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