Purchase Price vs. Rental Value: How N.E.O. Stacks Up

[Benjamin Moody]

The average single family home price in the United States is $295,300 as of June 2020(NAR). Multi-family residential (2-4 units) properties have followed a similar trend, some market areas reaching $200,000+ per unit prices. As an investor, you are constantly searching for new ways to make your dollars work for you. The common tactic in real estate investing is to look at higher populated area, where common sense says housing is in high demand. However, any money watcher knows as demand increases, so does price. What if I told you there was a market where rental demand has remained steady, even with a decline in population. Where the average single family home price is $89,000, 2-4 units properties, fully occupied, listed for sale for $59,900. Where realistic CAP rate goals for investments are 12-15% not 6-8%. Welcome to the Mahoning Valley in Ohio.

To begin, the Mahoning Valley refers to Trumbull and Mahoning Counties with Youngstown, OH and Warren, OH being the two major city areas. Since the 1970's this area has seen a relatively steady decline in population, making it rapidly fade from investment radars as all instincts would point to declined demand. However, with a college campus (Youngstown State University or YSU), with 87% of students living off campus, the Covelli Centre (concert, hockey, basketball, convention center), Vallourec Steel, Eastwood Mall (largest mall complex in the US by land ownership), Covelli Enterprise and the Debartlo Corporation to name a few items - this area has turned into an almost secret community; left unaffected by the growth of elsewhere. Being in the top 25 lowest cost of living; the Mahoning Valley has a average median household income of $24,361.00 (census.gov) - no, that isn't a typo. 

Here is where it gets interesting. After the 2008 housing crash, property values dropped drastically and just recently started to recover. Yet, rent values has continued to increase. The current average as of February 2020 was $881/month (SFH, multi's and apartment complexes included). 46% of single family homes in Youngstown are renter-occupied. In Warren, OH a study was done in 2018 by the county zoning office and found that 57% of single family homes were registered with the city as rental properties - with projections that this number would increase to 68-74% by 2030. Keep in mind, these numbers do not include multi-family properties.

Why? It boils down to population and society. With the median income, most of the population cannot qualify for a mortgage. If income doesn't do it, credit will - low income mean less loan approvals; lower approvals means lower scores. Second, every year students graduate college and return to live with their parents until they can stand on their own. However, living in a low-income area means it will take a few years to build and save enough to be able to afford the cost of living somewhere else. Rather than buying a home for 2-3 years, almost 80% of the population between ages 25-35 choose to rent with the plan to eventually leave the area. Not to mention the 87% of YSU's 12,000 undergrad students who choose to live off campus. Lastly, there has been a resurgence in population; there has not been a decrease in how many leave, but rather how many come back. Realizing the benefits of such a low cost of living, people are starting to move back tot he area and choosing to commute to work etc. I should note, Youngstown, OH is 45 mins. from Cleveland, 45 mins. from Akron/Canton, 1 hour 20 mins. from Pittsburgh, and 2-2.5 hours from Columbus. 

Let's step away from investing real quick, just to put this market in to perspective. I'd like you to do a quick experiment. Go ahead, open another tab and pull up your housing search platform of choice. This home pictured below is currently for sale: it is 5 bedroom, 3.5 bath, 6,086 sq. ft. It is move-in ready in an A+ school district and sits on 24 acres, including a private pond. My experiment is for you to put in that information and tell me what this property would cost near you, then scroll down.

Are you ready? The listing price for this home is currently $699,900.00 - that's right, there is only 1 comma in that price. 

Purchasing in this area is unique. Unfortunately, you are more than likely not going to see the sale appreciation or drastic increase in appraisal value. No buying for $65,000 and 5 years from now selling for $130,000. As an investment strategy however, buying investment properties, enjoying your 10-15% CAP and knowing that at anytime - 1 year or 10; the minimum will be breaking even on the sale, making your rental income pure profit for the duration of ownership. This market is not a quick money scheme - rather a critical investment opportunity for sustained, profitable, long-term growth. A train that goes to fast will eventually crash, the trick is balancing the weight, watching to crossings, and finding the best speed to keep it moving. Welcome to Northeast Ohio.

[Benjamin Moody]

Originally posted by @Ari Hadar:

Interesting article. What is your take about greater Cleveland market? 

Great question Ari, in my opinion the greater Cleveland market is very similar to the Youngstown/Warren area I posted about. Realistically, most of the metro areas in Northeast Ohio sit relatively the same - with the exception of Ashtabula/Geneva which benefits from the seasonal vacation and boom of Geneva on the Lake each summer. There are 2 major differences I would mention in discussing Cleveland vs. Youngstown (or even Akron/Canton). Firstly, competition - Cleveland is a major metro area that is well known throughout the world. When I get a call from an international investor, it is 100% Cleveland, every time. Good properties are bought much faster, and generally create bidding wars that increase the sale price i.e. your total investment. Second, median income being $29,008 per household in Cleveland. This means that regardless of Cleveland (major city) or small metro areas - what your tenants can afford is relatively the same. Sure, there is a higher population which means quicker fills - but realistically the rent prices are going to remain in the same 'ballpark' area. More competition = more demand = higher prices. A fully tenanted tri-plex, with $2,400/month in rent could be listed for 175,000 in Cleveland; with an identical property, with $2,100/month in rent could be listed for $90,000. 

My last note, if you would be looking to flip, or make a majority of your profit on the re-sell, then Cleveland is the way to go in my opinion (it's the steak entrée) but places like Akron, Youngstown, Canton and Warren will generate the same rental income with less investment potential.