Is Cleveland OH still a good place to BRRR?

Question

I like to start a new business using the BRRR method ? What do you guys think ?

Patrick Drury · Answer

@Natalia EylerIf you can do a value-add deal locally, I would do that. The tough thing, I would assume, is finding a BRRRR deal that's viable in California. Broadly speaking in Cleveland, you are going to be way more likely to find a deal with better BRRRR numbers than in California. Not to mention the price of entry is substantially lower.

Samuel Diouf · Answer

A lot of OOS investors are having great success with BRRRRs here in Ohio. It is very important to have a solid team and strategy in place, because you’re taking on a lot more risk than a typical rent ready purchase. When doing BRRRRs you may have to leave some money in your deal but you’ll still be able to scale a lot faster than the typical buy & hold strategy. Your COC returns also increase significantly with this strategy.

Marc Rice · Answer

Hi Natalia, when considering BRRRR's, you need to have a good team of GC, PM, lender and realtor. I am an investor-friendly Realtor and investor in Columbus, OH, but I also serve in Cleveland. On my BP profile you can learn more about my experience in Ohio and resources I have in the local area. Please let me know if you have any questions about Columbus or if I can help with anything.

Drew Sygit · Answer

@Natalia Eyler

Recommend you first figure out the property Class you want to invest in, THEN figure out the corresponding location to invest in.

Why is Property Class so important for investors to understand and apply in their investing strategies?

Because the Property Class dictates the Class of the tenant pool that the property will attract.

The Tenant Class
greatly impacts rental income stability and property maintenance/damage by tenants.

Both Property Class
and Tenant Class affect what type of contractors, handymen and property management companies will work on a property.

If you buy & renovate a property in Class D area to Class A standards, what Tenant Class will rent it?

Or, if you put several Class D tenants in a Class A four-plex, what do you think will happen to the property?

So, if you fail to apply the correct assumptions to a property, your expectations won’t be met and it may even be a financial disaster.

We use the following to rank Property Classes, in order of importance:

• Property Tenant Pool: closely linked to location, but not always.
• Property Location: closely linked to tenant pool, but not always.
• Property Condition & Amenities: it’s important to, “Maintain to the Neighborhood.”

Key metrics for each Property Class:

Class A Properties:
Tenant Pool: Majority of FICO scores 680+, no convictions/evictions in last 7 years. 
Tenant Default: 0-5% probability of eviction or early lease termination.
Section 8: Class A rents are too high and won’t be approved.
Vacancies: 5-10%, depending on market conditions.
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.

Class B Properties:
Tenant Pool: Majority of FICO scores 620-680, some blemishes, no convictions/evictions in last 5 years.
Tenant Default: 5-10% probability of eviction or early lease termination.
Vacancies: 10-15%, depending on market conditions.
Cashflow vs Appreciation: Typically, 1-3 years for positive cashflow, balanced amounts of relative rent & value appreciation.
Section 8: Class B rents are usually too high for the Section 8 program.

Class C Properties:
Tenant Pool: Majority of FICO scores 560-620, many blemishes, but should have no convictions/evictions in last 3 years. Verifying recent 2-years of rental history very important! Same for 2-years of job/income stability.
Tenant Default: 10-20% probability of eviction or early lease termination.
Section 8: Class C rents usually meet program requirements, proper screening still recommended.
Vacancies: 10-20%, depending on market conditions and tenant screening.
Cashflow vs Appreciation: Should cashflow immediately, at the lower end of relative rent & value appreciation.

Class D Properties:
Tenant Pool: Majority of FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, but should have no convictions/evictions in last 12 months. Verifying last 2-years of rental history and income/employment extremely important to find the “best of the worst”.
Tenant Default: 20-30% probability of eviction or early lease termination.

Section 8: Class D rents meet program requirements, often challenges to pass Section 8 inspection.
Vacancies: 20%+, depending on market conditions and tenant screening.
Cashflow vs Appreciation: Typically, all cashflow with little, maybe even negative, relative rent & value appreciation.

Where did we get our FICO credit score information from?

Check out this chart:

FICO Score

Pct of Population

Default Probability

800 or more

13.00%

1.00%

750-799

27.00%

1.00%

700-749

18.00%

4.40%

650-699

15.00%

8.90%

600-649

12.00%

15.80%

550-599

8.00%

22.50%

500-549

5.00%

28.40%

Less than 499

2.00%

41.00%

Source: Fair Isaac Company

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.

Metro Detroit has 132 cities, the City of Detroit 183 Neighborhoods, which we’re analyzing and classifying. Check out the map on our website where we’ve made this all easy to follow.

We can also share numerous examples of properties & portfolios we’ve assisted investors with!

DM us if you’d like to discuss this logical approach in greater detail!

Dan H. · Answer

Was it ever a good location?

My ideal location can generate the largest value add for the cost.   A year ago I added a half bathroom out of existing space in a high housing cost market.  Comps showed the half bathroom added ~$50k of value.  What do you think it would add in Cleveland?  My guess is less than $10k.  What do you think the cost difference of adding the half bathroom is.  Even if my cost was double the cost of the halfbathroom addition in Cleveland, I got at least 5x the value of the Cleveland addition for virtually the same effort,

A brrrr is a long strategy.   This implies appreciation and rent growth are important (versus flipping they have little importance).  Neighborhood scout shows Cleveland’s appreciation for this century as being 1 out of 10 (so in the bottom 10%). https://www.neighborhoodscout.com/oh/cleveland/real-estate

Long term Rent growth has a strong correlation to the appreciation.

The question is why do you think Cleveland was a good brrrr market?  What brrrr trait do you think Cleveland is above average?

Good luck

Joshua Janus · Answer

@Travis Biziorek

Yes there are still quite a few BRRRR opportunities in Cleveland. I’m actively doing them as an investor here and helping clients do the same. Just be aware of the areas as you need the equity and the exit.

Jimmy Lieu · Answer

Hi Natalia! You can definitely start BRRRRing but California would be very difficult to do so. I would recommend Columbus Ohio! The macroeconomics are on fire here - population growth, job growth, and companies moving and developing here. For example Intel headquarters, Google, FB, Amazon, Nationwide, Honda, Anduril, Microsoft, LG, and many more. Additionally, the price point is still cheap enough to find the 1% rule and positive cash flow and there's amazing appreciation potential. Lastly, the price point is still very cheap here in the sense that you can still find investment deals that hit the 1% rule for 120-180k! Happy to connect and answer any questions you have!

Travis Biziorek · Answer

Hey Natalia,

I can’t speak for Cleveland specifically, but I’m still doing a lot of BRRRR deals in Detroit for out-of-state clients.

Detroit’s market has its ups and downs, but if you know where to focus and have a solid team in place, it can be a great place for cash flow and equity growth. The key is getting in on the right properties—mostly off-market deals that need work to unlock their value.

I’ve been investing in Detroit for 6 years and have a 12-door portfolio under my belt. Overall, it's been a hugely positive experience for me but it's not without its challenges.

If you're interested in the Detroit market at all feel free to reach out!

Drago Stanimirovic · Answer

Cleveland can still work for BRRRR, but it’s getting tighter than it was a few years ago, rising rehab costs, stricter appraisals, and some neighborhoods getting saturated. That said, if you’re selective with zip codes and have a solid local team, there’s still opportunity.

Just make sure the numbers work before the refi.

Bob E. · Answer

@Natalia Eyler  We have a dozen properties in Cleveland and are exiting the market.  Local governments just mess with you there.  The city of Cleveland recently passed a law that you have to have a "Local Agent In Charge", someone that is financially and criminally liable for anything that happens with the property.  Not a lot of property managers will sign up for that.  Other cities just seem to mess with you.

Is Cleveland OH still a good place to BRRR?

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