Hidden Problems in too-good-to-be-true Properties

[Alexander V.]

Hello, this is my first post on the forums, and I'm in need of some advice.

I've been analyzing potential properties for about an hour per day for a while now, just trying to get a feel for analyses and markets. I've noticed that in some markets, it seems impossible to find a property in which the numbers work; however, in others, it seems like almost every property looks good on paper. Specifically, I've noticed that Cleveland OH has dozens of duplexes for under 100k renting for $600-$900/month/unit, even in some of the lower crime neighborhoods on the west side.

When every deal looks good, I know something is wrong, but I'm too new to see what it is. The biggest issue that I can see is that almost without fail, the small multi-family homes in Cleveland are 80-120 years old, and I'm unsure of how to accurately estimate repair costs and hidden expenses. If the repairs are 10k (as some of the sellers claim...), half of these properties would have a CoCROI of 30%+ with a conventional loan at 20% down, which is possible for a home-run deal but clearly not for just about every duplex on the market. So what are the potential issues that make these on-paper good deals in-reality bad deals?

For a couple examples:

https://www.realtor.com/realestateandhomes-detail/...

https://www.realtor.com/realestateandhomes-detail/...

[James Wise]

Originally posted by @Alexander V.:

Hello, this is my first post on the forums, and I'm in need of some advice.

I've been analyzing potential properties for about an hour per day for a while now, just trying to get a feel for analyses and markets. I've noticed that in some markets, it seems impossible to find a property in which the numbers work; however, in others, it seems like almost every property looks good on paper. Specifically, I've noticed that Cleveland OH has dozens of duplexes for under 100k renting for $600-$900/month/unit, even in some of the lower crime neighborhoods on the west side.

When every deal looks good, I know something is wrong, but I'm too new to see what it is. The biggest issue that I can see is that almost without fail, the small multi-family homes in Cleveland are 80-120 years old, and I'm unsure of how to accurately estimate repair costs and hidden expenses. If the repairs are 10k (as some of the sellers claim...), half of these properties would have a CoCROI of 30%+ with a conventional loan at 20% down, which is possible for a home-run deal but clearly not for just about every duplex on the market. So what are the potential issues that make these on-paper good deals in-reality bad deals?

For a couple examples:

https://www.realtor.com/realestateandhomes-detail/...

https://www.realtor.com/realestateandhomes-detail/...

Not all of them are good deals. Not all of them are bad deals. You can make a lot of money in the Cleveland market. I have made millions. You can also loose money in the Cleveland market. It isn't Candy Land. in this thread. I'm not interested in engaging in a discussion on whether you should or should not choose Cleveland as a place to invest in. However if you do want to invest in Cleveland you should educate yourself on the different types of neighborhoods we have here. There are some great rental neighborhoods and there are also some incredibly blighted areas. Prices will vary widely and you need to know why that is. As such I created The Ultimate Guide to Grading Cleveland Neighborhoods so out of state investors can get a firm grasp on the Cleveland market.

Knowing the pros and cons of each type of neighborhood is very important. Take a look at some photos below to see some of the things you should be prepared for if you engage in investing in these blighted areas. Note; these are all photos of properties in my company's rental portfolio. We have a portfolio of over 1,000 rentals in a wide range of neighborhoods in Cleveland.

Tenants got into a fight over a nominal sum of money. Burning one parties car was the way one of the parties involved decided to handle the situation.

Best part about the car fire was one of the parties forgot which car was owned by the tenant. They just knew it was gold. So they set all of the gold cars they saw in the parking lot on fire.

No caption necessary for this toilet from hell.

This is what a kitchen can look like when a low income tenant moves out of it.

This is what a backyard can look like when a low income tenant moves out of it.

If tenants in these tough neighborhoods don't have yards, don't worry they will light off their fourth of July fireworks in their bathrooms.

Don't worry though. Sometimes when they move out they forget about their unregistered firearms.

----

Another point i'd like to make is you can make or loose money in any market not just Cleveland. There are a ton of Midwestern markets in this country that will more or less provide you with the same experience as you'll get out here in Cleveland. Don't think that one particular out of state market will shoot you to success or abject failure. It's not really that complicated to buy out of state. It only becomes complicated when investors try to over complicate or over think everything. Whenever you are buying a property out of state you should do a few things to ensure it's as smooth as possible.

• Don't buy in the roughest neighborhood in the urban core. Pick a solid B-Class suburban area. Perhaps a nice 1950's built bungalow.
• Always hire a 3rd party property inspector to give you an unbiased feel for the home. The reports are 40-90 pages long and go through the entire house in great detail.
• Get an appraisal. If your using financing the bank requires this. This is good. The bank isn't going to let you blow their money. They have more skin in the game then you do.
• Make sure you get clear title. If using a lender this is a non issue. They will make you do this. It's those maniacs that buy homes cash via quit claim deed off of craigslist that really get screwed.
• Make sure your property manager is a licensed real estate brokerage.
• Understand you can not eliminate all risk, only mitigate it. If you are risk adverse real estate, (especially out of state) is not for you.