Investing in Youngstown, OH

[Christopher Nerio]

Hi BP family, I am new to investing in RE and I have recently made a connection with an investor in Youngstown, Ohio. She said she owns 10 rentals and has been investing, strictly, in the 44507 and 44502 zip code area of Youngstown for 4 years. The prices of the SFHs is what really intrigues me. From what I've researched and what she told me, it is a low income area and has about a 13.5% vacancy rate. The lady makes her money through her rentals, managing rentals, and renovating the properties. So I buy the house, her company renovates it, then manages it. I live in Northern Va. She said that with about $45K ($5-10K for property, $5-10K for material, $15-25K for labor), which covers any major repair or replacement, I would have good cash flow. However, from what she told me, the rents are between $400-650/mo. According to my calculations it seems that my max investment that I would like would be $25k total to receive the monthly income I would like. The other concern I have is that she said that she doesn't do yearly lease agreements. Her tenants are all on a month-to-month cycle, which she said is normal in the area because with the area being low income, sometimes you get a bad tenant that you want to be able to evict them fast. However, she did say that because it's low-income many times the government pays their rent and that she tries to do a good screening of the tenants before hand (credit check and background check). Anyway, has anyone had success in Youngstown, OH? I hear it's kind of like Detroit? Should my max investment be less or more than $25k? What is the average rental rate there? Are the costs of labor and material accurate? Is it an area, that if the economy took a turn for the worst, that my rental would still be cash flowing? Any advice would be great. Thanks BP family.

[Marcus Auerbach]

@Christopher Nerio we have family in Leesburg, great area and I can say I have been there. As opposed to Youngstown, OH - but the numbers paint the picture. We have these kinds of neighborhoods in Milwaukee and there is a lot of hype around them from out of State investors. Of course, the prices are so low it seems like a no brainer. It's almost like penny stocks: they are so cheap that you can buy thousands and if they go from $0.02 to $0.04 you have made a lot of money, right?

There is a reason why these properties are so cheap. Think about it. They are sold for a fraction of what the sticks and stones are worth they are built of. And the lot is for free. You are basically buying a liability that nobody is willing to pay at least the replacement value of the structure. At some point you need a need a new roof and it will cost just as much as on a property in a great area with a good school district, where people actually want to live in. Same is true for plumbing, electrical, heating and windows. The only problem is that a fully improved property will be valued the same as the wreck neck door, because nobody who can afford a $150.000 mortgage with 3.5% down would willingly choose to live there. Let that sink in for a moment. That's a pretty low bar. You don't realize it until you have a client who seems to be well equiped to live in a rough area is asking you to help him buy a home in a better area, even though it means he has to sell his wife's car to come up with the downpayment. He's motivated!

The numbers seem attractive at first glance, but as you zoom out and look at the whole life cycle of your investment (i.e. 30 years), the picture changes dramatically. The low upfront investment and attractive cash flow are quickly off-set with high repair and maintenance expenses, higher turn over expenses and the cost of sunk capex. And you are missing out on the two main wealth generators in RE: appreciation and principal pay down. How long does it take to make a million with cash flow? Run the numbers through the BP calculator and look at 10 years and 30 years.  Many only realize it after the have accumulated a large portfolio of junk properties. Let me know if you want to buy an 82 property package in the inner city of Milwaukee: for sale, really cheap!       

[Christopher Nerio]

Hey, thanks for your response @Marcus Auerbach. Leesburg is great but pricey. Apparently, this investor says she makes the house practically brand new, including roof, HVAC, etc. depending on the condition of each aspect of the house (max $25K). I did use the calculator but only looked at the cash-on-cash return. However, what you told me is what I am thinking. Just to make sure I understand, you are saying that although the property would cash flow, the cash flow will take a while to build wealth, in addition to the cost of expenses, such as the ones you mentioned. Also, the property will not be worth the money I put in since it will be a renovated house next to a run down property or bad neighborhood, which I did see that the county's assessment of the property is way lower than the money I would invest into the house (don't know if that really matters, maybe that's a good thing?). Lastly, you are saying that it will not appreciate in value, which is a big concern of mine. Am I understanding correctly? I do plan on buying the property cash but was going to use a loan for the renovation. I would be interested in the property package you have mentioned or any properties in my price range for that matter but wouldn't it be a similar situation as what I'm talking about? While I've been listening to podcasts and reading forums I've heard many people speak about Milwaukee. Thanks again.

[Stan Wu]

Researching Ohio and Youngstown is on my radar. Anything that is on the low price point in any city has the highest vacancy rate and tenant headaches.  One should always buy into a better situation or buy their problems away.  For your $50K fully rehabbed, go for a $100K established complex (2 or 3 units).  As this Covid pressists, I found that the some areas are isolated somewhat from a negative economy: the cost of living is low so less swings in the community.  Love the open lands and Mill Park.  Wow.

[Kali Kerstetter]

Hello! I know this is an old post but wanted to reach out. I live in Youngstown and even though the area is low income, the need for adequate housing is high. Additionally, good landlords who take care of properties. I am hoping to purchase my first property in Youngstown soon. If you’d like to connect for additional insight, please let me know!

Kali

[Lori Williams]

This is an Old Post, but I'm going to comment anyway. Because 5 years ago I was sinking a lot of money in Youngstown, and 5 years later I'm still sinking a lot of money in youngstown.

note that I'm doing voice to text on my phone, so this comment may be a little wonky

I don't know where that woman was coming up with her properties, but it sounds kind of like the hood. And Youngstown does have its share of hoods.

There is not one distressed property in the city that you can rehab for less than 50k-100k. At least not if you're going to do the good as new kind of rehab

But there are absolutely areas in Youngstown that are low crime, that are appreciating, and that you can still buy properties at a great price, and, if you rehab them properly and fully, you can get excellent rents with excellent profits.

I just wanted to set the record straight. Contrary to let people who don't know Youngstown think, it is a great Old City with some gorgeous architecture, and there are neighborhoods that are absolutely worth the cost of transforming them.

I own four properties in a cluster in a little neighborhood. I paid between 25k and 55k per property. I spent between 40K and 80k to rehab them. My monthly net profit for all four properties is a little over $5,000 per month

So there is a lot of money to be made here if you know your neighborhoods, and you know what's going on in your neighborhood, and you are willing to invest what it takes to get the high returns.

just like in any city, not all properties and neighborhoods are created equal. Yes, Youngstown has its rougher, low rent areas. But it also has some areas that are being revitalized and are appreciating at 15 to 25% per year and have been for the last several years, and where you can get rents that far exceed the market.