Hello and welcome back to another episode of Passive Real Estate Investing. I’m your host, Marco Santarelli, and today we have another great market spotlight for you. We haven’t done a market spotlight in the Cleveland market for a little over a year, so I thought it would be an opportune time because it’s such a great market. It’s got great cashflow opportunities, lots of inventory investors, really enjoy and appreciate what’s available in the Cleveland market. It’s something that we’ll talk about a little bit later here in the show, is the true definition of a turnkey investment property. Like what is a turnkey rental property? And it was a conversation that Tom and I were having offline before I started recording today’s episode. And it’s just amazing how many people slap lipstick on a pig out there and call it turnkey. So we don’t want you to make that mistake thinking you’re getting a good property or a turnkey property, and it turns out it actually isn’t because it’s gonna end up costing you a lot of money. And usually that’s measured in thousands of dollars trying to cure the issues in that property. So we want you to avoid that. So let’s talk about the Cleveland Ohio market and why it makes sense to invest there and the opportunities available. And just educate you a little bit on what is one of these great opportunities out there.
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So, with that, with me today is Tom, our fantastic property provider in the Cleveland Metro area. Tom, welcome back to the show.
Hi. Thanks for having me.
It’s good to have you back on. I I know we were talking a little bit offline and it’s always interesting conversation and we end up talking about things that I wish I was capturing in a recording and I said, you know, Tom, let’s just talk about that on the show, <laugh>.
Absolutely.
That’s, that’s what we’re gonna do today. So anyway, Tom, you know what, it’s always great to start with, you know, the market itself. ’cause I like to take a top-down approach. Where are we investing? And then let’s get into the properties in that market that makes sense from an investment perspective. So having said that, you know, from a high level, talk to us about your market, Cleveland. Why does it make sense to invest there?
Yeah, Cleveland’s great. We have a lot of good appreciation. The price to rent ratio is, is, is very good. It follows the 1% rule. And you know, the properties in general, I mean, we like to say we don’t have that like, you know, very high growth, high fast growth. We’re more like the, the tortoise and the tortoise and the hare. We’re slow and steady and we’re gonna finish very well. We see a, a specifically I focus on the west side of Cleveland and niche communities that we’re gonna see that steady growth and appreciation and just that long term return that investors should strive for.
A lot of people don’t really know what makes up the Cleveland economy. You know, they know it’s in Ohio and, and some people refer to it as the rust belt ’cause there’s just a lot of steel industry, or at least there was at one time, you know, a hundred years ago <laugh>. Yeah. But what would you say makes up, you know, the main drivers for your economy there?
I get these the question very often and yeah, we do have a steel mill here still, but I feel like it’s a dying industry. You know, the real tall tale is you drive past downtown Cleveland and you look at every skyscraper and it has some sort of financial institution or bank at the very top of it. Like KeyBank, Huntington, US Bank, a lot of financial institutions progressive insurances here, their headquarters is here. Sherwin Williams is building a brand new skyscraper in downtown Cleveland. Now, again, we’re not the fastest growing city like Miami or, or New York City or, or something out west, but we you know, we’re finally getting a couple new skyscrapers and Sherwin Williams is, is putting their name on that one as their new corporate headquarters.
So the economy’s diversifying is what you’re saying. It’s not just, you know blue collar steel mill. It’s, it’s getting into the financial sector and whatnot.
And we also have a lot of really good healthcare here as well. We have people that travel from all over the world to come to the Cleveland Clinic world renowned healthcare here as well.
Interesting. Would you say the I don’t know if you know this, but do you know if the population is growing in Cleveland or if it’s just kind of flat, which is fine, you know, there’s no problem having flat growth in a market. You know, it still lends to a healthy market, healthy economy, healthy housing market.
I’ll be honest, I don’t know it off the top of my head, but I can only assume our, our population is has some steady growth to it.
Right. Kind of a side question for some investors, they don’t really care all too much about, you know, looking at the quality of life in a particular market. But, you know, I think it’s always good to, you know, consider, do you have any comments about Cleveland’s quality of life? You know, I do.
I I do actually. I feel like, you know, our communities here are very built on like hardworking people. We like to say the housing that we target for that price to rent ratio is called a workforce housing. So we’re not getting, you know, super high a class rents, but we’re getting, you know, the high Cs and Bs and those are the people that, you know, are putting in those 40, 50, 60 hour weeks getting their paycheck, paying their rent, you know, putting their kids through school and that sort of thing.
Yeah. And that’s great. The last time I checked Cleveland’s numbers, it had a cost of living overall that was about 6% less than the national average, which is, you know, it’s, it’s measurable. It, it, it just means that it’s more affordable to live in Cleveland than many other markets around the country. So that’s a draw for a lot of people, especially if you don’t have a, a big income, you know, it just brings people in because they can afford housing, afford food, afford the, you know, property taxes, state taxes, whatever else. So, you know, having a cost of living below the national average is, is actually a draw. Helps bring people in. Yeah. Any comments about the job market there? I, I know I’m asking you, but probably throwing you some curveball questions here.
No, it’s, it’s fine. You know, I, I feel like I can’t give you any actual statistics, but again, she and William and their corporate office, and a lot of these financial institutions and these healthcare bigger hospitals that we have here, you know, seem to be pretty, pretty demanding on the, our workforce. And I, again, I don’t know the unemployment rates, but I could only assume they should, I would assume they’re on the lower end nationally. Yeah. we don’t see a ton of homeless here and that sort of thing. So I feel like there’s a lot of opportunity for, for those who wanna work.
One thing I was impressed with that I didn’t know about Cleveland is its long-term stability. It has been ranked as one of the strongest, it’s not even a ranking, well, it is a ranking in the sense that it’s just data. Not that people were, you know, ranking things subjectively. But Cleveland was ranked among the strongest markets with regard to long-term investment opportunities for real estate and real estate investors in the entire country. It had strong job growth, a lot of job opportunities, which, you know, I kind of figured would be, you know, there. But one thing that actually really surprised me when I was kind of looking up some quick stats on the market is the 10 year average appreciation rate in Cleveland was a little over 75% over the 10 year period. Which is, it, it, that number actually places it in the highest 50% or the 50 percentile in the country.
I mean, it, that’s almost a 6% annual appreciation rate on average over the last 10 years, which is a very healthy number. You know, anything between four and seven is what we tend to see or expect long-term. But if you’re averaging 6% per year over the last 10 years, that’s a pretty impressive number. You know, people don’t typically think of Ohio and the cities within Ohio as appreciation markets. You know, they, they see it more as what we call a cashflow market. It’s a slow and steady market. It’s what you called the 1%, you know, numbers when it comes to the rent to price ratio. And you know, that’s great because it means that the property will cash flow, it’ll generate a good cap rate, a good cash on cash return. And that’s attractive to a lot of investors because they want the cash flow, they want the, you know, the the cash on cash return. They want the property to pay for itself over time. And then if they get that, you know, positive appreciation, that’s, you know, that’s the wealth creation part of it. That’s the bonus. Call it, you know, the icing and cherry on top. So apparently that’s what you guys have there in Cleveland. It’s kind of like for some people it’s a market that’s under the radar <laugh>, but it’s great.
Yes, we sure are. We sure are. We are you know, Zillow, I believe they’ve said we were like the number two market for investment similar to what you stated, I believe, recently in 2023. So yeah it’s, we definitely have a lot of opportunity here. It’s great.
Yeah, for sure. So let’s kind of get a little more granular. Let’s kind of just talk about the types of neighborhoods that you’re focused on. People always, you know, are interested in, in the neighborhoods, you know, to me, neighborhoods are very, very important. Neighborhoods can range from your low income c class neighborhoods to high income, you know, premium a class neighborhoods. But to me a lot of the risk is mitigated and controlled by choosing the right neighborhoods, even in a not so great market, but just being in the right neighborhoods make almost ensures your success, especially long-term success. So talk to us about the types of neighborhoods that you’re focused on and why, and, you know, you can talk about whatever you want related to neighborhoods.
Absolutely. So in general, I’m born and raised Clevelander. I’ve been heavily involved in the development of the west side for over a decade and a half now. I mean originally I was doing high-end and new new construction and renovations in an area they called the Detroit Shoreway, which, you know, back in oh eight, I was able to buy houses for sub 10,000 and hold onto ’em for five years and sell ’em for, you know, upward towards 200,000. You know, again, there’s that appreciation change in the market. It’s about identifying the up and coming markets. So again, I focus on the west side of Cleveland because we for see the boundaries of the west side shrinking. We have the lake to the north, to the east, we have the highway and steel mill and hospital. And then, you know, to the west we have a, a park system and higher very a plus communities. And then to the south we have also suburbs pushing in. So the west side itself, you know, metro west side of Cleveland is shrinking. And therefore I feel pushing rents, pushing values of the properties. And, you know, even myself, I’m heavily involved in the market where we’ve purchased about 200 houses in 2023, and, and we make them all very turnkey, push the rents and the values, and therefore increasing the, the neighborhoods themselves.
If someone’s listening to this and they’re actively investing in Cleveland, what advice would you give them as far as areas or pockets to avoid like that? Investors typically end up investing in not knowing that they shouldn’t be investing there.
So we have the east and the west side, and southerly suburbs. So again, I heavily push the west, west side. I’m heavily involved for that reason that I just explained. I’m not gonna downplay the east side, but again, there’s some tougher neighborhoods over there. So the better communities that bump up to those tougher neighborhoods require point of sales, heavy rent registrations, they’re tougher on the landlords. They have a you know, they, they, they have a lot more demand from the homeowner than they would on, on the west side for that reason, because they have to have, you know, some way to kind of push back on those tougher neighborhoods that boundary them.
Speaker 2 ([spp-timestamp time=”12:25″]):
So Tom, what’s the rental market like in the areas that you’re focused on? Like when I say areas, I’m talking about like general areas and neighborhoods. Do you have a strong rental pool? Are you, are you filling vacancies quickly? Is there good quality tenants? You know, talk about whatever you want, even demographics if you want.
Yeah, yeah. So you know, basically our goal is to put out a top-notch product. And so we, we fit that, the turnkey because of that. And so when you have a top-notch product, you typically get a better tenant. So when you have a better tenant, they stay longer, they’re less likely to move. And you know, we have some good things on, on the west side, like the zoo, the hospitals, things like that. In general, like I said, we have more of like the working class type of tenant. They’re not the a class that live downtown and in the high rises or in the fancy neighborhoods. They’re the people that are, you know, again, the nine to fives or the, they’re, you know, they’re putting in the hours and they’re doing it to support their families, so.
Right. Okay. Good stuff. Yeah. So let’s talk about the properties that you’re working on now. I know these tend to change from time to time because inventory levels, you know, come and go. Sometimes there’s not a lot of inventory in the resale market, we have to shift to new construction, whatever else it may be. So describe the kind of the typical property that you are making available now that we call turnkey. Absolutely. In the neighborhoods that you’re operating in.
So nowadays, inventory’s slim, it’s tough to come across purchasing property, low distressed properties coming harder and harder to come by. And the people that have them, they are marketing them as turnkey, but they’re really not, like I was telling you, I’ve seen, you know, a house that might be a hundred years old and it looks like the co kitchen’s never even been remodeled or, or there’s been any modifications at all. And they’re like, oh, it’s Turkey. It’s like, well, not really. So we pride ourselves because we do the kitchens, we do the bathrooms with, you know, shaker white cabinets. We put the LVP flooring in. We use all the products that last longer. We, you know, a lot of our, our, our bathrooms, we tile the showers, some kitchens we even put granite in. So we like to put out that big good product.
And my construction company management company we’re vertically integrated. We operate outta the same office. So, you know, again, with that turnkey product, we even, like I told you, we’re, we’re offering a maintenance warranty with that. The thing about the inventory is it’s becoming slimmer, but we’re very good. I have a very good staff. We’re great at sourcing property. We see everything that comes available. I, again, born and raised here, I know all the wholesalers, anyone who’s selling we’re in touch with, where we’re trying to keep our price good for your clients is, you know, I’m going after a lot of portfolios, so I might buy a 20 or 30 house package and still offer the sale price of like a reasonably priced home to say your clients. I got a lot of single families. It’s harder and harder to come across the multi-families. They’ve been in a very much demand, but we still have quite a bit of those as well. I try to keep an average of 20 to 30 houses for sale at all times.
That’s cool. Yeah. Tell me a little bit about the price range of those properties. What’s priced on low end, what’s priced on the high end, and while you’re at it, maybe talk about the monthly rent equivalent for those respective properties.
Absolutely. So with the single families, you know, the tenants, we have them take care of the property, they have to pay the water and sewer, then they take care of the landscaping. So that saves the owner on some costs. And so with that, you’re gonna have a little bit of higher sale price on the single families. But also, if I bought a single family and I made a turnkey, I could sell it on the MLS to a first time home buyer for pr pretty much more than what I could sell it to one of your clients for after I rent it, just because of the price. The rent ratio of the cap rate doesn’t make sense. So, so let’s say a three or four bedroom single family house, we price between, you know, 1 65 and 180 and that house will bring, you know, anywhere from, you know, 15 to 1600 a month in rent.
And again, the owner’s expenses are lower on that because the tenant is responsible for that. Whereas on a multifamily, there’s an Ohio tenant law that states the owner has to pay any utility that’s not individually metered, which typically is the water and sewer bill. So that raises the owner expense. And also, you know, I’ve been doing this very long time, and so it makes sense for me to say, Hey, when it comes to landscaping and cutting the grass in the summer months we don’t have to do snow removal on smaller multifamily, but that also adds another owner expense is, is the lawn care. So you have those two other facets on the multifamily, but when you’re buying right now, let’s say we have a duplex that’s gonna bring in 18, 1900, you’re gonna see it for sale again for that 180, 190,000 pretty well meets up with the 1% rule. Now if it’s in a little bit neighbor, more better neighborhood, you might see it like 10 or 10 or $15,000 higher. Again, you’re gonna pay to be in that better neighborhood and that sort of thing.
I think it’s good to remind listeners that the 1% rule is hard to find today. You know, if you roll back, you know, six to 10 years, it was not uncommon to find properties that fit that 1% rule, quote unquote. And for those people who don’t understand that, it just simply means that the property rents for 1% of that purchase price per month. So a hundred thousand dollars property is renting for a thousand dollars. A $200,000 property is renting for $2,000 a month. That’s, that’s the 1% rule. It’s not a hard and fast rule, it’s just a quick litmus test. But that’s pretty hard to find today. It’s become harder and harder to actually achieve that. So I think what’s the new normal is something more like 0.8%, plus or minus, depending on the market you’re in. So if you’re around that 0.8% RV or rent to price ratio, you’re doing fine.
The property will still carry itself, it’ll still cash flow. It won’t be as sexy on the cash, on cash returns, but if you’re in the right market, you’re gonna certainly make up those gains in the unrealized gains through the equity growth from the appreciation and, and of course the amortization of the loan. So Tom, you, I think you were mentioning something about like a warranty or a rent guarantee or something like that. Now you guys manage Yes. The properties too. It’s a sister company of yours. You do the property management. Yes. Maybe talk about the property management side a little bit and then tie it in with whatever warranty or rent guarantees you guys are doing.
So I’m buying not just to sell, I’m buying for myself as well. More than 50% of the homes I buy I’ll refinance and hold myself long term because obviously the values there. We have a very good management team here, ton of experience and just very good people at what they do. We charge reasonably, that’s a very fair 10% is typically what we charge our clients. We do very good at going through and being very selective with the tenant process based on the factors that we can, which is their income versus rent, which is typically we, we try to get to that three and a half to four and a half times income to rent ratio. And, you know, the construction company does all the maintenance, which I, I believe saves our clients a lot of money because they don’t have to go out and find a, a plumber or something of that sort.
And again, I’ve been doing construction, geez, almost my whole life I’d say. So I know just about everyone in town. I’m not gonna go and call Roto-Rooter, not to bleep them on on show here, but you know, I’ve known my plumbers a very long time. They give us great pricing, which I pass on to our clients. We have an over a 30 person construction team crew. We’re very good at turning units, turning them fast, getting them back and back on the market, back rented. So we try to keep people’s vacancies very low. The construction teams, again, I charge a very reasonably do hourly rate for that sort of thing. And again, hand in hand, when we provide a product, we pride ourselves on that. If the roofs are old, we replace ’em. If the furnaces are, are more than 10, 15 years old, same with the hot water tanks, we replace ’em.
If the electrical panels are outdated or Federal Pacific, we update ’em. We the windows, if the windows are old or have lead paint on ’em, we replace ’em. We take care of all of the capital improvements for our clients. So when they get a product, they can just not worry about it and just cash flow and think about their next opportunity. And so with that, we have pride in our products. So I, I happily offer a warranty on all the maintenance for six months, but that’s on top of, let’s say if there’s a new roof, there’s a 25 year warranty, the furnaces are 10, 15 year warranties. All these things get, I can pass on to our clients because I’m using the same contractors that I’ve worked with for the last 10, 15 years, and I’m gonna continue to work with also on the rent side, we pride ourselves and we offer a six month rent guarantee.
Sometimes we get to the finish line and we like to take our time, not anything crazy, but maybe we sell the house prior to it even being finished, and we wanna get it to the finish line as far as the sale goes. And so, you know, we might not have a tenant in there. So day one, we close the house. If there’s not a tenant in there, I’ll cover the rent till we place a tenant, or God forbid if there’s any issues, we cover the rent. If there is, is any. In that case, we usually give a six month guarantee there as well. And that gives, that gives the client peace of mind that they’re cash flowing for day one and in the first few months of owning it, they’re not gonna have some crazy expense or an unexpected expense and they’ll be cash flowing as they should.
I think that’s amazing. You know, that’s, I have to stress or emphasize how generous that is because most property providers out there don’t offer a rent guarantee. It’s, it’s pretty unheard of actually. And the fact that you actually offer a rent guarantee and for as much as six months is impressive and generous. So you really set yourself apart. Thank you, being that way and doing that and offering that. So that’s great. Like, you know, thank you for that.
Yeah, absolutely. It’s, it’s our goal to give that superior product and service and that just kind of goes hand in hand, you know?
Yeah, for sure. There was something I wanted to ask you tied in with that, the whole management thing. Oh, maybe, I don’t know if you know any stats off the top of your head, but what are you seeing in terms of the occupancy rates with the properties you have under management? And what about turnover times as well?
Again, I’ll, I’ll start with the turnover time our abatements and construction team is ever developing and getting better. Our turnaround time, you know, we use the same material on every property. It’s cookie cutter, so if something gets damaged, it’s pretty easy for us. Let’s say a cabinets get d gets damaged, we could take a cabinet door or drawer off another cabinet that I have in stock at my warehouse, put it on pretty quickly. We have, you know, besides my team, we have a lot of subcontractors that we use for painting and everything else. And so we’re very capable of turning a unit in a few weeks or less and being able to get it back on the market. So again, that, that helps with that, that turn time and, and, you know, keeping the vacancy low. In general. As far as our vacancy goes, I don’t know the actual statistic because we’re turning so many units from distress to turnkey.
So we, we do have units always available, but that’s because we’re turning so many new units, but they fill quickly because again, we have that good product. So vacancy in general, I’d say on the long-term hold is extremely low. Extremely low. I know everybody uses a different percentage in their equation of trying to figure out their cap rate and that sort of thing. And I like to, for me personally, I like to keep it around two point a half, 3% or less. Some people like five, some people like 10. I mean, you don’t really know until you actually do it. And, and again, for us it’s, it’s on the much lower side.
Yeah, still impressive numbers. I mean, that’s great. ’cause It, the turnover is low and the turn itself is quick. So that’s really what you want as a property owner. You don’t want the property vacant. You want at least and filled all the time. So Tom, I guess in wrapping up here, is there anything else that you wanna mention or comment about regarding the market or the investment opportunities in Cleveland?
You know, in general, I think we touched on it a little bit, but I did wanna circle back to again, you know, just give us the opportunity to present our product to you, come to us, give us that opportunity because we want to make sure everyone has a good experience in the investment world. And I hear so many horror stories and now ever, so more often, I keep hearing that the word turnkey being used in my sense inappropriately. I invest a lot of time and money into, to making these properties top end, top of the line for the investors and then see someone market something on the MLS as turnkey, and it, it just, it makes me cringe sometimes. So, I mean, not to put that at the end of the show here, but I think that’s definitely something your clients should keep in mind as, as they look for what their next purchase might be.
Yeah, definitely. I, I agree with you and <inaudible> score that there’s just so many people out there that are putting out product that is really just available on the MLS on the market. It’s on market and you know, nobody’s really behind it trying to improve or renovate it. Maybe they’ve done some cosmetic upgrades, but, you know, you start looking at the mechanicals and condition of certain things and you know, you’re gonna start spending money on repairs and maintenance and even capital expenditures in the short term. So you really have to be very, very careful and, you know, we always recommend, my team of investment counselors will always tell clients, get an inspection done, even if it’s new construction, get an inspection done because you just don’t know what’s gonna be overlooked or missed, and then, you know, you’re gonna run into a problem in three or six months or a year.
Absolutely. I, I, I always suggested as well, the other thing I wanted to point out, I know over the course of 2023, a lot of investors have have kind of slowed down, been a little more pessimistic because of, you know, rates and things like that. And I have to say, you know, I’ve done a lot of refinances myself. There’s a lot of good lenders out there. I know you guys have a lot of good referrals, as do we. We’ve been seeing people getting in, in the six percentiles, you know, where people have come to us and they’re like, oh, it’s eight or 9%. It’s like, no, it’s not though. You just need to be, you know, guided to doing it the right way and, and you could still get a good rate. So your investment looks good to you on paper.
Yeah, I agree. And, and I’m glad you brought that up. It’s worth mentioning because rates have been coming down, so, and it’s my belief that they’ll continue to come down over the course of the next year and two. So all good news for investors. Good stuff. Well, Tom, yeah, thank you for coming back on the show. I know it’s been a little over a year. It, it’s certainly worth, well worth revisiting the Cleveland market. There’s a lot of good investment opportunities there. So, you know, my team and I, we love working with you guys. We have a good relationship and, you know, our yeah, absolute clients are always happy with the product that you guys are putting out, so thank you.
No, and, and I, we appreciate the opportunity and, and the feelings mutual. We always have very good clients coming from you and, and we’re very appreciative of that.
Thanks. Well, thanks again, Tom. And then just in wrapping up the show here, you know, I, again, if you have a question about the Cleveland market, the opportunities there or anything in, in general about real estate and real estate investing, is it right for you or how do you get started? Or how do you grow your portfolio from 10 to 12 to 12 to 20 and whatever else, you know, just contact my team of investment counselors. We’re here to help you, put you on the right track, give you some guidance, hold your hand, connect you with Tom and his team, our lenders and everything else that you can possibly need. Think of us as the hub of a wheel. And everything you need is on one of those spokes. So reach out to my team. There is no cost or obligation. The strategy sessions are for free and just share your questions with us. Remember to subscribe to the show. It takes you three seconds to do. So just click the subscribe button. That way you never miss an episode. We release at least one per week, and it just keeps you dialed in. Whether it’s a market spotlight or just a tactic or investing in strategy about real estate investing, we were, we’re here to help. We just want to educate you. And that is it for today. Thank you for listening, and we will see you all on our next episode.
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