Don't Buy Market Price Rentals in Rust Belt Cities off the MLS

Don't Buy Market Price Rentals in Rust Belt Cities off the MLS
There is no shortage of rental properties in Cleveland or any other rust belt city for that matter. It’s quite easy to buy a home in a suburban B+ market off the MLS for near-market prices, slap a new coat of paint on it, replace the carpet and get it leased up at or near market rents. This may not be the best example of putting a lipstick on a pig, but its darn close.

This is a strategy many investors follow, which is not a surprising considering we see deals such as the example below listed quite often.

Purchase Price: $79,000
Rehab Estimate: $2,250
Market Rent: $1,050

I don’t mean to say that this is a bad deal, but do consider two very important factors: 1) your capex expense will be more than 10% of gross rent annually and 2) you will not get the very best tenants possible. Today I will discuss upfront capex and will touch on attracting the best possible tenant in another post.

What Do We Do?
Presented with the option of buying one of two homes located directly next to one another, one for $80,000 that is “rent ready” or one for $50,000 with missing plumbing, frayed electrical, ratty carpet, etc – I’ll chose the latter all day long. Why? It’s a value-add opportunity that allows me to make all necessary changes on day 1, thereby limiting future capex (Bulletproof Rentals!).

Why Do We Focus on Value-Add?
I’m a glutton for stress and headaches! Just kidding – it’s a strategy I was taught by my mentor. From our very first meeting, he told me one thing “Look, I want to help you. But you need to do it right. Buy them cheap, fix it up very nicely and you won’t get phone calls down the road. It makes life much easier. It truly becomes passive investing after that.” I took that to heart.

Upfront Capex
The typical home we buy costs about $30-40,000 and is in need of significant rehab. Work typically includes the following:

• All new plumbing / electrical / HVAC
• Refinished hardwood
• Replace windows
• Replace roof as necessary
• Gut & tile bathrooms
• Demo kitchen, install new cabinet, tile floor and granite
• Landscaping
• Sealcoat driveway
• Interior / exterior paint

That’s another $30,000 in upfront capex that takes at least 2-3 months from the day I acquire the property to the day its listed for rent. But the end result is stunning, take for example the pictures below.  Guess what, it's 100x nicer that the house next door with cabinets from the 70s and a formica countertop. 

For now, we'll leave it at the end result. Check out our next blog post for the financial reason we do this...higher rent, less cash invested, and higher returns.