Why I sold Cleveland.
Those who have read my member blog articles are familiar with my journey.If you haven't, they're still there.
So I listened to the Grant Cardone BP podcast a few weeks before making my move into Cleveland multifamily apartments.He had warned listeners against investing in the snow belt.
I ignored him.
My opinion was that you could invest in hell as long as the numbers work.I still believe that.
In the end, it wasn't our numbers that were the problem.it was the devil that was in the details.
Within a few months of owning our 2 buildings, it became very clear that we had made a terrible mistake.
It was taking way too long to fill vacancies, evictions were a monthly fact of life and letters and notices from city council and the county never stopped coming in the mail.
The letters almost read like we were running a 5-star hotel in some of the repairs authorities required landlords to make, ranging from fixing intercom devices to relocating trash, among others.
Inspections were frequent and petty, especially if you commit the cardinal sin of accepting section 8/CMHA tenants.Yet you could almost certainly not achieve anything close to 90% occupancy in a C-neighborhood without accepting section 8, just forget it.
Then there were the water and sewer bills!
Oh lord, that was what broke the camel's back.No due diligence could have prepared us for the absolute rip off that was the water and sewer utility costs in Cleveland Heights.It was easily our largest expense month to month, even after we changed all plumbing fixtures to more economical ones.
There is an explanation for why Cleveland Heights pays more water and sewer utility than the city of Cleveland, but I'm no longer interested in that nuance and will not bore you with it.
Just know that your water and utility bills will be insane if you're buying in Cleveland Heights.Sellers will try all sorts of tricks to hide this during due diligence.Do not fall for it, request the last 12 months of utility bills from Cleveland Water.Minimum.
Treat the water bill like you treat rental income verification.You will thank me for it.
There will be those who would argue that we simply overpaid going in.
Maybe.
Maybe not.
But after more than a decade in this business,I think I have a fair handle on value.Even in a hot market.
In the end, it was the ceaseless intrusion by local authorities into our business that killed our interest, not the snow.
We had invested in Florida for 10 years before moving into Cleveland. We are yet to receive a single official letter form any local authority on any of our Florida buildings till date.
Our 2 Cleveland buildings needed an entire separate file folder, just to keep up with all the notices we kept getting from the city.
I'm sure there are tons of local investors making it work and killing it everyday.But I will no longer invest in the mid-west.
I agree with Grant Cardone: I'm staying away from the snow belt and its crazy liberal governments.
Maybe forever.
Comments (13)
Thanks for sharing Charles.
This is helpful information for me as I'm just getting started and wouldn't have imagined these problems. I wish you success as you move forward into other areas.
Pam Holbrook, almost 5 years ago
@Pam Holbrook
You’re welcome.
We need to warn those coming after us if there’s danger ahead.
That’s how the pack survives.
Charles A., almost 5 years ago
I used to wholesale remotely in Cleveland. We had a lot of success there, but seeing the issues that the buy/hold crowd had there convinced me never to own MFH in the snow belt.
I stuck to AZ for my MFH and am very happy about it. Thank you for writing this, hopefully it saves someone else the headache of finding out first hand. Sounds like it can be an expensive lesson!
Darwin Crawford, almost 5 years ago
@Darwin Crawford
We have a beautiful sprawling county.
There’s no need to nail ourselves to one frontier in the name of cash flow,especially one fraught with hidden surprises such as this.
Charles A., almost 5 years ago
I am glad I am reading this I was really excited about the Cleveland area. However the landlord expenses like water and electric made me second guess buying there. Now this cements the deal of me not buying in Cleveland. I'm glad that you exposed the city and their pettiness. In N. Charleston, SC close to where I am located and where most of my rentals were purchased is very petty. They have code enforcement officers riding around on a daily basis looking for infractions or any type of violation. I went to court for grass not being 6 inches high and the guy next to me was in there because he changed his screen door without a building permit and it was his house.
Account Closed, almost 5 years ago
When government gets out of the way,private enterprise drives the economy with the invincible hand of John Adams.
In this situation,government builds a gazebo in your parking lot!
Charles A., almost 5 years ago
yeah I couldn’t pull the trigger either after DD. You can see them pulling up pipes all over the place too. I assume to get ahead of the LEAd flint MI type problems.
Would have loved to invest there but too many risks with old
Buildings and low C class rent appreciation.
Michael Rodriguez, almost 5 years ago
@Michael Rodriguez
That’s right.
Not so much the age of the buildings though...
Many of our buildings in Jacksonville are about 60-70 years old too.
The intrusion by government and the abysmal tenant base was just too much of a cash flow killer for us.
Charles A., almost 5 years ago
I am still in SFH stage. But I had the same debate between Cleveland and Jacksonville. I even entered contract for one property in Cleveland but backed off last minute after doing all the research. Exactly the issues you mentioned. Although the PM for that property claimed to bill utility to tenant, I learned it was not the norm in that area. And then all kinds of scary stories of local government officials trying to 'regulate' landlords.
Phillip (CJ) Yu, almost 5 years ago
@Phillip (CJ) Yu
It’s not at all standard practice to bill back water to tenants in Cleveland or its suburbs.
Something to do with landlord still being on the hook for unpaid water bills by a rogue tenant anyway.
So most landlords just take care of the water/sewer utility and work it into the numbers.
We did eventually put a separate token levy on each tenant in the Cleveland Hts building for water, but a far cry from what they actually incur in water bills.
Levying them for exactly how much they each incur in water bills would have brought a $800 rent to essentially $1100/month.
They were already routinely late on rent at $800 with a few evictions underway.
Charles A., almost 5 years ago
If you could not fill your units easily I am going to field a guess that your building was on Noble. Unless you're local and self-managing (and can handle all these little things yourself), all those buildings on Noble (from the EC border all the way to Mayfield Road basically) are tough to make work. You get rents that are the same as or barely higher than Cleveland proper rents, but much much higher expenses.
Cleveland Heights is a tough city for owning apartment buildings. Same with Shaker Heights. Fussy city requirements, high expenses, and shockingly low quality tenant base (compared to the surrounding SFR communities). You probably would have been fine with investing in SFRs in Cleveland Heights, or with investing in apartment buildings in a less fussy city (like Cleveland proper), or with investing in apartment buildings in a city that attracts higher quality tenants in apartments (like Lakewood or Lyndhurst).
Robert Matelski, almost 5 years ago
@Robert Matelski
You’re dead right.
The Cleveland Heights building was on Noble Rd.
However, the second building was in Cleveland, just 10-15 minutes from downtown.
But it was essentially the same story, save for the crazy water bills.
Charles A., almost 5 years ago
I was looking at condos in Shaker Heights but after I looked at the hoa fees I choked. Then I saw that it seemed like it was condo after condo. I decided not to look anymore.
Account Closed, almost 5 years ago