My 2 cents, investing in Cleveland from California

[Jared Lichtin]

Hey BP, I'm an investor in Cleveland, originally from there, and now living in Orange County, CA. I've been seeing a lot of the same questions from out of state investors, asking about Cleveland. Some ask about good neighborhoods, others ask financial specifics, and some are curious about things like the point of sale inspections that cities conduct. I thought I'd open up and give my own thoughts, as I have been rehabbing and buying rentals in Cleveland for six years now. 

The big reason the housing market continues to stay strong there (and inventory in popular suburbs are super low) is the pharmaceutical industry. Big distributors and manufacturers are positioning themselves alongside the two largest employers in Cleveland (maybe in Ohio, below Nationwide Insurance in Columbus). University Hospitals (UH) and Cleveland Clinic are huge. Literally every main exit off the highway has an emergency room or major hospital wing located there. I remember growing up in the 90's we had Hillcrest or Independence. Now, it's Cleveland Clinic Hillcrest, etc. They have literally bought out every small hospital in town and expanded it. To put in perspective, Cleveland Clinic and UH employ over ONE THIRD of the city of Cleveland, in some form. 1 out of 3 people... crazy.

Another main reason the market has turned up has been big business investing there, as huge companies like Eton Corp, Nestle, Quicken Loans, and Progressive Insurance have moved large offices there. The tax benefits alone make sense, and you can pay employees less, compared to operating out of Chicago or New York. And, if companies like Amazon are in the retail or online space, being centrally located geographically poses a nice advantage for shipping. 

Population-wise, at least what I can remember, was 1.1 million people lived in Cleveland in 2000. Then, it sunk below 500k during the crash, and it's back to above 500k. However, the majority of jobs lost when the steel mills shut down were blue collar, working class jobs. People lived in inner city Cleveland, just as much as the suburbs. But after the crash, I felt like the suburbs were still expanding, while some other areas were abandoned. Now, with both blue and white collar jobs moving people back to Cleveland, there is a SERIOUS inventory shortage in the suburbs. This is also a result of Cleveland having an older-than normal population. I don't have exact numbers, but spend a few days there and tell me it's not apparent. People are A- living longer, and B- staying at home rather than going into assisted living. So, a lot of baby boomers are staying at home with their aging parents, or putting their parents into senior living at Menorah Park, and moving into their old digs. This really prevents deals from opening up to investors like myself, but at least I understand the narrative of what's going on. Some of my flips are breaking appraisal numbers, which is good. But for retail buyers looking for a good deal, most of those deals need some updating. 

Numbers wise there are deals in C and D level neighborhoods, maybe even more than the nicer ones. Section 8 tenants even pay over $1,000 a month, if I'm not mistaken. I am really only in B and A level suburbs, but I do know that buying a duplex for 70k and renting both sides for 700 or 800 is pretty normal. The numbers I get on my flips are a bit different. I buy something for 110, put 100 into it and sell for 300. Right now, we're doing a flip in Shaker Heights we got for 166, putting in 100 and it's in the 400 range. 

On the multi-family side, there are still deals on both ends of town. I just bought a 3-plex for 72 k in a really good area, putting 75k into it (all new electric and plumbing, but home depot finishes) and refinancing. Already have an appraisal at 230k, and I wouldn't be surprised if I can break 3k on rents (1100, 1100, 800)... for a house that will cost me 1400-1500 to own, those are sick numbers, especially since I'll be hopefully break even after the refi. 

I realize every business model is different, but for a first-project out of state investor, my best advice would be to fly to Cleveland first to get a feel for the city, and see as many neighborhoods as you can. Once you feel comfortable with a neighborhood, then you can start shopping for deals. It just gives you better context. Cleveland rental markets thrive on proximity to work, proximity to highways, and (for most young people) proximity to bars, restaurants, and fun things to do. That's why Gordon Square & Detroit Shoreway have blown up so much. They're supported FIRST by strong retail, shopping, and a dog-friendly brewery, and wouldn't you know, next thing every tattooed early thirties hipster with a dog or a kid wants to live close to 'an untouched, trendy pocket' of town. 

The point of sale thing in Cleveland Heights and Shaker Heights is annoying, yes. But if you are negotiating, it's usually a point of contention to get the price down. "I'm going to have to escrow 15k with the city to get this done... I can't pay more than x."

Now, I rarely have any time to post myself but I did however attend a great meet-up last week by @John Koster, another fellow LA investor from Cleveland. I drove up from Newport Beach, and met a lot of great people, all really with the same goal... to make money investing out of state. Since there were so many questions, so little time, I decided to host investors down in my place in Newport Beach on Thursday, so if you want to come up and talk shop, I'll be happy to take care of dinner and drinks. The event is posted on the bp events tab. https://www.biggerpockets.com/forums/521-events-an....

I will also be in Cleveland the first two weeks of October, and I'd be happy to show anyone around some of my rehab projects, and do a general neighborhood tour. 

If you are an out of state investor interested in Cleveland, I'd be happy to answer any questions on this thread, or connect w me here on BP.