Reasonable cap rates for SFH in Euclid or Parma?

15 Replies | Cleveland, Ohio

Hello friends,

I'm newer to the CLE market (invest mainly here in LA, where I'm based), but I know some folks who are also out of state, who've had good experiences investing in SFH in the area, so I"m looking into it. Spoke with someone recently who mentioned Euclid or Parma as possible areas to look into - what sort of cap rate would be competitive for single family homes in these areas? I am told that Euclid is a good deal cheaper than Parma, but Parma may be more stable in terms of tenant turnover. Any feedback is appreciated.

Thanks Bob and Federico. I heard the same from another investor re POS. What sort of return would you consider competitive in Parma? I hear different feedback from folks on this, some say closer to 8, others say closer to 12, trying to get a feel for it. 

Hey Noam,

I know both areas pretty well. Lived in Parma Heights for a while and looked at taking a job in Euclid.

Euclid is rough and borders a rough area. Parma is blue collar but still overwhelmingly safe. A young family from our Church just moved to Parma (Tuxedo Avenue, if you're looking in that area) and it's a great starter home community. Rents are good and the renters tend to be a lot more responsible than those living in Euclid.

Note that these two areas are quite far apart from each other: driving from Parma to Euclid is a good 20 mile trip.

Happy to provide further insight if you think it'd be valuable.

Al

Thanks @Al Blazek . What should one expect the numbers on a SFR investment rental in Parma to be?

What's your "ideal deal" ? And anywhere else in Cleveland area for that matter.

It's hard to answer that question without knowing the particulars. Since I haven't bought/sold real estate in Parma proper, and only bought a house for personal living in Parma Heights.

What is your personal "hurdle rate"? Are you buying for cash flow, appreciation or a mix? How leveraged do you plan to be?

Without knowing these - plus your own personal risk profile - it makes it hard to say what would help you out.

To give you an example of what I considered to be a great deal, the very first house I bought I paid $1,500 more than asking price(!!) from MLS because 1) supply was VERY low, 2) there was a new outdoor mall slated to go in a year after I bought and 3) the rents supported a price up to $10K more than what I paid.

So I bought it. 

What was supposed to be a cash flow house - rent was $1,100 a month when I bought it using an 80/10/10 loan - and it turned into an appreciation play as real estate prices soared... and rents dropped (yes, dropped) since everyone and their brother was interested in buying, standards were very loose and the rental market weakened while demand to buy soared.

I eventually sold that house to my long-time renters for $185,000. No realtors. Their rent was $975 when I sold - so the cap rate was literally halved from when I bought it.

Was this a success or a failure from your perspective? From mine, it was a success. But for you, if you want/need cash flow, you might have been unhappy - the cash flow was close to zero when I sold as rental prices contracted.

TL;DR  Tell me your goals and your needs and I can tell you what I would consider successful.

You should be able to better than 8...   

As for reason for why Parma over Euclid, for local people probably has more to whether you are an east sider vor a west sider. As a property manager, my life is easier in Parma.  I agree with both @Al Blazek and @Federico Gutierrez as to the reasons.  Try to be South of Snow Rd in Parma... all things being equal.

You can still beat the 1% rule in Parma. And that's a B Area. Coc is 8-12% depending on the ZIP code. Closer to brookpark road they are cheaper. 

But a sfr that all utilities are paid for by the tenant is money any day

thank you all for your input. 

In short I’d say I believe that if you are looking to invest in a rental for the long run then you should go with a B property. In the long run, between vacancy, maintenance, tenant pool and appreciation potential I think B properties make a much better return. 

But of course you never know what will happen 5, 10, 20 years from now in an area. B neighborhoods can turn into D’s and D’s can become A’s, etc. 

Originally posted by @Federico Gutierrez :

You can still beat the 1% rule in Parma. And that's a B Area. Coc is 8-12% depending on the ZIP code. Closer to brookpark road they are cheaper. 

But a sfr that all utilities are paid for by the tenant is money any day

 In cleveland, water and sewer is still the responsibility of landlord. I have not seen lower expenses for sfh vs duplex.

Aaron

It is really hard right now to find good properties in good neighborhoods here at good prices. 

I am a bit too busy with property management for the next few months. I recommend you hire @Federico Gutierrez .  He is good at turning up investor properties, and can coach you on these nuances.

Bob

Thanks for the feedback, @Bob Collett and @Federico Gutierrez

Totally understand investing in a hot market. Where I live is ultra competitive as well. To that end... Federico, are offers using conventional 25% down financing still winning offers or are the good deals getting snatched up by out of state cash buyers?