And I’m not talking about a few points a year type of appreciation here. The areas that we’re buying in – I can give you an example of my primary; I’ve purchased ten years ago for $23,000 in Indian Village a 4,000 square foot [unintelligible [00:13:08].28] mansion. It was rough and I’ve put a lot of money into it, perhaps close to 100k total invested, but it’s worth 400k-500k now.
That type of appreciation, that type of hockey stick curve exists and it existed in downtown, in Midtown, Corktown, Indian Village, which I mentioned… That’s transferred over to other areas of Detroit (a university district), and now it’s hitting other neighborhoods, like the Jefferson-Chalmers we’re talking about, MorningSide is also near on the East Side, South-West Detroit outside of the super hip Hubbard Farms and Mexican Town area. There’s a lot of opportunity in South-West Detroit; we just bought a duplex down there.
And then on the West Side – I don’t deal much in the left side for geographic reasons, simply because I like my holdings within my regular travels, or ideally within a bicycle ride from my office or from my house… But North-West Detroit has a lot of churn and a lot of opportunity for transition there. So we’re talking about properties that pre-crash peak – for example your three-bedroom typical bungalow… In Detroit, the 1,000-square foot three-bedroom bungalow is kind of a common type of home – these houses sold for 80k to 120k pre-crash, 2005-2006, and now you can still purchase them in many neighborhoods, fully renovated, tenant-ready, in the 30k-40k range, or even 50k on the higher end. Sometimes even in the 20k range, but maybe not quite as nice.
Basically, you’re buying at a quarter to a third, sometimes half of the pre-crash peak values, and these areas when they hit that sweet spot, around 50k-60k/unit, lenders really start to take attraction to it, and the whole area experiences a dynamic shift from being a primary renters’ area to being new homeowners buying – and not just on FHA, but on conventional mortgages – new homes in the area. So you’ve got a big pop, where these properties go 20k, 30k, 40k over a couple years, and then all of a sudden they jump into 75k, 85k, 95k… Because when I look at a house that’s $80,000 versus a house that’s $60,000, the difference in strike point for me is $20,000, but for a homeowner who’s buying a house that’s $60,000 versus an $80,000 house, they’re looking at $125/month in debt service… So it’s easy for them to say “Well, we’ll just pay $5,000 more”, whereas for me that’s hard cash out of pocket, so it doesn’t always make sense.
Investors can’t compete against homeowners, and those neighborhoods that are ripe for transition – those are the areas we like to target.
Joe Fairless: Based on how you’re talking, it sounds like you also have your own property management company.
Brent Maxwell: We do. And we were a public property management company and we provided services to the world, but we’ve actually kind of closed our doors on that and now are only working with clients that are purchasing through us, with us, or partnering with us. So we’re a private in-house property management company doing all of our own management.
Joe Fairless: What’s a typical partnership structure?
Brent Maxwell: We used to do flips, so it was basically an equity split where an investor put up cash, we would take care of the acquisition of the deal, managing it, doing the whole process, and we would split the upside. Sometimes we would have cash in the investment, other times it’d just be straight 100% investor capital.
What we switched the model to though is now we offer a small percentage on an annual basis, because we’re buying to hold for basically 2-5 years is the typical target length, and then of course it depends on factors that are outside of everyone’s control, such as if we hit another swoon, or if there’s a recession for a while, what that does with the market. I look forward to the opportunity to have easier buying, for sure, because the market is very tight and it’s hard to find good deals… But that is unlikely – based on everything I’ve read and everything I’ve seen, and historical evidence – that it’s going to last for a long time if there is any kind of a buyer’s market there, because of the fact of the massive shortage that exists in the inventory of the market here.
So we offer a fixed return plus an upside.
Joe Fairless: So it’s kind of like a preferred return, plus they’re equity owners in the deal?
Brent Maxwell: Exactly.
Joe Fairless: Okay.
Brent Maxwell: And we form new LLC’s, and partnerships, and a full operating agreement – it’s done in a very clean, professional fashion. [unintelligible [00:17:11].03] the whole nine yards.
Joe Fairless: Based on your experience, what is your best real estate investing advice ever?
Brent Maxwell: Best real estate investing advice ever? I don’t want to live with regret, and I don’t think anybody else does either. Looking back, the deals that really bothered me the most are the ones that I passed on, for one reason or another, that I should have pulled the trigger on.
So if you look at the opportunities that happened in say, Corktown in Detroit, just outside of downtown – those values are through the roof. I’m not gonna miss them again, and I don’t think anybody else should.
The big crash of 2008 (09.15.2008) – that day came once in our lifetime. It’s not gonna come again. We’re not gonna see that level of opportunity, that level of correction. It’s a multigenerational event. So we still have the opportunity here in Detroit to take advantage of the opportunity that is here. It’s not gonna be here forever, so my best advice is if you see something and you wanna do something, take a shot.
Joe Fairless: At the time, why didn’t you pull the trigger on the properties in Corktown?
Brent Maxwell: I thought they were overpriced at the time, and I didn’t see the massive appreciation that was going to take place.
Joe Fairless: When you say that you thought they were massively overpriced at the time, what sales data were you looking at to determine that?
Brent Maxwell: To determine whether they were overpriced or not?
Joe Fairless: Yes.
Brent Maxwell: Just by comparing to other neighborhoods of Detroit, price per square foot, type of property and how much it was selling for. It comes down to demand and what people will be willing to pay. In some cases I’m still just completely baffled. There are brand new townhouses built in Detroit, not far from these neighborhoods that I’m talking about on the East Side, that are selling for $400/foot. Now, I don’t know about other markets in the country as far as that goes, but $400/foot for Detroit housing is through the roof, and it’s awesome! But if you would have told me 8 years ago that these houses were gonna be developed and you were gonna have 2,000 square foot townhouses selling for $799,000, I would have said “No way! That’s insane!”
But yet, if you look at that from a global standpoint and from other markets’ standpoint, it’s actually not that expensive to have a nicely developed townhouse, 2.5 miles outside of the city center, in a stable neighborhood, that you can get for under a million… That’s challenging in Chicago, for sure. You’re not gonna get that in Lincoln Park, are you?
Joe Fairless: Well, I don’t think so. I don’t know. [laughs] Probably not. I don’t know Chicago real estate that well, but I’ll trust you on that. So at the time – just traveling back in time to when you thought they were overpriced, based on other neighborhoods in Detroit and the price of property, without just pretending you’re at the roulette wheel and just hoping that it goes up, if the numbers and the data was saying “Don’t do it”, then how do you now make a decision in a similar circumstance to then do it, besides just hoping that it does it?
Brent Maxwell: Okay, [unintelligible [00:20:06].29] that area completely turned, and that’s one of the reasons why those prices have gone up so high; it was a different flavor of neighborhood, and it changed due to the influx of double-income no-kid people, and hipsters, and millennial workers, and so forth. You know, a very popular, hip neighborhood. Same thing with the West Village area, the Islandview area I was talking about with the property on 2,000 square foot townhouses trading for 799k. That example of the 2,000 square foot townhouse has been supported by the transition of the Corktown neighborhood.
Corktown was an anomaly at the time, but now we’ve got a historical precedent that suggests that this is something that’s going to happen in other areas, and I could see it happening in other areas as we speak.
Islandview, which is where those townhouses are – it’s really challenging to find any deals there for sure, but they’re available. We bought a house on Field Street a little while ago, which is in that neighborhood, that’s doing very well for us… And that Jefferson-Chalmers I mentioned on the East Side is another one where the edge of that has a lot of opportunity for us. So we are basing our buys on historical precedent, along with, in many cases, in more of the bread and butter neighborhoods; we’re not looking at that gentrification factor, but just looking at the ability for the neighborhood to catch back up to where it was. We’re dealing with a straight recovery there, it’s not a gentrification.
So if you’ve got a neighborhood where properties are trading for 30k-40k for nice houses, but they were trading for 80k-100k, that is just a recovery play waiting to happen, and the city and the market are both behind a nice neighborhood, with lots of good brick housing stock, including some mixed in frames. Those areas are going to recover; the city wants them to recover, the market is gonna want to recover, the prices are going up, and you see where prices were flat for 12, 13, 14, where they’re now starting to curve up and you see values increasing. It’s happening, we’re in the middle of it, watching it occur, so that’s how we know that these opportunities are real, and they’re happening, and we’re gonna take advantage of that. But like I said before, the caveat to it all is at this moment in time we still buy based on cashflow and income. So as long as we can make a real-world realized double-digit return on these investment properties, they’re buys when they have all those other upside potential elements attached to them, and we’re buying them with the immediate forced appreciation value-add play attached to them.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Brent Maxwell: Sure, let’s go.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Okay, best ever book you’ve read?
Brent Maxwell: Best ever book I’ve read… How about The One Thing, Gary Keller.
Joe Fairless: Best ever way you like to give back?
Brent Maxwell: I like to help people who are struggling to get back on track, whether it be via taking my time and working with recovering alcoholics and addicts, or helping struggling families to get back on track.
Joe Fairless: And how can the Best Ever listeners get in touch with you?
Brent Maxwell: 313-422-1333, or Brent@IpsRealty.com.
Joe Fairless: Brent, thank you so much for being on the show. A couple takeaways — I got a lot of takeaways, but a couple of them certainly rose to the surface… One is alignment of interest with the city, and also looking historically what’s happened in certain neighborhoods, and seeing if the fundamentals are still there, that will continue to drive that growth or bring that growth back… And that’s some of the things that you’ve mentioned with the 50-year land use map; by the way, I googled a couple cities and I didn’t get it, the 50-year land use map, so perhaps — obviously, it’s with Detroit, but then I’m sure there are others similar things… Perhaps looking at the zoning for the city. There are zoning maps for all the cities, and seeing how that’s laid out, and seeing what the plans are for the future use of that land; maybe talk to some individuals within the economic development organization with your city or your county.
Then you said this – you don’t invest in Detroit, you invest in certain areas of Detroit, and being very specific about those areas; you like the edge of hip, and we talked about how to look at that, both 1) talk to local experts, and 2) look at the data, and then that’s where the land use and just where the city is wanting to take it… Because it’s tough to swim upstream against the government, but if you flow with the government and where the city is allocating funding, then as you said, rising tides lift all boats.
Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Brent Maxwell: Thank you, Joe. You know, I always say, “You can’t flip the tide, but you can ride the waves.”
Joe Fairless: I love that.
Brent Maxwell: Thanks, Joe. Have a great day.