How to Invest in Ann Arbor Rental Properties
Here’s what to plan for and what to avoid when buying rentals in the Ann Arbor area.
Why is the Ann Arbor area great for buying rental properties?
Legendary real estate investor Sam Zell was still a student at the University of Michigan when he started investing in student housing in Ann Arbor.
Home to the University of Michigan and a surging, tech and healthcare-fueled economy, Ann Arbor boasts a diverse array of rental property options with continual high demand for each. Real estate prices and average rents certainly reflects the desirability and reliable long-term growth of Ann Arbor real estate.
The local economy is resilient and produces many high paying jobs and opportunities for entrepreneurs. The local population is well educated and by many standards the most educated community in the country. As a result, incomes tend to be high and unemployment low. Thus, there is continually demand for housing with solid average rents and high occupancy levels making the Ann Arbor area a fantastic place to buy investment rental property.
According to namecensus.com and data from the 2021 American Community Survey (ACS) 5-year survey of the US Census Bureau, here are just a few solid stats on income, population and demographics for Ann Arbor:
Median Household Income- $138,333
Average Household Income- $197,811
(40.19% of households make 200,000+ a year)
Master’s degree- 48.07% of the population
Bachelor’s degree- 44.85% of the population
Unemployment rate- 2.90%
Median age- 47.7
Percent of population living below the poverty line- 1.60%
Typical rent paid- $1,500-$2,600
University of Michigan Students- 49,972
Here are the types of rentals you can consider acquiring in Ann Arbor:
Short-Term Rentals (STR): STRs in Ann Arbor do well with all the college sports and the many university and community events and art fairs. About 8,900 guests used Airbnb in 2018 during University of Michigan football weekends and local hosts earned about $1.55 million according to Airbnb.
Mid-Term Rentals (MTR): MTRs also do well with all the students and traveling professionals that frequent the community every year. According to mysmartmove.com, employment of registered nurses is expected to grow by 15% from 2016 to 2026 and Ann Arbor, MI is 10th in the country for demand for mid-term rental housing for travel nurses.
Long-Term Rentals: Traditional rentals do well as the economy is strong and people want to live close to where they work and enjoy the many benefits the Ann Arbor area has to offer with great schools and an active, diverse community. According to zumper.com, as of August 2023, the average rent for a 1-bedroom apartment in Ann Arbor, MI was $1,794 which is a 34% increase compared to the previous year. Also, 72% of University of Michigan students live off campus according to U.S. News & World Report.
The Ann Arbor area is great for buying rentals as it constantly ranked one of the best college towns in America, has a competitive rental market with high lease renewals, and an undersupply of rentals.
1. An article by Jeff Rohde for roofstock.com lists Ann Arbor as the 2nd best college town to buy a rental property in 2022.
2. RentCafe.com in their 2022 Year-End Report listed the Ann Arbor area as the 20th most competitive rental market in the U.S. with a 65.4% lease renewal rate and was undersupplied with rentals.
3. According to the City of Ann Arbor, 55% of the housing stock in the city is already rental units but demand for rentals is still high.
The Ann Arbor area is good for buying rentals because the local economy is strong, there are world-class education institutions, local leaders value environmental sustainability, and there are many protected parks and green spaces which drives housing demand.
What are ALL the types of rental property options in Ann Arbor and its surrounding communities?
There are a diverse range of rental property options in the Ann Arbor area to suite anyone’s investing goals or needs.
House Hacking
House hacking means renting out the rooms in your house to help pay part or all of the mortgage. Affordability is a challenge in the Ann Arbor area and house hacking provides a great way to own real estate while sharing the costs with others. There are Facebook groups dedicated to helping you find roommates and offer a room in your house to rent. There are even sites like roomies.com to help you find roommates or list a room in your house.
Single-Family Rentals
Single-family rental houses command a premium for rents in most places in the Ann Arbor area. You can also think about renting your single family house as a short-term rental (less than 30 days), mid-term rental (30 days or longer) to traveling students and professionals, and you can even add an Accessory Dwelling Unit (ADU) in your basement or on your property to add an additional rental unit so long as there are not zoning or deed restrictions.
Student Housing
Student housing, of course, is a great investment option with the University of Michigan and Eastern Michigan University nearby. Facebook groups and various online sites are available to help you place students in your student rentals with proximity to the local universities being ideal.
Active-Senior Housing
Active senior housing, as our population ages, is another niche to consider for investing in the Ann Arbor area and these can be single-family homes or multi-family properties offering housing for active seniors who choose to live near or with each other.
Individual and Mobile Home Parks
Individual mobile homes or entire mobile home communities can be an attractive investment for providing affordable housing options in the Ann Arbor area. More and more people are choosing this as an affordable housing alternative and this investment provides a higher return than other commercial property rentals can.
Multi-Family Properties
Multi-family properties are another great option when investing in the Ann Arbor area. These properties also sell for a premium in the Ann Arbor area. Financing is based on the property’s value for 2-4 units and the buyer’s ability to qualify financially with longer residential style mortgages available. For properties that are 5 units or more, the property value is based on the income the property produces divided by the capitalization rate at the time and less on the purchaser’s personal ability to repay the loan. They are financed with a commercial loan of shorter duration than a residential mortgage which usually requires being refinanced.
What are the things to look for when doing due diligence for Ann Arbor rental properties?
Certainly, owning a rental property in the Ann Arbor area can be profitable but doing the work before the purchase is key to maximizing returns and minimizing risks.
Obviously, you want to analyze and underwrite the opportunity well so you know you have enough cashflow to make it work and improve the property and rental value over time.
Additionally, having property inspectors and contractors on your investment team is critical to avoid expensive repairs or plan for them accordingly.
There are a few additional things to look for or consider when doing your due diligence before buying rental property in the Ann Arbor area.
Check that all permits have been closed and completed for work that has been done on the property or you may have to pay to have the work completed. In the City of Ann Arbor, permits and permit status can be found on their STREAM system. For other communities in the Ann Arbor area, you may have to contact the building and permit department to see if there are any permits that have not been finalized for the property you are considering buying as a rental.
Recent major improvements to the property like a radon system, electrical box, or water heater that was not permitted may have to be retroactively permitted and brought up to code by the new owner so be sure to ask about any major improvements to the property and if permits were pulled and finalized.
Understanding the tenant’s Right to Renew law in the City or Ann Arbor which requires the landlord to give the tenant 180 days before the lease expires a good faith effort in writing to offer the tenant the right to renew the lease unless the landlord can show good cause not to renew the lease. The penalties for the landlord for not following this can be 2 months rent paid to the tenant for relocation assistance.
Landlords in the City of Ann Arbor are also required to give a physical copy (electronic copy not allowed) of the Rights and Duties of Tenants Booklet.
Landlords in the City of Ann Arbor must also comply with the Early Leasing Ordinance (ELO) which tells landlords when they can enter into a new lease with the existing tenant or start showing the property to new tenants with specific timelines and communication requirements.
Landlords in the City of Ann Arbor must also comply with the Non-Discrimination Ordinance and Fair Chance Access to Housing Ordinance which prohibits the landlord from asking about a prospective tenant’s criminal background or using it in the decision making to provide housing unless required by federal or state law and not discriminating on things like weight and source of income like housing vouchers.
Landlords in the City of Ann Arbor are now required to put carbon monoxide detectors, by local housing code, in various places in a rental unit.
Landlords in the City of Ann Arbor may soon need to comply at the time of rental inspection for a Certificate of Compliance with various energy efficiency requirements for appliances and report the energy efficiency of the rental unit(s) to perspective tenants as a part of the City’s Green Rental Housing Program.
Landlords in Ann Arbor must also provide mandatory lease clauses with a certain font size and bolded text to tenants or risk having their leases be out of compliance and voided.
Check with your Realtor, real estate attorney, or title company to make sure there are no deed restrictions or covenants that would prevent you from doing what you want with the property or zoning restrictions.
Status of Certificate of Compliance for long term rentals. This can be checked on the City of Ann Arbor’s STREAM system. In other local communities, you would check with the rental or housing department.
Status of short-term rental license for each unit that will be a short-term rental. This can also be checked on the City of Ann Arbor’s STREAM system or with the rental or housing department of other local communities in the Ann Arbor area.
Review the various flood zones in the Ann Arbor area—especially in the City of Ann Arbor. You can access FEMA’s flood map tool here. If the property is in a flood zone, sometimes you are required to obtain a Rebuild Letter from the building department where the property is located saying they will allow you to rebuild the structure in the flood zone to get lending. Additionally, lenders may require flood insurance.
Make sure to do an environmental survey for a commercial property
prior to purchasing the property.
In addition to making sure you are getting a good deal on your rental property and having it physically inspected, there are many other issues to be aware of and consider during your due diligence process to save money and minimize risk.
“The Ann Arbor area is a great place to invest in rental properties and has been consistently ranked as one of the best places to live, go to school, work, and retire in the country.”
What is the rental licensing process in the Ann Arbor area?
Rental inspections are required every three years in the City of Ann Arbor. Other local communities in the Ann Arbor area are every two years or they do not have a rental inspection requirement.
First time rental inspections cost $750 in the City of Ann Arbor and $500 for renewal inspections. Other local communities in the Ann Arbor area have similar fees or no fee if a rental inspection is not required.
You can apply for rental inspections for the City of Ann Arbor here and it is through the city’s STREAM system.
If you are considering a short-term rental license in the City of Ann Arbor, make sure the property is allowed to be a short-term rental by the city’s requirements. The license must be renewed every year for each unit and costs $500 a unit. You can find out more information here and apply for the license on the city’s STREAM system. Other communities in the Ann Arbor area have their own short-term rental requirements or no restrictions at all.
When budgeting for getting a property compliant as a rental if it has not been a rental before, plan on at least $5,000 per unit in the City of Ann Arbor. Initial rental inspection compliance costs vary for other communities in the Ann Arbor area depending on rental inspection requirements.
Common inspection repairs discovered during inspections include repairing and replacing smoke and carbon monoxide detectors, fixing leaky faucets or shower heads, replacing burnt out light bulbs, re-wiring or repairing non-working switches, repairing or replacing GFCI outlets, securing dryer vents with UL tape (not duct tape), and re-caulking in the bathrooms. Other requirements may include a furnace or boiler check, preventative sewer cleaning, fireplace and chimney inspection, and fire alarm inspection.
Obviously, you want to plan for the various required rental inspections and potential costs before purchasing rental property in the Ann Arbor area.
When should you consider using a property manager when buying rentals in the Ann Arbor area?
We always recommend using a good, local property manager for several reasons.
1. A property manager will make your investment as passive as possible and help to avoid fair housing and compliance violations with the various local laws and ordinances.
2. A property manager can help get a property compliant as a rental and manage the repair process with their in-house maintenance team or preferred contractors. They will also meet the inspector on the day of the inspections.
3. A good property manager is a valuable member of the real estate investing team and should be brought in before the property is purchased to help budget for repairs and plan how to bring the property up to full market rent and be fully occupied
4. A good property manager will save you money by making sure you are buying in a good area and keeping your tenants happy so you have less turnover of units.
5. A good property manager can also help you find off market deals as they work with investors who will be thinking about selling at some point.
There are many reasons to use a good, local property manager when considering buying rental property in the Ann Arbor area.
Bottom line for buying rentals in the Ann Arbor area.
The Ann Arbor area is a great place to invest in rental properties and has been consistently ranked as one of the best places to live, go to school, work, and retire in the country.
The rental property options in the Ann Arbor area are diverse and fit into anyone’s investment or ownership goals from house hacking, to short-term rentals, to multi-family investing.
Clearly, there are key considerations to watch for when doing your due diligence besides having the property physically inspected. This includes things like making sure permitted work has been completed before purchase, looking for major recent improvements that were not permitted that may require the new owner to do retroactive permitting and bringing the work up to code, and understanding the various local rental compliance issues.
Additionally, it’s important to be aware of the status of the property’s Certificate of Compliance or rental licenses. Bringing a property that has never been a rental before up to compliance can be costly and one needs to budget accordingly.
Always consider using a good, local property manager to help you select the property, plan for repairs, and bring the property up to market rents and occupancy levels.
Finally, owning rental property in the Ann Arbor area can be very profitable and rewarding. Just do your due diligence and have the best people possible on your investment team.
To your success!
Arbor Advising has a passion for helping people buy, sell and invest in real estate. We believe real estate is the best way to create passive income, grow your wealth and provide inflation adjusted returns in retirement with fantastic tax benefits.
Want to learn more? Contact us.
Disclaimer:
Always speak to your CPA, investment advisor and attorney before making any investment decisions. Past performance does not guarantee future returns. Arbor Advising seeks to educate and does not endorse any specific product, service or investment.
