MF Cash Flow - Columbus vs Cincinnati/Cleveland

[Joseph Todd]

Hey all,

A couple of partners and I are getting ready to deploy some capital in medium-sized multifamily in Ohio. We are looking to get into B neighborhoods or upper end C neighborhoods. Our primary goal is consistent cash flow, not particularly worrying about appreciation. Those of you who invest in or work with MF primarily, I am curious:

1. How do you see Columbus compare to the other major metro areas (primarily Cleveland/Cincinnati) in terms of cash flow? Am I wrong to think that cap rates have declined as a result of millennial movement into the city and constraint on supply?

2. What are the reasons you chose to invest where you did?

3. Do you see population and jobs continuing to leave urban centers in favor of suburbs?

4. Besides the excitement about affordable property values and some young people taking advantage of this affordability, what are the real driving factors that will carry these markets forward and ultimately transform them into healthy, sustainable areas?

5. Are there any local resources that I wouldn't know about and should check out to expand my understanding of these questions?

Much appreciation to anyone that is willing to speak with me and help out. If there is something I can do for you to make it worth your time, please let me know. Hope to be working with some of you soon!

-Joe

[Jonathan Twombly]

@Joseph Todd I personally would focus on deep underlying trends like population growth.  Overall, Ohio has poor to negative population growth - except for Columbus, which is still drawing people in.

Columbus also is anchored by state government, large universities, and the businesses that both of those things attract.  In the aftermath of the Great Recession, I tracked the unemployment numbers for many markets around the country, and I noticed that cities that were dominated by government and universities were not hit nearly as bad as those with other core bases for their economies.

I've also noticed a trend on BP for people to be attracted to many markets solely because the high cap rates.  Cap rates are a function of demand, and the demand is affected by the underlying fundamentals.  High cap rates can *sometimes* result from markets with good fundamentals being overlooked.  (South Carolina was like that when I got into the market, which is why I focused there while everyone else was salivating over Texas.) But that is not usually the case.  Usually high cap rates reflect the market's insistence that investors be compensated more for the risk they are taking.

Another error is new investors going to high cap rate markets because they compare those markets to other markets - but they neglect to look at historical cap rates in the markets they are investing in.

If one market is trading at 6% and another is trading at 9% right now, when Market A returns to the historical level of 8%, Market B is not going to stay at 9%.  It's going to return to its historical level of 12% or whatever it was.  Investors need to take this into account in their investment decisions. 

And, even more importantly, in those high cap rate markets, they need to understand what will happen to the jobs when a recession hits.  Movements in cap rates are irrelevant unless you are trying to refinance or sell.  But a spike in unemployment will definitely hit you hard.  You should focus some analytical attention on this factor.