What about the Columbus, OH market?

[Michael Wentzel]

So I'm currently purchasing houses in southern Colorado for buy-and-hold. But I am originally from Ohio and have been considering markets back there. Cleveland has some beautiful houses for cheap prices. There seems to be opportunities to make money there. But then I noticed Columbus, Ohio has similarly cheap homes and has a stronger job market. I'm also more familiar with Columbus, having grown up in the suburbs. Looking around on BP and the internet, there doesn't seem to be much information out there on the Columbus market.

Who is working in Columbus, Ohio? What is your strategy? What are the pros and cons of the market there? Any guidance on neighborhoods that are decent where you can still find a deal?

I'm looking for sfh's for less than $40,000 and multi-families for less than $80,000 that have 2% rent over purchase price.

Mike

[Peter Lohmann]

Hey Mike,

I think I might be able to help answer some of your questions about the Columbus, Ohio market. I own a property management company located right in the heart of the city (King-Lincoln). I've been buying and managing property here in Columbus for 5 years now.

I have several clients (most of them out of state) that operate in "rougher" neighborhoods of Columbus (South Side, Hilltop, Linden, etc). They each own between 5 and 20 single-family and small multi-family properties. As their property manager responsible for all of the leasing, maintenance, and rent collection, I get to see exactly how well the properties are performing over the long term.

The short answer is - not as well as one would hope. There are a few things that folks tend to overlook when examining "2%" deals in these neighborhoods.

• Maintenance costs are ALWAYS going to be higher than what you anticipate. It's some sort of Murphey's law. Compounding this is the fact that maintenance costs don't get cheaper with lower-income property. So that 5% you allocate toward maintenance on a 900/mo rental (which is 45/mo) is only $27/mo at the $550 rent range. That's laughable. I tell my clients to allocate at least 10% for maintenance in lower income areas, if not more.
• Capital improvements are often ignored altogether. Plan on at least 5% for those (things like HVAC units, hw heaters, roofs, etc) if holding the property long-term.
• There's no getting around it - the tenant base is of lower quality. Most people understand this intellectually, but brush it off without examining the realities that come with it. People are in these neighborhoods because they can't afford to leave, for the most part. They are rougher on the properties, harder to get a hold of, more consistently late with the rent, more difficult to evict, and generally assume that you as the property manager (and the owner) are a scumbag and treat you and the property accordingly. This is due to their past experience and it's an uphill battle to prove to them you are a decent person who cares about them and will respond to maintenance requests.
• Collecting rent is harder. A lot harder. Most folks do not have a bank account, and many do not even have an email address. This eliminates online payments in almost all cases. People will be paying with a money order, which is usually ok, except when they mail it in and you never get it, and they don't believe you. With a check, they can look to confirm it was not cashed. No such luxury with (most) money orders. Bottom line: Raise your vacancy estimates (rent uncollected is actually worse than a truly vacant property).
• People just don't have any extra money. At all. So if they stop paying rent, there's almost nothing you can do except beg, or evict. You also will not succeed if you attempt to make them pay for repairs that are technically their fault (flushing baby wipes down the toilet and clogging the sewer, for example). It's also very tough to enforce late fees since 1) They don't have the money, and 2) You can't evict someone for not paying late fees (generally). Get used to late rent.
• Leasing, supply-side: The supply of decent rentals in these neighborhoods is higher than ever, due to "word getting out". Take a look on Craigslist. You have a LOT of competition.
• Leasing, demand-side: The demand for good-quality rental homes in these neighborhoods is SKY-HIGH. Seems great, right? Well, it does until you actually look at who makes up that demand. 95% of that high demand is of low-quality tenants (eviction history, criminal history, no verifiable income, extremely low income, unable to provide a security deposit, or some combination of these). The demand for homes by qualified renters, is very, very low. You will be fighting it out (read: lowering your rent) to attract them, or you will be settling for a low-quality tenant who will damage your property, need to be evicted eventually, or both.
• Vacancies take longer on average to fill (vs nice areas of town) in any event.

These are the boots-on-the-ground realities of investing on LMI neighborhoods. You're going to need a thick skin and a great team to make it work over the long run. Don't be fooled by the seemingly high cap rates / cash-on-cash returns - in practice, it's rare to even approach the rates of returns that most wholesalers will try to sell you on.

Don't get me wrong - people can and do succeed. And many tenants are not the nightmare I lay out in this post. I have some really amazing tenants in "bad" areas of town (generally those I have placed myself, vs inherited from the previous property manager). But it will take time to fill your vacancies with quality tenants.