Why I sold Cleveland.

[Charles A.]

What's going on BP!

It's been a minute.

I wrote previous member blog articles about transitioning from duplexes and four-plexes into apartment building investing. 

We did that in 2 markets simultaneously:Jacksonville FL and Cleveland OH.

After a crazy 18 months, we just sold both buildings in Cleveland-just to stop the bleeding.

The Jacksonville building is a home run.

To read details on why I'm now shorting Cleveland and will never touch the mid-west with a long pole again, read my blog article here:

https://www.biggerpockets.com/member-blogs/8290/85811-why-i-sold-cleveland?created=1

Have a happy July 4th, y'all!

[Jay Hinrichs]

@Charles A.  this is simply systemic of chasing yield.  IE what looks best on paper.. and forgetting that the market prices for risk.. you go for the higher cap rates your taking on greater risk should be no surprise there.. 

we see investors from low cap rate markets go through this learning curve all the time.. 

so with cap rates at 4 or 5 in those same markets I suspect the issue suddenly go away.. its the quality of the asset and the tenant base.. bottom line.. 

throw in city rules which can be researched up front.. 

I had a client from Oregon who followed me to Atlanta when I was buying court house steps there in 2012 and just killing it.. he did the same he bought 40 or 50 homes and in 2 years made a few million in equity like we did.. 

he then decides to go into MF.. and sends over this C class in Memphis.. which does not have all the city stuff but it has the same tenant mix.. it was half empty and he picked it up for 10k a door with the idea of putting in 10k a door for improvements then selling it for 40k a door..  I told him DONT do it.. U cant make money when your in ORegon and you have a 40 unit in the mid west in C class or C- which is really D + for just plane D.. 

He buys it and it was a progression.. puts the money in does improvements for tenants  B ball hoops BBqs 

those are destroyed in less than a month..  PM and on site manager ripping them off left and right. he gets it up to about 90% occupancy but has 30% collection issues.. a Murder a few other violent crimes. later and things start to go back to the mean.. he is now having to fly there once a month to collect what rent he can.

finally gave up like how these properties get recycled and sold for 450k to the next victim and lost 500k plus in the process..  had he went to Germantown and bought a 4 cap or 5 cap I bet he still owns it.

Its the buyers who do this to themselves thinking their criteria is 10 caps or higher and THEY can turn it around.. 

Locals can and do make this work.. but its hands on HIGH touch run it very sternly type thing.

I was shown another 10 cap in Memphis not picking on Memphis..  but the local guys were running it and proud of the return.. we drive over its fenced off.. with a guard at the gate.. its basically 100 % MhA and tenants are all women.. No men are allowed on the property Etc.. but to me it looked like it was run as a mini prison..  Of course its not but the out ward security reminded me of that..  and I was like HOlly cow there has to be a better way to make money than take these things on..   So bottom line its investors falling on their knives not realizing how management intensive this asset class is..  and or Even pro's not realizing in the mid west particularly that returns price for Risk.