What I've learned investing in Cleveland market for a few years.

57 Replies

I see Cleveland come up a lot for investors out of state.  It makes sense when you see the prices are relatively low and rents are relatively strong for those prices.  I invest there because I live in Ohio and grew up in Ohio.  Although I don't live in the Cleveland area we have family there and are in the area every couple months.  While not all Cleveland specific, I thought I'd throw out some stream-of-consciousness style thoughts about my time investing in real estate and in CLE real estate.  I'll even include a pie chart at the bottom of the post.

My portfolio is 7 buildings with 20 units total.  ALL of my buildings are in B areas as defined by The Ultimate Guide To Grading Cleveland Neighborhoods. I generally have increased the size of the buildings as I gained experience. I started with the SFH and my last buy was the 6-unit apartment, which I bought around Summer 2018.

SFH: 2

Quads: 2

Duplex: 2

6-unit Apt: 1

  • Cleveland B areas are decently nice.  Honestly I expected them to be a lot worse when I first visited to check out the neighborhoods.
  • You should definitely visit the area before investing though and view several neighborhoods/suburbs.
  • Cleveland property taxes are high, especially relative to the value of the properties.
  • Any purchase you make on a property the county/school district will file a complaint to get your property taxes raised to the market price you paid.  (And it's hard to argue against the value if you just paid that price.)  So don't look at the current tax bill before you buy, calculate what it WILL BE at the increased purchase price, because that's what it will be once they are done with you.
  • Also the tax increase will be retro-active for the year in which you purchased.  Often the tax increase will not happen until > 1 year or more since you bought it so you can suddenly have a big amount of back taxes on your next property tax bill.  I just had my first tax bill for an increase from 2017 that finally went through and all the retroactively increased taxes were on my 2019 bill.  So instead of 2900 for the half I had to pay 4500 (on one building).
  • Cleveland housing stock is old.  Not east coast old, but still really old.  The "newer" housing stock is like 1950's or 60's.  And a ton of it is 100 years or more.  Lots of them have asbestos, lead paint, old knob and tube wiring, the works.  Not anything to freak out about but that's just the reality of most of the investment stock.
  • Because they are old, most of the properties I've bought have real hardwood floors under the carpet.  I never knew why it was a thing to put ugly carpet over hardwoods, but I've had the carpet ripped out in multiple of my units and had the hardwoods sanded, stained and refinished and they look AMAZING.  Highly recommend checking whether there are hardwoods under the carpet if you can during an inspection.
  • Cleveland has a really weird (and sort of BS, IMO) thing where the water/sewer bills are always in the property owner's name even if it's a rental property.  Across the board, tenants don't get their own water/sewer accounts nor pay those bills.  I've never lived in another place that was like this but that's seemingly how it is throughout CLE.  Utilities (of which most is water/sewer) for me was and is a huge expense.
  • Also on sewer/water, since tenants don't pay the bill, they don't care how much water they use.  They also don't give AF if the toilets run or the faucets leak.  And they won't call you or your PM to report it because that requires effort and there's no incentive for them to do so since they get no bill.  You basically have to be watching your bills like a hawk and notice when something uncharacteristic happens.  I've asked PM to send plumbers out to inspect buildings where the water bills were high and they find that half the units have faucets constantly dripping or toilets constantly running and the tenants are like *shrug* I didn't think it was worth calling about.
  • Lots of Cleveland suburbs have (or had) a thing called Point of Sale inspections.  Which is any time a property is sold, the city gets to make their money permitting the purchase, in which they send an inspector out and they give you a laundry list of stupid things to fix up.  Some suburbs give you a few things.  I had one in Cleveland Heights that gave me a 200 bullet point list of things they wanted to fix.  Some POS cities require you to put $ in escrow as insurance that you will do the POS repairs.  So not only do you need the $ to do the repair, you need 1.5x the amount factoring in your deposit.  I don't really mess with POS areas as I found it to be more hassle than it was worth.
  • If you buy a multi-unit, definitely check whether there is central heat or individual furnaces per apartment.  One building I bought I didn't check (I had to move fast and I did get a great deal) but I inherited central heat and water heater solution that costs me $ every month for as long as I own the property.  Oh, and you know if you are heating the building for them, tenants will keep their windows open in the winter for the fresh air.
  • If you buy from a retiring landlord and/or get inherited tenants, expect to pay the piper eventually in terms of deferred maintenance and/or evictions.  I would say at least 1/3 of my tenant base is still inherited tenants.  One of my duplexes I'm evicting both inherited tenants at the same time, and expecting to eat it when it comes to the rehab bill.
  • I took the deferred tenant/repair route to grow my portfolio "quickly" (for me) from 0-20 units in a couple years.  I don't regret it because I jumped on some opportunities but if those same opportunities weren't there, I would have taken a different approach, I probably would have bought a building, done a full turnover/rehab and put all new tenants in at the beginning.
  • Keep a lot of funds available and don't get to thin in your bank account buying deals.  I've had a few times in the past few years where I stretched too thin and was really sweating it out wondering if I was going to run out of money when the next property tax cycle came around or the next $10k vacancy/rehab happened.
  • Most surprising thing I've discovered about real estate investing (generally, not CLE specific) is how much it helps lower your adjusted gross income for tax purposes.  As I've grown my portfolio I've actually paid lower and lower income taxes due to depreciation, and expenses deductions.  
  • You WILL have evictions eventually, even in B and above areas.  I thought it was over stated or that it only happened in C areas because I went for something like 3 years and no evictions, then I've had to pay for at least 4 in the past 6 months or so.

As promised, a fun quick books chart with a few redactions.  The huge "expense" bar in December 2018 is the accountants adding back my interest expense for all 12 months into my books in December (that way I didn't have to break mortgage payments into principal and interest throughout the year until I handed it off to them @ EOY.)  So you can pretend that is spread out across the previous 12 months bars.  The negative expense in March is a cash out refi I did that I haven't correctly categorized yet.

Updated about 2 months ago

One other thing I forgot to mention in the Cleveland post, is most of the areas that I invest in also require you to get an annual city property permit for your rentals. It's usually in the $150-$200 range, per building, per year. So it's not a trivial expense once it starts to add up.

Updated 2 months ago

Here is a link to the pie chart in higher resolution so it's legible (I hope) since someone said it was hard to read. https://imgur.com/a/73klV0P

Oct 2018 is where I hit a big clump of vacancies all at once (non payments that became evictions or would have but they bailed before court) so less income from vacancy, plus court costs, plus rehab costs at turnover if the unit was a mess which since most were inherited tenants they usually were, plus PM leasing fees, etc.. equals a pretty sad stretch of months at the macro level when you look at how am I doing as an investor.  :)

I invest in Cleveland myself and that is some awesome information

@Marc Hanson I think you pretty much nailed it. You mentioned the water and sewer but didn't mention the costs of these bills (unless I missed it). Water and sewer costs are extremely high in the Cleveland area. In my Parma duplex, it can run as high as 150-200 dollars per month. It is outrageous. 

Thanks for the info.  I invest in Cleveland as well!

Good info, thanks. I can't read the info in the chart table very well even using magnifier. Would it by chance be in google docs?

Could you share your approximate cash flow per door?

@Jim Robertson - Thanks for letting me know.  For whatever reason, the website compressed the image.  I updated my original post with an imgur link to a high-res version of it that is hopefully more legible.  Cash flow per door is tricky.  Because most of my units are inherited / deferred maintenance, that means the first time they go vacant I have a huge bill, which can be over $10,000 when you factor painting, new floors, new kitchen or new bath, etc.  So while an individual property might be cash flowing well, pretty much all my money coming in goes back out as other units go vacant and turn over.  It sounds scary but I'm not sure I've had a positive cash flow year yet.  2018 was on track to be but the bad end to the year I mentioned sort of killed it.  But when you are doing 40,000 in repair costs in a year, that accounts for a lot of cash flow that doesn't make it to my pocket.  That's a big part of why I said if I started over, I would start with a fully rehabbed and re-tenanted building vs the inherited route.

Also worth mentioning is that since I do not self-manage, I'm paying an extra 10%+ in rents collected to PM, plus leasing/advertising fees, plus whatever markup on supplies/labor that I could save self-managing if I wanted to go that route.  I'm definitely paying a premium to outsource that aspect of my investing because I have a day job, and I've also done my own self-management before and while I know I can do it, I did not enjoy it so I happily take the hit to let someone else do it.

@Brian S. - Yeah I didn't mention dollar amounts. I was trying to keep the post percentage based but I guess this is worth mentioning in concrete numbers as well. Yes water/sewer is ridiculous. My monthly bills range probably from 75 to 300 total per building per month. Most are probably in the 125 - 225 range. One of my quads has lower water bills than my SFH too. I've never understood that building but it's always had really low water and sewer usage. Maybe there are no bathtubs in that one.

Also worth further mentioning, is unspoken in all of this is that I have accumulated equity in my portfolio via debt pay down (most of my loans are 20 year vs 30) and value appreciation (and forced appreciation through the rehabbing / fix up). I bought most of these properties MUCH cheaper than you can get anything comparable even at the time I bought them, but definitely today a couple years later. SFH for 61k that rents for $1000. Good luck trying to find that in a B area of Cleveland today. Quad for 120k that rents for $2300/mo and is probably worth closer to 200k now. And so on. Yeah the repairs eat up most of my cash flow but that also means the tenants are paying for the rehab over time vs me. I have only had to add funds from my personal checking account once in the past year and a half. In the beginning I was writing checks every month almost. Once I got to about 10+ units it started to be more self-sustaining.

Originally posted by @Brian S. :

@Marc Hanson I think you pretty much nailed it. You mentioned the water and sewer but didn't mention the costs of these bills (unless I missed it). Water and sewer costs are extremely high in the Cleveland area. In my Parma duplex, it can run as high as 150-200 dollars per month. It is outrageous. 

 wow that's insane. My water/sewer usually runs me $25-$35/unit/month depending on the size in PA. 

An area which is showing very similar numbers and performance is southern Wisconsin. Rock County has been great to out of state investors and is putting up quite similar numbers. 

$75-$100 per unit every month is the 'ball park' estimate I was told by the guy helping me get started in Cleveland investing to factor in for your water and sewer.  It has held up to be a remarkably good ball park on average.

In the last 12 months, I have spent $18,153.20 on "utilities".  (90% of that is probably water/sewer with a little of it being the shared heating building).

$18,153.20 over 12 months = $1,512.76 per month average.

$1,512.76 per month spread across 20 units = $75.63 per unit per month.

Now the past 12 months I didn't have 20 units the whole time.  The first few months I had 14 units.  So the true average might be a bit higher once I get a full 12 months @ 20 units but still, that's a good ball park in my experience so far (and remember, I monitor my water bills for high usage / leaks.  Lots of investors probably do not.)

Originally posted by @Marc Hanson :

I see Cleveland come up a lot for investors out of state.  It makes sense when you see the prices are relatively low and rents are relatively strong for those prices.  I invest there because I live in Ohio and grew up in Ohio.  Although I don't live in the Cleveland area we have family there and are in the area every couple months.  While not all Cleveland specific, I thought I'd throw out some stream-of-consciousness style thoughts about my time investing in real estate and in CLE real estate.  I'll even include a pie chart at the bottom of the post.

My portfolio is 7 buildings with 20 units total.  ALL of my buildings are in B areas as defined by The Ultimate Guide To Grading Cleveland Neighborhoods. I generally have increased the size of the buildings as I gained experience. I started with the SFH and my last buy was the 6-unit apartment, which I bought around Summer 2018.

SFH: 2

Quads: 2

Duplex: 2

6-unit Apt: 1

  • Cleveland B areas are decently nice.  Honestly I expected them to be a lot worse when I first visited to check out the neighborhoods.
  • You should definitely visit the area before investing though and view several neighborhoods/suburbs.
  • Cleveland property taxes are high, especially relative to the value of the properties.
  • Any purchase you make on a property the county/school district will file a complaint to get your property taxes raised to the market price you paid.  (And it's hard to argue against the value if you just paid that price.)  So don't look at the current tax bill before you buy, calculate what it WILL BE at the increased purchase price, because that's what it will be once they are done with you.
  • Also the tax increase will be retro-active for the year in which you purchased.  Often the tax increase will not happen until > 1 year or more since you bought it so you can suddenly have a big amount of back taxes on your next property tax bill.  I just had my first tax bill for an increase from 2017 that finally went through and all the retroactively increased taxes were on my 2019 bill.  So instead of 2900 for the half I had to pay 4500 (on one building).
  • Cleveland housing stock is old.  Not east coast old, but still really old.  The "newer" housing stock is like 1950's or 60's.  And a ton of it is 100 years or more.  Lots of them have asbestos, lead paint, old knob and tube wiring, the works.  Not anything to freak out about but that's just the reality of most of the investment stock.
  • Because they are old, most of the properties I've bought have real hardwood floors under the carpet.  I never knew why it was a thing to put ugly carpet over hardwoods, but I've had the carpet ripped out in multiple of my units and had the hardwoods sanded, stained and refinished and they look AMAZING.  Highly recommend checking whether there are hardwoods under the carpet if you can during an inspection.
  • Cleveland has a really weird (and sort of BS, IMO) thing where the water/sewer bills are always in the property owner's name even if it's a rental property.  Across the board, tenants don't get their own water/sewer accounts nor pay those bills.  I've never lived in another place that was like this but that's seemingly how it is throughout CLE.  Utilities (of which most is water/sewer) for me was and is a huge expense.
  • Also on sewer/water, since tenants don't pay the bill, they don't care how much water they use.  They also don't give AF if the toilets run or the faucets leak.  And they won't call you or your PM to report it because that requires effort and there's no incentive for them to do so since they get no bill.  You basically have to be watching your bills like a hawk and notice when something uncharacteristic happens.  I've asked PM to send plumbers out to inspect buildings where the water bills were high and they find that half the units have faucets constantly dripping or toilets constantly running and the tenants are like *shrug* I didn't think it was worth calling about.
  • Lots of Cleveland suburbs have (or had) a thing called Point of Sale inspections.  Which is any time a property is sold, the city gets to make their money permitting the purchase, in which they send an inspector out and they give you a laundry list of stupid things to fix up.  Some suburbs give you a few things.  I had one in Cleveland Heights that gave me a 200 bullet point list of things they wanted to fix.  Some POS cities require you to put $ in escrow as insurance that you will do the POS repairs.  So not only do you need the $ to do the repair, you need 1.5x the amount factoring in your deposit.  I don't really mess with POS areas as I found it to be more hassle than it was worth.
  • If you buy a multi-unit, definitely check whether there is central heat or individual furnaces per apartment.  One building I bought I didn't check (I had to move fast and I did get a great deal) but I inherited central heat and water heater solution that costs me $ every month for as long as I own the property.  Oh, and you know if you are heating the building for them, tenants will keep their windows open in the winter for the fresh air.
  • If you buy from a retiring landlord and/or get inherited tenants, expect to pay the piper eventually in terms of deferred maintenance and/or evictions.  I would say at least 1/3 of my tenant base is still inherited tenants.  One of my duplexes I'm evicting both inherited tenants at the same time, and expecting to eat it when it comes to the rehab bill.
  • I took the deferred tenant/repair route to grow my portfolio "quickly" (for me) from 0-20 units in a couple years.  I don't regret it because I jumped on some opportunities but if those same opportunities weren't there, I would have taken a different approach, I probably would have bought a building, done a full turnover/rehab and put all new tenants in at the beginning.
  • Keep a lot of funds available and don't get to thin in your bank account buying deals.  I've had a few times in the past few years where I stretched too thin and was really sweating it out wondering if I was going to run out of money when the next property tax cycle came around or the next $10k vacancy/rehab happened.
  • Most surprising thing I've discovered about real estate investing (generally, not CLE specific) is how much it helps lower your adjusted gross income for tax purposes.  As I've grown my portfolio I've actually paid lower and lower income taxes due to depreciation, and expenses deductions.  
  • You WILL have evictions eventually, even in B and above areas.  I thought it was over stated or that it only happened in C areas because I went for something like 3 years and no evictions, then I've had to pay for at least 4 in the past 6 months or so.

As promised, a fun quick books chart with a few redactions.  The huge "expense" bar in December 2018 is the accountants adding back my interest expense for all 12 months into my books in December (that way I didn't have to break mortgage payments into principal and interest throughout the year until I handed it off to them @ EOY.)  So you can pretend that is spread out across the previous 12 months bars.  The negative expense in March is a cash out refi I did that I haven't correctly categorized yet.

Nice Summary. FYI there are other ways to handle the water. It just depends on your PM (or if you handle it yourself.) Some will charge the tenants a flat fee (say $50 per tenant) that they must pay with their rent. When the bill comes in, the PM should charge the tenant for any overages. This only works in Single Family Houses, or multis with multiple meters. For example, let's say you have a SFR and you charge the tenant $50 a month for water. The bill comes in at $75. Then you inform the tenant they now owe an extra $25 with their rent. If they don't pay it they are in violation of their lease for nonpayment of utilities.

The other option (you need a PM for this volume) Send the water bills directly to the tenant. Inform them they MUST pay it like any other utility bill. Monitor the water accounts online via the city's portal and make sure they pay. Failure to pay the water would be a violation of the lease for nonpayment of utilities. 

You can put the Cleveland water bills in the tenant's name but it is a VERY difficult process. It is not worth it.

There are other ways as well. Owners should not front the bill. Even if it is multifamily, you can just charge a flat fee. Increase it if you find yourself paying to much still. 

Yes, the taxes here can be annoying. If you find a decent enough lawyer, they can be challenged. It just depends. 

Point of Sales are on their way out. Many of them are being challenged in the courts right now and some cities have stopped them. It is only a matter of time. They are old laws from the 1970s. 

Yes, many of these properties are older, but you can also find properties that have been gutted and renovated to a high standard. 

Thank you for this information.  I'm a new investor in Cleveland and this was very helpful.  Interesting point on the tax increases.  That is something I did not have built into my models.... UNTIL NOW!

Very helpful breakdown. Thank you.

Awesome post!  Thanks for sharing.  I also invest in Cleveland multi-families and its good to be able to compare notes and share experiences.  Great tips for the water bills and tax bills BTW.  I'd struggled to come up with a good estimate for water and sewer rates.

@Justin Wilson - Yeah, I don't see the $75 water ballpark figure thrown around too often online but it's a really good default value to pencil into your calculations.

@Marc Hanson  

Awesome writeup and great advice! I invest in C properties in Milwaukee, and I see a lot of similarities in the markets. 

Inherited tenants = russian roulette. That part resonated with me especially, haha. 

How long do you think it takes to stabilize the average property, given that you have to turnover inherited tenants, do rehab, etc...

In my market, I'm guessing it takes 1.5-2 yr to expect full stabilization.

Great work! Great summary of Cleveland as well. Thanks for sharing!

@Taylor Chiu - I was told to expect 2 or 3 years to stabilize and turn over a 2 or 4 unit type building.  Unless you are kicking people out and not renewing leases to get it done faster.

I have one unit in one of my quads who is an original tenant and he's not going anywhere.  From all I have heard is he is a total filthy slob type borderline hoarder with all his junk, and when he leaves that will be a FULL floor to ceiling gut  remodel.  But his rent is on the higher side in that building and he has shown no indication of missing payments or causing trouble other than if he's so dirty it can attract pests.

Now you have me curious to go figure out exactly how many of my tenants have been there from the beginning.  I'll report back when I figure it out.

@Ryan Ingram - Thanks!  I'm a lot less experienced than many, but I've also learned a bunch of things about my market so if I can help save someone else some pain starting out, I'm all about that.

@Marc Hanson 2 - 3 years sounds reasonable. In my case, I expect to evict about 1/3rd of my inherited tenants. Some don't pay from the start, and some make it for a few months and then go cold. It's a process!

Originally posted by @Marc Hanson :  
  • You WILL have evictions eventually, even in B and above areas.  I thought it was over stated or that it only happened in C areas because I went for something like 3 years and no evictions, then I've had to pay for at least 4 in the past 6 months or so

Do you have more information about the eviction process and time frame to get a court date? Who's side are the judges on?

Great post.

Thanks

This post has been removed.

Hey Marc,

Has it been difficult managing from a distance albeit a small distance?  I'm looking to move to Columbus but if there are potential properties in Cleveland then i'll pull the trigger.  

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