Top 5 Biggest Mistakes Investors Make in the Cleveland Market

Successful real estate investors know what to look for in a property and what to avoid. Investing in many properties and helping investors find excellent investment properties, here are the top 5 mistakes we see Real Estate Investors make.

Number 1: Only Buy A Investment because it looks good on paper.

If I could only pick one mistake investors make, this would be the one. We see so many investors only look at how the property performs on paper and don't do their neighborhood due diligence. Often, Real Estate investors come to us and say, "we want a 12% cap rate, a 15% Cash-on-Cash return, and we don't care what class area we are in."

These are the same investors who call us to list their property in one to three years because they have become tired of all the vacancies, evictions, and damage done to the property. And the cherry on top is that this property likely won't see any appreciation because these "great deals" are typically in D areas.

The best advice we can give investors is to avoid getting caught up in how great the numbers look on paper. If the deal seems too good to be true, it likely is.

Number 2: Timing in the Market or Getting Stuck in Analysis Paralysis

Often, we hear investors say they are waiting for the market to cool off or for the market to crash. Regardless of the market we are in, you can find a source that will suggest we are headed for a real estate crash or real estate prices will continue to climb. No one knows for sure what will happen in the Real Estate Market. But we know that if you buy suitable quality investments that cash flow, you can withhold the bad times and make money in the good times.

It is about time in the market rather than timing the market. A quick story on that in 2019, I was talking with a potential client considering making an offer on an investment property. At the time, the investment property was for $110,000, and market rents were about $800 a unit. The buyer didn't pull the trigger because they believed home prices were too high. After all, he had a point. We have seen a steady increase in home prices over ten years. At some point, it had to burst. In 2023 that property is worth $150,000, and market rents are between $850 to $950. What is this buyer doing today? He is waiting for the market to crash. Maybe the market will, or perhaps it won't, but two things are for sure. When you buy real estate, you receive the benefits of depreciation, and if you invest in good quality properties with the appropriate leverage, you can withstand the down market cycles.


Number 3: Not hiring the right property management company

You can buy a great property that loses you money every year. It doesn't matter how good the investment is; you need a good property manager to have a good investment.

For example, you buy a turn-key duplex in a B-class area for $170,000. The estimated rent in the area is $1,200 per unit. Your underwriting shows that you should cash flow $500 a month after all expenses are paid. What a deal! But then you hire a property manager who doesn't screen your tenants, and within the first two months of owning the property, the tenants are not paying rent, and you are on your way to your first eviction. You now lose three months of cash flow and thousands of dollars in attorney fees.

Your rental property is a business. And the operator of that business is the property manager. If you have a lousy operator, this will create a nonprofitable business.

If your property manager is bad, your only hope of having a good investment would be the depreciation you received and the potential appreciation you have earned.

Number 4: Not looking at Leases

The motto we like to go by is "trust but verify." If the listing agent says that the tenants are on year-long leases and are paying $950 a month in rent, trust that they are, but most certainly verify by reviewing copies of all active leases of the property.

We were in escrow with a property where the listing agent thought the rents were $1,350 per month. When they sent us a copy of the lease, the lease showed $950 per month in rent! When I called the listing agent to discuss this discrepancy, they realized they had made a mistake with this property and another one the seller had listed. Thankfully we read over the lease carefully and verified all information.

Number 5: Not underwriting deals correctly

Underwriting properties correctly is one of your most important activities as a real estate investor. Underwrite too conservatively and miss out on a good deal. Underwrite too loosely, and you will buy a bad investment. Let's start with underwriting deals too conservatively.

Once, we worked with an investor looking for Douplex in the $130,000 to $200,000 range. They aimed to achieve a 10% cash-on-cash return and an 8% Cap Rate, which is a good and realistic goal in the Cleveland Market. The only issue is that they budgeted 10% for repairs and maintenance, 10% for cap-ex, 10% for property management, and 10% for vacancies. They only took 80% of the market rent and financed this investment with a 6.5% interest rate. Any property in an area worth investing in if you take 40% off the top in operating expenses, and then there will be another 50% in PITI expense (50% rule) that only lease 10% room for profit margin.

On top of that, the buyer only considered 80% of the current market rent. What did this result in? Not buying any deals, which is back to the second mistake real rate Investors make (not purchasing real estate). This buyer missed out on many good rental properties.

Conversely, underwriting too loosely can result in you buying a lousy deal that loses you monthly money!

What is a good rule of thumb for underwriting properties in the Cleveland market? This is how we underwrite our deals.

- Property Management: 10%

- Repairs and maintenance: 5%

- Cap Expenditures: 5%

- Vacancies: 5% 

- Water and Sewer: $60 per unit per month

From looking back at our profit and loss statements, this has been a pretty accurate approach to how our investments have performed.

Again, this is for the Cleveland market, and there can be a variety in this analysis. For example, if all the mechanicals has recently been replaced, we loosen up on the 5% for cap expenditures. If all the mechanicals are at the end of their life, we need to adjust our purchase price as we know we can have $20,000 plus in upcoming expenses.