Invest in Phoenix or Cleveland?

Question

I'm a new investor interested in buying multifamily units in either Phoenix or Cleveland. I'm interested in buy and hold multifamily units or small apartment complexes and am primarily interested in cash flow. I currently live in California and am interested in having a property manager for my rental properties. I was originally interested in Cleveland but have hearing that Phoenix has been cash flowing pretty well. However, due to the pandemic many people out of Arizona are buying in Phoenix because of the cheaper housing, good weather and the ability to work from remote. Because of this, I've heard from a few sources that it's not a great renting opportunity right now. Perhaps I'm analyzing the two situations differently but all I care about are the numbers and what will provide greater returns. I recognize that there are opportunities in each area but I'm asking the community their thoughts in investing in either market. The proximity to Phoenix would be great but I don't see myself being there too often unless I'm buying.

Which market would you choose and why? Which is better for my goals and why? Thank you for your help.

From my research these two areas tend to have

Which market would you choose and why? Which is better for my goals and why? Thank you for your help.

From my research these two areas tend to have

Brian Garlington · Answer

You’ll get better net cash flow in Cleveland. You will have more appreciation and depreciation in Phoenix and higher overall values.

Steven Foster Wilson · Answer

Neither. Choose Columbus, growing population (unlike Cleveland) & affordable prices (unlike phoenix). Not to mention we have a ton of companies setting up shop here and investing in the city.

Jonathan Oh · Answer

@Kyle Johnson"but all I care about are the numbers and what will provide greater returns" - this is a beginner mistake. It's not just about cashflow now, but also the future. Take a deep look at the macro trends for the market and submarket/neighborhood trends to gauge what the outlook is. If you're strictly looking for immediate returns, Cleveland will be better because homes are cheaper and rent-price ratio is much higher. In Phoenix, homes are more expensive, but you have a lot of growth happening there. Both markets have pros and cons, so comparing Phoenix with Cleveland is not quite apples to apples. Hope this helps.

Will Fraser · Answer

Hi @Kyle Johnson, welcome to the Biggerpockets forums!  You've whittled it down to two good markets here!  Call me contrarian, but I've got to go against your assessment and say that you do, in fact, care about more than the numbers.  Or, if you want to be a strictly numbers guy then you at lest care about these three different numbers:

• Numbers now
• Numbers later
• Numbers in the end

Because these three numbers are not the same, I think the most prudent thing to do when considering any two markets is to thing about the meta-trends happening and how those particular markets are likely to fare.  With regards to the Phoenix MSA vs the Cleveland MSA . . . I'd bet on Phoenix all day every day in the 2nd and 3rd category above, so it's my "winner winner chicken dinner".

Remington Lyman · Answer

It does not matter where you start as long as you develop your Core 4. The core 4 is David Greene’s strategy for long-distance and made up of a realtor, contractor, property manager, and lender. Once you have this team in place, you should be able to confidently invest in any market.

Having said that I would recommend investing in Columbus, Ohio

Brandon Goldsmith · Answer

Like others said both are good markets but if the immediate cash flow is the main priority, the numbers will be better in Cleveland than in Phoenix. I agree with @Steven Wilson on Columbus. It might be worth looking into. @Kyle Johnson

James Wise · Answer

I don't get into the which one is better game. But if you do decide on Cleveland you'll get some value out of reading The Ultimate Guide to Grading Cleveland Neighborhoods.

P.S.

Below is a punch list of quick tips I like to give new out of state investors.

• Don't buy in the roughest neighborhood in the urban core. Pick a solid B-Class suburban area. Perhaps a nice 1950's built bungalow.
• Always hire a 3rd party property inspector to give you an unbiased feel for the home. The reports are 40-90 pages long and go through the entire house in great detail.
• Get an appraisal. If your using financing the bank requires this. This is good. The bank isn't going to let you blow their money. They have more skin in the game then you do.
• Make sure you get clear title. If using a lender this is a non issue. They will make you do this. It's those maniacs that buy homes cash via quit claim deed off of craigslist that really get screwed.
• Make sure your property manager is a licensed real estate brokerage.
• Google Clayton Morris and/or Morris Invest for a cautionary tale of what not to do when buying turnkey real estate
• Understand you can not eliminate all risk, only mitigate it. If you are risk averse, real estate, (especially out of state) is not for you.

Andrew Weiner · Answer

I think that you should be focused less on market and more on identification of the best possible deal and where you feel most comfortable.  Although it is a tough time to travel I think that physically visiting each market would make sense to get a better feel and allow you to meet some local resources.  I have friends that have made big money and lost big money in what the forums consider to be the best markets.  The most important thing to do is make sure to buy at the right price and maintain sufficient reserves to do preventative maintenance.  If you are financing the deal then a few extra dollars might still look good on a COC basis but you have to make sure that you aren't putting your exit and liquidity at risk by overpaying in the market.  I wish you the best of luck on the search and whatever market you end up in make sure that you have an experienced local working with you before you buy.

Randahl Benson · Answer

@Brian Garlington

Exactly what I was going to say.  Just be careful in Phoenix there is some low end trash being sold for ridiculous prices being sold to newbie investors.

Enrique Huerta · Answer

@Kyle Johnson, both are excellent markets. You said cash flow is more important to you so if that is true I would point you to Ohio. Also, I just have to comment on your "good weather" comment...LOL Phoenix is super hot but I guess it is good relative to Ohio :). To your point, though, Phoenix' cash flow is looking better right now as occupancy is tight and rents are still growing. If you decide on Phoenix, I'm happy to put you in touch with some folks on the management side.

@Brian Garlington hit the nail on the head. You'll generally get stronger cash-on-cash returns in Ohio but Phoenix offers appreciation potential that Ohio can't match (yet). Wouldn't be uncommon for Cash-on-Cash to be 10%+ in Ohio with minimal upside (aka your IRR will be close to your COC return) whereas Phoenix could show a 8% COC return with IRRs north of 15% (meaning greater projected equity appreciation). Personally, I'll take the slightly lower COC to take advantage of the greater back end growth but I'm relatively young and focused on total return rather than cash flow.

Bottom Line:

Which market would you choose and why?

I would choose Phoenix because it is closer to home, the appreciation potential is very real, the cash flow is solid, the trends are extremely favorable, the operating expenses are lower (insurance, taxes, repairs & maintenance, etc.), and it is a hot market in many investors' eyes which should make your exit easier.

Which is better for my goals and why? See above. I would not underestimate the logistical issues of investing OOS if I were you. Phoenix is closer by air and car and more relatable in that many Californians are moving there and will continue to do so (most likely).

Which market would you choose and why? Which is better for my goals and why? Thank you for your help.

From my research these two areas tend to have

Invest in Phoenix or Cleveland?

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