Why I sold Cleveland.

78 Replies

What's going on BP!

It's been a minute.

I wrote previous member blog articles about transitioning from duplexes and four-plexes into apartment building investing. 

We did that in 2 markets simultaneously:Jacksonville FL and Cleveland OH.

After a crazy 18 months, we just sold both buildings in Cleveland-just to stop the bleeding.

The Jacksonville building is a home run.

To read details on why I'm now shorting Cleveland and will never touch the mid-west with a long pole again, read my blog article here:

https://www.biggerpockets.com/member-blogs/8290/85811-why-i-sold-cleveland?created=1

Have a happy July 4th, y'all!

If you could not fill your units easily I am going to field a guess that your building was on Noble. Unless you're local and self-managing (and can handle all these little things yourself), all those buildings on Noble (from the EC border all the way to Mayfield Road basically) are tough to make work. You get rents that are the same as or barely higher than Cleveland proper rents, but much much higher expenses.

Cleveland Heights is a tough city for owning apartment buildings. Same with Shaker Heights. Fussy city requirements, high expenses, and shockingly low quality tenant base (compared to the surrounding SFR communities). You probably would have been fine with investing in SFRs in Cleveland Heights, or with investing in apartment buildings in a less fussy city (like Cleveland proper), or with investing in apartment buildings in a city that attracts higher quality tenants in apartments (like Lakewood or Lyndhurst).

To say you're done with the midwest because of one or two bad experiences (with buildings that were inherently not likely to be profit machines from the get go) is like saying you're never going to date again after having one bad date with someone from Tinder (whose profile screamed crazy from the get go).

I'm no expert regarding Cleveland from a commercial standpoint,....but I remember having a couple of very good conversations with Michael Swan before and he does have some commercial property in the Cleveland area......I believe he said to me IF you go commercial, stay away from the Heights as an out of state investor.

@Brian Garlington you're right, 10-unit on Noble @Michael Swan had and got rid of.

Apartments in Cleveland Heights are tough to make work, and they're not very desirable. I've seen success around the Cedar Fairmount neighborhood but the prices are outrageous.

@Charles A. I didn't work with you on these Heights deals, but had we landed that 12-unit building in Rocky River that you bid on, your experience would have been much different. City involvement there is almost non-existent, another reason I favor the westside.

In a recent podcast that interviewed Brandon Turner that I heard, if you listen in between the lines, you’ll discover even he is having enormous challenges with his apartment building in Cincinnati.

It’s likely why he’s more excited about his mobile home parks and syndication deals now.

It’s a common theme through the Midwest,I think.

Don’t just talk to brokers and local stake holders with vested interests...

Speak to investors who have actually risked capital.

They’ll tell you the cold hard truth about investing in the snow belt.

@Charles A.   this is simply systemic of chasing yield.  IE what looks best on paper.. and forgetting that the market prices for risk.. you go for the higher cap rates your taking on greater risk should be no surprise there.. 

we see investors from low cap rate markets go through this learning curve all the time.. 

so with cap rates at 4 or 5 in those same markets I suspect the issue suddenly go away.. its the quality of the asset and the tenant base.. bottom line.. 

throw in city rules which can be researched up front.. 

I had a client from Oregon who followed me to Atlanta when I was buying court house steps there in 2012 and just killing it.. he did the same he bought 40 or 50 homes and in 2 years made a few million in equity like we did.. 

he then decides to go into MF.. and sends over this C class in Memphis.. which does not have all the city stuff but it has the same tenant mix.. it was half empty and he picked it up for 10k a door with the idea of putting in 10k a door for improvements then selling it for 40k a door..  I told him DONT do it.. U cant make money when your in ORegon and you have a 40 unit in the mid west in C class or C- which is really D + for just plane D.. 

He buys it and it was a progression.. puts the money in does improvements for tenants  B ball hoops BBqs 

those are destroyed in less than a month..  PM and on site manager ripping them off left and right. he gets it up to about 90% occupancy but has 30% collection issues.. a Murder a few other violent crimes. later and things start to go back to the mean.. he is now having to fly there once a month to collect what rent he can.

finally gave up like how these properties get recycled and sold for 450k to the next victim and lost 500k plus in the process..  had he went to Germantown and bought a 4 cap or 5 cap I bet he still owns it.

Its the buyers who do this to themselves thinking their criteria is 10 caps or higher and THEY can turn it around.. 

Locals can and do make this work.. but its hands on HIGH touch run it very sternly type thing.

I was shown another 10 cap in Memphis not picking on Memphis..  but the local guys were running it and proud of the return.. we drive over its fenced off.. with a guard at the gate.. its basically 100 % MhA and tenants are all women.. No men are allowed on the property Etc.. but to me it looked like it was run as a mini prison..  Of course its not but the out ward security reminded me of that..  and I was like HOlly cow there has to be a better way to make money than take these things on..   So bottom line its investors falling on their knives not realizing how management intensive this asset class is..  and or Even pro's not realizing in the mid west particularly that returns price for Risk.

Hi @Jad Boudiab ,

I am closing on a 24 unit in Painesville and a 57 unit in Mentor soon.  I sold my Shaker Heights 8 unit on the corner of Almar and Warrensville Center Rd. 3255 Warrensville Center Rd.  and my Cleveland Heights 10 unit at 2435 Noble Rd.  Those two, I overpaid and thought I was buying yield deals.  Not the case.  Those were my first two 1031 Exchange deals and cut my losses and moved on.

Those two were money pits.  I now am focused on value plays in Lake County.  You live and you learn!!  

I will be a principal in 200 units primarily in Lake County, Ohio.  I also have a 12 unit doing really well at 24600 Euclid Ave. in Euclid near brand new Amazon Fulfillment Center and a 24 unit in Akron doing very well too.

Feel free to reach out to me anytime.

Swanny 

Cleveland?  Land of 'savage' investing and home of nightmare... toilet, kitchen, hoarding, junk, Christmas eviction... horror stories authored by our own Mr Wise?

I'm shocked you are exiting.  LOL   Not all LLing has to be savage LLing.   It CAN begin with "Between naps, I sometimes....

Originally posted by @Michael Swan :

Hi @Jad Boudiab,

I am closing on a 24 unit in Painesville and a 57 unit in Mentor soon.  I sold my Shaker Heights 8 unit on the corner of Almar and Warrensville Center Rd. 3255 Warrensville Center Rd.  and my Cleveland Heights 10 unit at 2435 Noble Rd.  Those two, I overpaid and thought I was buying yield deals.  Not the case.  Those were my first two 1031 Exchange deals and cut my losses and moved on.

Those two were money pits.  I now am focused on value plays in Lake County.  You live and you learn!!  

I will be a principal in 200 units primarily in Lake County, Ohio.  I also have a 12 unit doing really well at 24600 Euclid Ave. in Euclid near brand new Amazon Fulfillment Center and a 24 unit in Akron doing very well too.

Feel free to reach out to me anytime.

Swanny 

 That's right man, you live and you learn.

Glad to see you growing the portfolio with stronger properties, Mentor will be a good one to hold.

Originally posted by @Michael Swan :

Hi @Jad Boudiab ,

I am closing on a 24 unit in Painesville and a 57 unit in Mentor soon.  I sold my Shaker Heights 8 unit on the corner of Almar and Warrensville Center Rd. 3255 Warrensville Center Rd.  and my Cleveland Heights 10 unit at 2435 Noble Rd.  Those two, I overpaid and thought I was buying yield deals.  Not the case.  Those were my first two 1031 Exchange deals and cut my losses and moved on.

Those two were money pits.  I now am focused on value plays in Lake County.  You live and you learn!!  

I will be a principal in 200 units primarily in Lake County, Ohio.  I also have a 12 unit doing really well at 24600 Euclid Ave. in Euclid near brand new Amazon Fulfillment Center and a 24 unit in Akron doing very well too.

Feel free to reach out to me anytime.

Swanny 

Swanny your fortunate you can make a boo boo and still live to fight another day.. investors starting out if they did the same thing they could be out of business and or take years to recoup..  we see so many CA investors who say they are priced out of CA or west coast trying to buy their FIRST property in these markets..  I get the experienced well cashed up investor like yourself you can do this but all these first timers.. Boy they better choose wisely.. and from my standpoint buying lower return assets to start and fill their experience bucket would be a smarter play than what we see them do buying the most high risk since the returns on paper are what entice them to make this type of investment in the first place. 

Originally posted by @Steve Vaughan :

Cleveland?  Land of 'savage' investing and home of nightmare... toilet, kitchen, hoarding, junk, Christmas eviction... horror stories authored by our own Mr Wise?

I'm shocked you are exiting.  LOL   Not all LLing has to be savage LLing.   It CAN begin with "Between naps, I sometimes....

reality Steve it has zero to do with the city and everything to do with the asset class..   other than I agree some of those cities are not owner friendly they want the buildings in perfect shape and will keep on you until they are.. sec 8 is section 8 that's same all over the place.. 

Hi @Jay Hinrichs ,

It is a big risk if you have never owned Apartment Complexes going into a new market, without a proven team that has already been there and done that in that market.

There are sooooooo many pitfalls or landmines to unsuspectingly walk on.  I was in the beginning just figuring, trading in a San Diego Condo I purchased in 2011 for $100,000 making $5,000 cash flow per year for a $12,000 cash flowing Apartment complex and doing the same on another.

Chasing yield I thought would be safer than value. Boy was I wrong. Luckily, I kept learning and researching and fine tuning my approach for Value instead and finding the right team members, through painful trial and error and am now seeing incredible increase in NOI, cash flow, and appreciation. The two deals right now are $2,000,000 for 57 units in a nice area called Mentor, Ohio and a few minutes east of that a 24 unit at $762,500 in Painesville, Ohio.

So, fast forward from May of 2015 that 10 unit on Noble Rd. In Cleveland Heights to now 10 apartment complexes and 200 units.  Those first two losses were very expensive ($350,000) losses.  

Just remember, buyer beware.  ONLY talk to other owner’s that have invested there.  Make sure you can raise rents at least $100-$150.00 per unit in a 2-3 year period.  There has to be huge upside in rents.  Hopefully, not too much crazy rehab to do so.  Charge $25-$30 pet rent, per pet, two pets max, plus a security deposit for the pets too.  Start charging water/sewer fees at least $20.00 a month for water/sewer 1br units and at least $30.00 per month water sewer fees for 2br units.  Plus, replace all toilets with time.  Outstanding product by Niagara - Stealth elongated bowl.  Tenants love it!! .80 gallons per flush.  Niagara Massager shower head.  Again Tenants love it 1.7 gpm.  Tamper proof aerators on the bathroom sink .50 gpm and tamper proof aerators in kitchen sink 1.5 gpm.  Plus, charge waster/sewer fees and watch expenses drop dramatically.  LED lighting too throughout the complex.

Your PM has a job to save you money and increase the money coming in every month.  In Lake County for your basic 800-900 sf 2br we get $750.00 rent and when you add those other charges, we are about $800.00 a month.  We buy these things for between $30,000-$36,000 a unit now.  The entry rents when we purchase are about $600.00 to $650.00 a unit for the 2br and $475-525 for the 1br units. The 1br after we take over go to at least $650.00 a month.  

In Mentor we will be able to easily get $795-$850 for the 2br and $695-$750 for the 1br.

I keep hearing about the prices people are paying per unit for other places and their rents are soooo much lower than what I am getting.  It seems they are chasing yield in places like Lakewood etc..

Again, buyer beware!! Go in on your first few deals with seasoned investors.  Too many landmines or pitfalls to step on doing it alone.  A lot of fake news out there people.

Message me to talk more.

Swanny 

@Michael Swan   yup my point exactly you could take a 350k loss and not lose a beat..  others would be wiped out.

all because they sold or did not want to buy lower yield.. chasing yield is gambling as much as those that say buying for appreciation is gambling.. probably worse actually..  your the exception not the rule.

@Jay Hinrichs

Hi Jay - I'm fairly new to BP but your posts always impress me. I've been looking into investing in SFR properties in Warner Robin's GA. for the purposes of long term renting as well as appreciation. Something in this area and price range:

https://www.zillow.com/homedetails/121-Fisher-St-Warner-Robins-GA-31093/49853176_zpid/

It seems like most of the surrounding area is commanding $7-800 rents. Am I missing something or are these good deals?

Thank you in advance for any knowledge you can share!

Nick

Originally posted by @Nicholas Carlson :

@Jay Hinrichs

Hi Jay - I'm fairly new to BP but your posts always impress me. I've been looking into investing in SFR properties in Warner Robin's GA. for the purposes of long term renting as well as appreciation. Something in this area and price range:

https://www.zillow.com/homedetails/121-Fisher-St-W...

It seems like most of the surrounding area is commanding $7-800 rents. Am I missing something or are these good deals?

Thank you in advance for any knowledge you can share!

Nick

that's south of Macon..  we did our investing in Henry county  so not familiar with that area..

Hi @Jay Hinrichs ,

Don’t get me wrong here.  It was really painful to cut my losses and move on from those first two.  One I went 2 years and the other 2.5 years.  That was me, my wife, and my Mom and Dad’s life savings.

The most W2 earnings my wife and I have ever made was $80,000 before one year total family income.  That was a HUGE expensive lesson!! We are in the process of last stage of repositioning 2 complexes, the middle of repositioning 6 others and just buying these two complexes.

I manage the heck out of my property managers etc...  I went through workshops and training too, along with following David Lindahl’s Multifamily Millions for repositioning Value deals.  This is not passive!! You need to be on top of everything or it can get away from you in a hurry!!

Swanny

Originally posted by @Michael Swan :

Hi @Jay Hinrichs,

Don’t get me wrong here.  It was really painful to cut my losses and move on from those first two.  One I went 2 years and the other 2.5 years.  That was me, my wife, and my Mom and Dad’s life savings.

The most W2 earnings my wife and I have ever made was $80,000 before one year total family income.  That was a HUGE expensive lesson!! We are in the process of last stage of repositioning 2 complexes, the middle of repositioning 6 others and just buying these two complexes.

I manage the heck out of my property managers etc...  I went through workshops and training too, along with following David Lindahl’s Multifamily Millions for repositioning Value deals.  This is not passive!! You need to be on top of everything or it can get away from you in a hurry!!

Swanny

YUP its a job  plain and simple it may not be 9 to 5 but it is a job if you want to be successful.. its a profession actually professional landlord apartment owner.. those that think that they are going to invest in high paper yield rentals and sit on the beach with out a care in the world  that's simply just selling the dream.. then you wake up and realize hey I have invested millions of dollars in cash and debt.  

and it just got real..  so you trade one job for another.. one you run yourself the other your working for someone.. its a personal choice. 

there was an interesting back and forth over on the " rent control is sweeping the nation thread"" with a couple of SF long time landlords.

and as one pointed out  his 13 doors are worth 200 plus doors in the mid west his cash flow is as much if not more ( he bought in the 90s is appears)  so he self manages his 13 doors  his renters are all mid level or higher Tech types  who can pay 2500 to 5k per door for rent. So when you read between the lines that is the investor who can live the dream.. he made millions o appreciation NOT day one but now.. and now his rents appreciated were in the mid west rents are quite stable.   And his work load is truly that of someone who can work it a few hours a week type thing..  

When you go up in asset class and come down in Cap rate.. this also allows for professional management to run apartments and that also makes it very passive.. I have a business partner from Hawaii I met him when I  brokered a 5 mil 80 unit in Portland.. they paid cash for. He comes twice a year mainly to do a quick walk through and then we go do dinner and wine tasting etc..  but his PM manages the onsite manager.. that's true passive.. and he bought the 30 unit next to him a few years ago for I think about 3 mi.. and he turned down an offer last year of 13k mil for all of it..  you simply cant have that kind of movement in low end C class.. C class is your running  business like you said full hands on deck .. full engagement.. 

@Michael Swan ch is a challenge that is hard understand unless you live there. Congrats on Mentor - if the number she work that should be a long term play. @Charles A. was the on in Cleveland on the east side? 

Unfortunately see this time and again. Sellers/ brokers promote properties at amazing returns and don't include all the details. 

Although the returns on sfr on not bad. Have a client selling in euclid for 65k with 950 in rents. With financing would be a pretty good return.

Originally posted by @Jay Hinrichs :
Originally posted by @Steve Vaughan:

Cleveland?  Land of 'savage' investing and home of nightmare... 

reality Steve it has zero to do with the city and everything to do with the asset class..   other than I agree some of those cities are not owner friendly they want the buildings in perfect shape and will keep on you until they are.. sec 8 is section 8 that's same all over the place.. 

I hear you, Jay.

James has the best graphic tenant horror stories.  James operates in Cleveland.  I couldn't help myself ☺

Originally posted by @Steve Vaughan :
Originally posted by @Jay Hinrichs:
Originally posted by @Steve Vaughan:

Cleveland?  Land of 'savage' investing and home of nightmare... 

reality Steve it has zero to do with the city and everything to do with the asset class..   other than I agree some of those cities are not owner friendly they want the buildings in perfect shape and will keep on you until they are.. sec 8 is section 8 that's same all over the place.. 

I hear you, Jay.

James has the best graphic tenant horror stories.  James operates in Cleveland.  I couldn't help myself ☺

 YUP he lays it out there..  but I have seen as bad if not worse in Portland.. NOT by tenants but owners who are full blown horders

last 18 months I demo 'd  6 houses that were lived in for years and were just beyond salvage..   

what I think most don't realize is when they are buying a rental in the mid west or that new thing that is going around a BRRRR

in most instance those houses look like that because of tenant abuse.. some are owner abuse but most are just recycled properties were tenants have beat the crap out of the houses and beat the crap out of the landlord who did not realize what they were getting into and or cant fathom or comprehend how people can live like that.

@Michael Swan

Be careful,my friend.

No matter how deep your pocket is,the Midwest will screw you.

It may be way more painful on the monster bigger deals actually in my opinion.

If you have tens of millions into an apartment deal gone wrong in Cleveland,it hurts in 10 million more ways.

Going big does not eliminate risk.

It amplifies it.

And a deep pocket can be wiped out by a big deal gone  wrong as easily as a newbie could get wiped out on a smaller deal gone wrong.

I’m with @Jay Hinrichs 💯 %

I do now understand why my favorite BP blogger (wink wink) packed up from Lima OH to relocate his investing to Arizona.😃

If you know, you know.

Best of luck with your Mentor closing though.You might need it!

Hi Charles,

Lake County is soooooo business or landlord friendly compared to the Heights etc... it is an entirely different world in all aspects.  Commercial RE Taxes are about 50% lower than Shaker Heights and Cleveland Heights too.

That’s why I got out of the areas you were investing in a hurry!!  

Good luck to you too Charles!!!

Swanny

Originally posted by @Michael Swan :

Hi Charles,

Lake County is soooooo business or landlord friendly compared to the Heights etc... it is an entirely different world in all aspects.  Commercial RE Taxes are about 50% lower than Shaker Heights and Cleveland Heights too.

That’s why I got out of the areas you were investing in a hurry!!  

Good luck to you too Charles!!!

Swanny

 Agree with you Swanny.

Saying all of midwest (or all of Cleveland) is a money pit is hasty generalization.

Charles, you just made a mistake in investing in the wrong area of Cleveland.

I love Cincinnati and made MILLIONS buying apartment buildings there. Here's just one example:

https://www.biggerpockets.com/forums/311/topics/644570-how-i-made-over-1-million-on-1-deal-after-6-years-of-headaches

@Michael Ealy

You bought that in 2011.

I know I could post multiple similar wins for you that I had in Florida in 2011.

But I won’t bore you.

You live in Cincinnati.

I live in Jacksonville and bought my Cleveland buildings in the past 18 months.

Read my blog again and then read @Jay Hinrichs comments above.

We are trying to inform newbies and out of state investors, not savvy locals like you.

The post is not to say it’s absolutely impossible to make money in Cleveland.It just points out blind spots that’s often papered over by local stakeholders who sell Cleveland and cheap Midwest homes to uncanny out of town investors.

Information doesn’t hurt.Especially if it’s open and balanced like in this forum where it’s free to hear both sides of the story.

I hope you get the difference.

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