Picking a cashflow market to scale

[Vasyl Levchenko]

Hello community,

I am evaluating some cashflow markets that I am interested in and would like to share my findings and thoughts on the subject and listen to your feedback. Critiques are encouraged as this is a combination of research and personal opinions.

I'm based in Chicago, own 2 properties(6 total units), really discouraged to invest in Chi because of anti landlord policies, rising crime and taxes etc. Currently debating between 4 options:

1. NW Indiana(Hammond, Portage, Lake station).

Cons - Low appreciation, less options for pm and contractors, population loss.

Pros - Close proximity/more control, landlord friendly, less competition, low prices, decent housing stock(small MF), predictable taxes.

2. Cleveland, OH and suburbs

Cons - High crime rate and unemployment will result in property tax increases over time, tenant friendly, population loss from Cleveland proper. Relatively high competition, seems to be a problem to find good pm. Suburbs have high taxes.

Pros - a lot of big developments, great cultural life, cheap properties, great housing stock(a lot of small and medium size MF) suburbs offer solid class B for low price, good appreciation.

3. Cincinatti, OH

Cons - very high crime, a lot of inequality - taxes are going to go up, tenant friendly leaning housing council, somewhat competitive, population loss over time.

Pros - Some development going on, good apprectiation, low prices, can diversify in Kentucky/other bank of the river, good housing stock(Has some small/medium MF)

4. Indianapolis, IN

Cons - too hot/very competitive, no housing stock(mostly SFR).

Pros - high appreciation, close proximity, low prices, landlord friendly, stable taxes, population gain.

5. Jacksonville, FL

Cons - too hot/very competitive, no housing stock(mostly SFR), high insurance costs.

Pros - Great appreciation, relatively low prices,

Population gain, landlord friendly, desirable sun belt, landlord friendly, predictable taxes.

[Gregg Cohen]

@Vasyl Levchenko - Great post.  I wish more investors did this type of due diligence when comparing markets.  I'd be happy to chime in on the Jacksonville, FL market as I've been investing here since 2006.  This year my company will be buying around 700 homes in Jacksonville (just as we've done in recent years.)  I believe this is absolutely the best time to invest in Jacksonville because of the reasons you described above along with historically low interest rates which boost up your positive cash flow.  Generally, in a growth market like Jacksonville which has appreciated 19% more than the US avg since 1991 (source: Federal Housing Finance Agency), you usually have no shot of positive cash flow.  Now, we do in Jacksonville.  Many investors have a very myopic view of what makes a great rental property investment and they only focus on cash flow.  However, your job as an investor is to produce the best risk-adjusted return on investment.  If you compare Jacksonville with Cleveland, for example, you'll see a small difference in cash flow earned but a large difference in home price appreciation over a full market cycle.  

Cleveland has a slightly better rent-to-price ratio than Jacksonville and will produce a better cash-on-cash return in year 1 from the net rental income.  However, Cleveland's average home price appreciation since 1991 is only 2.3%.  Jacksonville's average home price appreciation annually is 4.3%.  If you plan to buy and hold for a full market cycle (10-20 years), you should expect the home price appreciation rate over the cycle to be similar to the historical average because that's how market cycles work.  Holding that property in Cleveland literally would be like leaving hundreds of thousands of dollars in home price appreciation on the table versus choosing to invest in Jacksonville.

My viewpoint here on how it is important to evaluate home price appreciation is based on the idea that you are buying and holding for a full market cycle though.  If you're only in for a few years, I'd suggest not factoring in the potential home price appreciation as it is highly speculative at that point. 

As far as the cons you mentioned in Jacksonville, you just have to find the right partner in order to find inventory.  We've been buying renovations as well as building our own new construction inventory and you should be able to find the right property as well.  Also, insurance costs are pretty low actually.  Annual premiums for a new construction house will range from $400- $500 per year (around $800 per year for a renovation.)  This is one way reason we can still achieve positive cash flow even though it is a high growth market. 

Hope this helps!