LONG DISTANCE REAL ESTATE INVESTING

A Project

Presented to the faculty of the Department of Business Administration

California State University, Sacramento

Submitted in partial satisfaction of

the requirements for the degree of

MASTER OF BUSINESS ADMINISTRATION

in

(Entrepreneurship and Global Business)

by

Andrew Thomas Musca

SUMMER
2020
 © 2020

Andrew Thomas Musca

ALL RIGHTS RESERVED

ii
 LONG DISTANCE REAL ESTATE INVESTING

A Project

by

Andrew Thomas Musca

Approved by:

__________________________________, Committee Chair

Nuriddin Ikromov, Ph.D.

__________________________________, Second Reader

Sudhir Thakur, Ph.D.

__________________________________
Date

iii
Student: Andrew Thomas Musca

I certify that this student has met the requirements for format contained in the

University format manual, and that this Project is suitable for shelving in the Library

and credit is to be awarded for the Project.

_______________________________, Dean ______________

William P. Cordeiro, PhD Date

College of Business Administration

iv
 Abstract

of

LONG DISTANCE REAL ESTATE INVESTING

by

Andrew Thomas Musca

Many potential Real Estate investors are priced out of the areas that they currently live in.

Previously, this would have meant they either could not invest in Real Estate or had to move to

a lower priced area in order to invest. However, in the modern Internet age, deals can be made

anywhere and completed on mostly on a smartphone. Discovering the correct market and

property type for investing is dependent on many factors including the investor’s goals for real

estate and willingness for risk.

Assuming the position as a potential investor and using sources such as “A Primer in U.S.

Housing Markets and Housing Policy” (Green and Malpezzi) and “Long-Distance Real Estate

Investing” (Greene), I analyzed housing markets of most metropolitan areas in the United States

over the last twenty years, set parameters on price-to-rent ratios, and forecasted appreciation in

cities to find a few specific cities to invest in.

Ultimately, I found Cleveland to be a city that met the price-to-rent and expected

appreciation parameters that I had set. Within those two cities, single family homes in the

Cleveland Heights neighborhood worked out to be the best deals based on their capitalization

(CAP) rate and price-to-rent ratio.

_______________________, Committee Chair

Nuriddin Ikromov, Ph. D.

_______________________
Date
v
 ACKNOWLEDGEMENTS

A special thanks to Dr. Ikromov for all of the input and time spent with me discussing

real estate. His helpful guidance often led me in the right direction to study new topics

and ideas I had not thought about. I would also like to thank Dr. Thakur for his

feedback on the paper. Additionally, I would like to acknowledge my cousin Jackie and

others who have inspired me to learn more about real estate investing.

vi
 TABLE OF CONTENTS
Page

Acknowledgements ................................................................................................................. vi

List of Tables......................................................................................................................... viii

List of Figures ......................................................................................................................... ix

Chapter

1. INTRODUCTION. ……………………………………………..……………………….. 1

Purpose ....................................................................................................................... 1

Opportunity ................................................................................................................. 1

Project Layout ............................................................................................................. 2

2. MARKET STUDY ............................................................................................................. 4

Causes of U.S. Housing Market Trends ...................................................................... 8

3. INVESTMENT ANALYSIS ............................................................................................ 12

Neighborhood Analysis ............................................................................................. 19

4. FORECASTED EARNINGS AND CASH FLOW ANALYSIS ..................................... 28

Common Expenses in Cleveland............................................................................... 33

Managing Long Distance Properties ......................................................................... 34

Long-Term Strategy .................................................................................................. 35

5. CONCLUSION ................................................................................................................. 36

Bibliography ........................................................................................................................... 38

vii
 LIST OF TABLES
Tables Page

1. Housing Costs in the U.S.…………………....………………….…………………..…. 5

2. Selected U.S. Cities with Price to Rent Ratio below 11……………….………..……..14

3. Selected Cities Job Data………..………….……………………………….…………. 15

4. Selected Cities Rent Change……….………………………………………….……….16

5. Property Taxes in Selected Cities……….………………………………………..…. ...18

6. Rent in Cleveland Heights……….………………………………………….. …….…..26

7. Rent in Garfield Heights……….…………………………………. …………….…….27

8. Cost analysis of Cleveland Heights Duplex……….………………………….………. 29

9. Cost analysis of Cleveland Heights Single Family Home………………….………… 30

10. Cost analysis of Garfield Heights Duplex ……….……………………………...……. 31

11. Cost analysis of Garfield Heights Single Family Home……..…...……………...…... .32

12. Cost Comparison of Four Cleveland Properties………..……..……………………… .33

viii
 LIST OF FIGURES
Figures Page

1. Appreciation vs Price to Rent Ratio……….. .. .………………………………………. 7

2. Appreciation vs Price to Rent Ratio, Top 100 Largest Cities……….………….……. .7

3. Price Change After Recession……………….………………………………….……. .9

4. WRLURI vs. Subsequent House Price Appreciation.………..………………………..10

5. Appreciation vs Price to Rent, Cities with Price to Rent 11 or Lower….. ………..…. 13

6. Rental Price over time 2010-2019…………..…………………………………..……. 17

7. Cleveland Sale and Rental Units.……………………………………..…. …………...19

8. Cleveland Workforce …………………….……………………………….………. …19

9. West Side of Cleveland …… ............ .………………………………. ………………20

10. East Side of Cleveland ……… ............. .………………………………. ……………21

11. Cleveland Heights: B+ level neighborhood .............. .……………………………… 25

12. Garfield Heights: C+ level neighborhood ….…………………………………..…… 26

13. Cleveland Heights Duplex………… .............. .………………………………. ……..29

14. Cleveland Heights Single Family Home…………..……………….…………….……30

15. Garfield Heights Duplex ………………….……………………………………….…. 31

16. Garfield Heights Single Family Home …….………………………………………….32

ix
 1

Chapter 1

INTRODUCTION

In this project, I assumed the role of an investor and went through the entire process of

analyzing and purchasing a long distance real estate property. Because of the internet, it is

possible for investors to purchase property in any area of the country. Through the project, I will

first examine the United States real estate market as a whole and look at factors determining both

the supply and demand for real estate in the country. I will then dive into specific markets in the

United States and decide which ones are best for investing in. After determining best markets to

invest in, I will analyze specific deals and the future earnings the properties can provide.

PURPOSE

The primary purpose of this project is to find the best real estate property for a new

investor that has a limited amount of cash to invest. This will include searching the United States

for markets with potential to appreciation, finding markets with high cash flowing properties,

combing through neighborhoods within markets and analyzing specific deals. It will also break

down the benefits of real estate investing and deciding between investing different types of

properties and grades of neighborhoods.

For the project, I will use the example of having $25,000 to invest in a down payment.

With this capital, we will see the types of investments that can be made throughout the entire

country. After establishing goals of maximizing return on equity, we will see what type of

property will be best to purchase to meet the end goal.

OPPORTUNITY

Investing in real estate provides multiple streams of building wealth that other

investments do not. I will break down the main sources of wealth building that real estate

investing provides. First is appreciation, both forced and natural. Due to inflation, an increasing
 2

population, and the permanent need for places to live; housing tends to naturally appreciate in the

long-term. It may have ups and downs in the short term but real estate has historically tended to

provide appreciation in the long term. In addition to natural appreciation, there is forced

appreciation. This is when a property is enhanced through upgrades to increase its value. For

instance, adding an extra bedroom or remodeling the kitchen will always add value.

The second form of wealth generation is cash flow. Cash flow is the amount of money

left over after all the bills are paid for at the end of the month. When analyzing a rental real estate

deal, an investor should always determine the amount of cash flow that the property will produce.

A calculation should be done to find revenue minus expenses. There are a lot of unforeseen

expenses in real estate that must be included such as vacancies, repairs, capital expenditures,

taxes and utilities.

The third form of wealth generation is through tax savings. The government provides tax

break for real estate owners via offering the ability to deduct depreciation on a property. While

this will not greatly alter a real estate deal, it will make a good deal better. In addition to

depreciation, mortgage interest, property taxes, insurance, and other operating expenses are also

tax-deductible.

PROJECT LAYOUT

This project consists of four remaining chapters: a market study, investment analysis,

forecasted earnings and a conclusion. In the market study chapter, I will provide macro-analysis

of the real estate market conditions throughout the country. Here, I will look at trends seen in the

United States and the underlying causes of those trends. In the investment analysis, I will draw a

line as a cutoff for criteria for rental properties and provide macro-analysis on specific cities. I

will then look into more detailed data on those cities including job growth, rental prices, and in-

depth neighborhood analysis. In the forecasted earnings chapter, I will look at four potential
 3

deals, provide cash flow analysis and return on equity (ROE) breakdown and potential next steps

from these deals.

 4

Chapter 2

MARKET STUDY

House prices and rents vary widely in the United States. Table 1 shows this range

throughout 912 cities in the United States that had available data for 2019. In Greenwood, MS,

the median price of a house in 2019 was $31,700. In San Jose the median house price in 2019 was

$1,150,701 (over 36x the cost in Greenwood).

Not only do the costs of renting vary but the price-to-rent ratios also vary greatly

throughout the United States. The price-to-rent ratio signifies the purchase price of a house

divided by the yearly rent of such a house. The price-to-rent ratio is an important measure to

show the relative affordability of purchasing versus renting in an area. The lower the price-to-rent

ratio, the more affordable it is to purchase a house, relative to renting. The higher the price-to-rent

ratio, the more affordable renting is, relative to purchasing. For example, in Bennettsville, South

Carolina, the median purchase price for a house is $44,646 and the median yearly rental cost for a

house is $19,152 (or $1596 per month). Dividing 44,646 by 19,152 gives you a 2.33 price-to-rent

ratio. This is incredibly low, in fact it is the lowest for the whole country found with the available

data from 2019. On the contrary, Vineyard Haven, MA has a median purchase price of $842,687

and a median yearly rental income of $11,772 (or $981 per month). Dividing 842,687 by $11,772

provides an outrageously high price-to-rent of 71.58, the highest in the country.

Purchasing a house with a low price-to-rent ratio is key in ensuring that the investor will

have ample cash flow each month. Cash flow is defined here as rental income net of expenses

including mortgage, property taxes, maintenance, and property manager fees etc. Looking at data

that includes info from cities across in the United States in 2019, the median house price was

$242,034 in 2019, the median one-year rental cost was $19,152 ($1596 monthly), and thus a

price-to-rent ratio of 12.63. Putting 20% on that house (or $49,406.80) with a 30-year mortgage
 5

and 5% interest rate, the mortgage cost each month would be $1039. If that median house

received the median rental income of $1596 per month. It would cash flow $557 per month or

$6,687 per year, without any expenses such as property taxes and capital expenditures. One

general rule of thumb is that expenses will add up to be about 50% of rental income. Using this

rule of thumb, the rental property above would have expenses of $798 and a negative cash flow of

$241. This shows that many houses will not be good rental properties for an investor that wants

the property to immediately cash flow.

Table 1 – Housing Costs in the U.S.

Housing Price One Month Appreciation Price-to-Rent

Median Rental Median
Min $31,710 $831 -$32,131 2.33
Max $1,150,701 $1,785 $508,208 71.58
Range $1,118,991 $954 $540,339 69.25
Median $152,394 $1,001 $33,415 11.04
Source: Zillow

Now that the internet and smart phones have made real estate nation-wide accessible to

everyone, why would anyone purchase property that has a high price-to-rent ratio and thus

doesn’t generate the most cash flow? There must be a reason that real estate investors are

choosing to purchase property in San Francisco with its astronomical price-to-rent ratio of 57.9.

The main reason behind that is the cities with higher price-to-rent ratios tend to see more

appreciation. Figure 1 below shows a graph of appreciation for the median house in 877 United

States cities from 2010 to 2019 on the Y axis and price-to-rent ratio on the X axis. The pearson

correlation coefficient, r, for those data points is 0.774, meaning there is a very strong correlation

between the two variables. Figure 2 showing the 100 most populous cities in the United States

has a nearly identical correlation, with an R coefficient of 0.782. An investor looking to get the
 6

best investment in terms of both appreciation and cash flow would look at the graph for cities in

the top left quadrant, meaning they have low price to rent ratio and high appreciation.

The fact that investors are willing to buy property with high price-to-rent ratio means

they are willing to give up cash flow now, if they are expecting their asset (the house) to

appreciate. The more they expect it to appreciate, the more they are willing to lose on cash flow.

In San Jose, CA; between the years 2010 to 2019, the median house appreciated $508,208. An

investor who purchased a median-priced house in San Jose in 2019 and rented it out a median

rate, would have a negative cash flow of $3,407 each month, or $40,884 each year. Assuming

rent did not increase, the investor would wind up with a total negative cash flow of $367,956 over

9 years. However, if the house appreciated $508,208 in the 9 years, then the investor would end

up with a positive $140,252 in appreciation minus cash flow. The large investment that this takes

and willingness to lose money each month is the reason most small real estate investors avoid

high-priced areas like San Jose in the Silicon Valley.

 7

Figure 1 – Appreciation vs Price to Rent Ratio

Figure 2 – Appreciation vs Price to Rent Ratio, Top 100 Largest Cities

 8

CAUSES OF U.S. HOUSING MARKET TRENDS

While looking at historical house price appreciation rates in a city can provide important

information, an investor truly cares about the future price appreciation, rather than the past

appreciation. If an investor can point down what causes a certain city or area to appreciate, they

should look for areas that match that trend. As with all economics, one must look to supply and

demand. If the demand for housing in an area exceeds the supply, then inventory will remain low

and the housing prices will rise. The mismatch in housing supply and demand can be caused by

numerous factors. Supply will not match demand if housing can not be built fast enough.

A major contributing factor to building constraints is regulation in a city that will slow

down building efforts. A group of researchers at the Wharton School of Business studied these

regulatory factors for over “2,450 primarily suburban communities across the U.S.” They found

the most highly regulated markets are on the two coasts in the San Francisco and New York

major metropolitan areas. These areas that are highly regulated have difficulty building inventory

fast enough to match demand. Thus, housing prices rise.

However, while the expensive markets are typically the most heavily regulated, they are

also the most volatile during recessions. Figure 3 below shows that expensive markets took the

largest hits to their overall value after the 2008 recession. There is a strong negative correlation

(R of -.804) between the housing prices in 2007 and the increases in the median home for a city

between 2007 to 2012. While the housing prices crashed in the expensive areas in the Great

Recession, the study found that the recession of 2008 did not lead any major market that was

previously highly regulated to reverse course. In fact, most of these highly regulated coastal

markets became more regulated over the period from 2010 to 2019. This means if the investor is

willing to wait out the recession, the prices will tend to rise above their previous highs.
 9

Figure 3 – Price Change After Recession

The study completed at Wharton aims to measure all means of restrictiveness. This

includes both the strength of the Not In My Backyard (NIMBY) movement in a community and

the amount of time a planning commission takes to approve a new building. Within this study,

they construct a measurement of “regulatory restrictiveness” called the Wharton Residential Land

Use Regulatory Index (WRLURI). I examined the existence of a correlation between a city’s

restrictiveness measure and the subsequent house price appreciation. Figure 4 below shows there

is a clear correlation (R value of 0.548) between a city’s restrictiveness and the subsequent house

price appreciation. Ultimately, this means that if a city is restricted in the number of houses it can

build, it will not be able to match its supply with the demand of the market. Thus, the cost of

houses in that area will increase.

 10

Figure 4 – WRLURI vs. Subsequent House Price Appreciation

From an investing standpoint, to forecast if an area’s housing prices will increase, it is

important to see an area’s ability to build more houses. If the city has a low WRLURI, meaning it

is easy to build inventory, it is much less likely to have appreciation over the coming years versus

a city that has a high measure of regulatory restrictiveness. Areas that are ranked with higher

regulation, typically have that score because they are regulated on multiple dimensions. In a

highly regulated city, it will typically take “at least three different entities to approve a project.”

Project review delay times are also more than double those in lightly-regulated areas, where the

average project review time is 8.4 months. In the extremely high regulated areas, some

communities have reported 18-24 month review times. Needless to say, there are processes in

place in these highly regulated communities that are not going to be changed easily. Thus, it will

continuously be difficult to construct new property and supply is unlikely to increase drastically.

Unless there is a specific reason that demand will falter in that region, it is a safe bet that the area
 11

will continue to appreciate if it is highly regulated since inventory will remain low due to the lack

of building.
 12

Chapter 3

INVESTMENT ANALYSIS

In this section, I will begin looking at specific cities found in Figures 1 and 2 above and

decide on a set market to do further analysis. I will then analyze the different markets based on

their price-to-rent ratios, regulatory restrictiveness, job growth and rental price changes. All of

these factors are important to consider when choosing a target market.

An investor looking throughout the country needs to draw a line at a certain point for the

price-to-rent ratio they are willing to accept. I chose to look at cities with a median price-to-rent

of 11 or lower. As you can see in Figure 5 below, the range of appreciation is much smaller than

in Figure 1 that had all U.S. cities. Despite the lower range, there are still significant differences

between a city like San Antonio, TX which saw appreciation of $59,951 and a city like Scranton,

PA, which only saw an appreciation $4,383 between 2010 – 2019. This is important to note

because an investor that is primarily looking for a property that will provide a positive cash flow

now can still see find markets that are going to appreciate. The investor does not have to invest in

high-end markets like the San Francisco Bay Area to reap the benefits of appreciation.

The correlation coefficient in Figure 4 below is 0.244, meaning there is some correlation

but not a strong one. This means there are other factors to look into that are causing appreciation.

Since 2010, the country was still in an economic recession. Some areas were harder hit and saw

more recovery after the recession.

 13

Figure 5 – Appreciation vs Price to Rent, Cities with Price to Rent 11 or lower

While making the search for the best market to invest in. I first drew a line to cut off all

cities with price to rent ratios below 11. After that, I selected six cities based on price

appreciation, price-to-rent ratio and WRLULI score. Table 2 below displays the six markets: San

Antonio, TX, Youngstown, OH, Columbus, OH, Scranton, PA, Albuquerque, NM and Cleveland,

OH.
 14

Table 2 – Selected U.S. Cities with Price to Rent Ratio below 11

One Price
Housing month One year to
Median2019- Rental rental Rent Appreciation
City 09 Median median Ratio 2010 - 2019 WRLU2018

San Antonio,
TX 201657 1535 18420 10.95 59951 0.1

Youngstown,
OH 95465 948 11376 8.392 13089 0.32

Columbus,
OH 205820 1785 21420 9.609 59160 -0.01

Scranton, PA 116589 1535 18420 6.329 4383 0.3

Albuquerque,
NM 206049 1596 19152 10.76 27823 #N/A

Cleveland,
OH 156260 1785 21420 7.295 25964 -0.28

Having selected these cities, I looked into employment data for each city. While the regulatory

restrictiveness is an important measure of supply for a market, job growth is an equally important

measure to see changing level of demand in a city. To determine job growth, I looked at the U.S.

Bureau of Labor Statistics data on total civilian labor force and the total unemployment rate.

These statistics provide a measure of the total people in the city working and look from work.

From the data, I extrapolated the civilian labor force % change and the unemployment rate %

change from 2015-2019 and 2018-2019 to get a glimpse of the overall trend of demand in each.
 15

Table 3 – Selected Cities Job Data

Source: U.S. Bureau of Labor Statistics

In the data gathered in table 3, I separated the cities demand into three levels: large

decrease in civilian labor force, low decrease to moderate increase in civilian labor force, and

high increase in civilian labor force. These three tiers are represented by the colors red, yellow

and green, respectively. San Antonio and Albuquerque, the cities in the Western side of the U.S.

saw the largest increases in civilian labor force. Columbus, Scranton and Cleveland saw minor

decrease to moderate increase in civilian labor force. Finally, Youngstown, OH saw a large

decrease in civilian labor force, a drop of 4.64% from 2015-2019, a time when the economy and

jobs were increasing in the overall United States. Due to this trend, I removed Youngtown, OH

from further analysis.

Next, I decided to look at the change in rental prices over the last few years in these

communities to see if they matched up with the change in civilian labor forces.
 16

Table 4- Selected Cities Rent Change

2015- 2017- 2018- 2019- 2020- Rent % change

RegionID RegionName 01 02 01 01 01 2015 - 2020

San Antonio,
395055 TX 1141 1205 1215 1213 1229 7.71%

394475 Cleveland, OH 1006 1024 1028 1047 1066 5.96%

394492 Columbus, OH 1103 1146 1180 1190 1188 7.71%

Albuquerque,
394312 NM 1034 1089 1108 1129 1158 11.99%

395075 Scranton, PA 864 916 992 994 15.05%

Source: Zillow

Table 4 above shows the percent change in median rental costs in the five selected cities. They all

saw moderate increases from 5.96% to 15.05%. In absolute value, the rent changes were from

only $60 in Cleveland to $124 in Albuquerque. Needless to say, it is not a drastic increase (nor

decrease) in all five cities. Figure 6 below additionally shows how rental prices have changed in

the five cities from 2010 to 2019.

 17

Figure 6 – Rental Price over time 2010-2019

Source: Zillow

Another key factor that can make or break a deal is the local property tax rate. Table 5 below

shows the average property tax rate for the 5 cities. They range from 1.02% in Scranton, PA to

2.41% in Cleveland, OH.

 18

Table 5 – Property Taxes in Selected Cities

City Tax Percent

San Antonio, TX 1.99%

Cleveland, OH 2.41%

Columbus, OH 2.06%

Albuquerque, NM 1.02%

Scranton, PA 1.60%
Source: Cuyahogacounty.us

After going through all factors above and the prioritization I have placed on cash flow, I

decided to select Cleveland to look into further. To ensure that there is no major risk to the

Cleveland market, I studied the market through the government’s Housing and Urban

Development (HUD) page to learn more about current economic conditions of the market.

It is shown in Figures 7 and 8 below and reported through the HUD website that

Cleveland is still recovering from the Great Recession of 2008. Resident employment has been

steadily increasing and unemployment was decreasing from the high of 2008 to 2015. While this

is not a booming economy, it is one that appears to be back on track.

 19

Figure 7 – Cleveland Sale and Rental Units

Source: U.S. Department of Housing and Urban Development

Figure 8 – Cleveland Workforce

NEIGHBORHOOD ANALYSIS

The greater Cleveland area (as with most cities) is incredibly diverse in its property

values, income levels of residents, crime, and many other metrics that make up a neighborhood

and its identity. Before investing in a city, it is important to understand the neighborhoods. In

figure 9 and 10 below, the city is broken down in colors signifying a “letter grade” for the quality

of property. Dark Green represents “A neighborhood”, Light Green “B Neighborhood”, Yellow

“C Neighborhood”, and Red “D & F Neighborhoods.”

 20

Evaluating the quality of a neighborhood is important for understanding the investment

returns on a property. An A level neighborhood will have higher rents but also a much higher

purchase price. However, these will not be propionate and the neighborhood will have higher

price-to-rent ratio. The price-to-rent ratio will typically decrease as the quality of the

neighborhood and property goes down. This may appear that the lower end neighborhoods are

better investments but they also come with more risks. Lower end neighborhoods tend to have

housing that is older and will have more maintenance issues. An investor will choose the

neighborhood depending on their risk profile and preference.

Figure 9 – West Side of Cleveland

Source: James Wise HWPG

 21

Figure 10 – East Side of Cleveland

Source: James Wise

Below I have provided definitions of the qualities of the different neighborhoods and then gave

some examples of that type of neighborhood in Cleveland.

 22

A Neighborhood – Mostly single-family homes that are owner occupied. Very low crime and

tenants that are mostly college educated. In Cleveland, the single-family house prices are

$150,000 and up.

A neighborhoods in Cleveland:

___

Shaker Heights (44122 & 44120)

Median Income $75k

Residential Property Tax Rate 3.97%

___

University Heights (44118)

Median income $68k

Residential Property Tax Rate 3.82%

B Neighborhood – Properties are a mix of SFH that are owner occupied and some that are rented

with the majority being owner occupied. Price range for SFH in Cleveland $60k-$120k. Low

crime and tenant base is mix of college educated and blue collar. Rents are around $800-$1000.

B neighborhoods in Cleveland:

South Euclid (44121)

Median Income $59k

Residential Property Tax Rate 3.16%

___

Cleveland Heights (44118)

Median Income $53k

Residential Property Tax Rate 3.80%

___
 23

Brook Park (44142)

Median Income $49k

Residential Property Tax Rate 2.31%

C Neighborhood – Mix here of SFH and multiplexes that are owner occupied and rentals with

the majority being rentals. Price range for SFH is 30k-50k. Tenant base is mix of blue-collar

workers, low income workers, retail, and those on SSI. Rents around $600-$800.

C neighborhoods in Cleveland:

Cleveland (44111)

Median Income $40k

Residential Property Tax Rate 2.79%

___

Bedford (44146)

Median Income $39k

Residential Property Tax Rate 2.67%

___

Cleveland (44135)

Median Income $38k

Residential Property Tax Rate 2.79%

D Neighborhood –Almost entirely rentals. SFH cost is approximately 30-40k. Rental price is

approximately $450-700. Crime is much more prevalent. Large portion of tenant base is on SSI

and section .80 housing.

D neighborhoods in Cleveland:

Cleveland (44120)

Median Income $34k

 24

Residential Property Tax Rate 2.79%

___

Cleveland (44109)***

Median Income $30k

Residential Property Tax Rate 2.79%

F Neighborhood –Lots of abandoned homes and houses that have been stripped of all valuables.

Houses sell for $15k to $40k. High crime and many houses and even entire blocks end up being

torn down.

F neighborhoods in Cleveland:

___

Cleveland (44105)

Median Income $25k

Residential Property Tax Rate 2.79%

___

East Cleveland (44112)

Median Income $24k

Residential Property Tax Rate 3.24%

___
 25

Cleveland Heights:

Figure 11 - Cleveland Heights: B+ level neighborhood

Source: U.S. Census

Located near Case Western Reserve University, tenants in Cleveland heights mainly consist of

students and professionals. The area mainly consists of single-family houses, duplexes and

apartments buildings that were built between 1920-1960. There is a large portion of SFH that are

owner occupied with many grand mansions that belonged to wealthy locals in the early 20 th

century.
 26

Table 6 – Rent in Cleveland Heights

Typical Rent Ranges

Bedrooms Single Family Houses Bedrooms Apartment/ Multifamily

2 Bedroom $800-$1000 1 Bedroom $575-$800

3 Bedroom $900-$1350 2 Bedroom $650-$1100

4 Bedroom $950-$1600 3 Bedroom $800-1300

Garfield Heights:

Figure 12 - Garfield Heights: C+ level neighborhood

Source: U.S. Census

 27

Garfield Heights is located on the southeast side of Cleveland with easy access to downtown

Cleveland via the freeway. The area has a mix of single family houses and multifamily homes

with a few apartment buildings. The houses were built between 1920s-19080s.

Table 7 – Rent in Garfield Heights

Typical Rent Ranges

Bedrooms Single Family Houses Bedrooms Apartment/
Multifamily
2 Bedroom $750-$900 1 Bedroom $500-$700
3 Bedroom $850-$1000 2 Bedroom $600-$850
4 Bedroom $900-$1000 3 Bedroom $700-1000
 28

Chapter 4

FORECASTED EARNINGS AND CASH FLOW ANALYSIS

After analyzing the neighborhoods, I selected properties in Cleveland Heights (B level

neighborhood) and Garfield Heights (C level neighborhood). In each neighborhood, I looked at

one single family house and one multiplex. When searching properties in these areas, I selected

properties that did not require any rehab to move in and were on the lower end of the price scale

for the neighborhood. I also assumed average rent levels the neighborhood when doing cost

analysis.
 29

Figure 13 - Cleveland Heights Duplex

Source: realtor.com

Table 8 – Cost Analysis of Cleveland Heights Duplex

 30

Figure 14 - Cleveland Heights Single Family Home

Source: realtor.com

Table 9 – Cost Analysis of Cleveland Heights Single Family Home

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Figure 15 - Garfield Heights Duplex

Source: realtor.com

Table 10 – Cost Analysis of Garfield Heights Duplex

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Figure 16 - Garfield Heights Single Family Home

Source: realtor.com

Table 11 – Cost Analysis of Garfield Heights Single Family Home

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Table 12 – Cost Comparison of Four Cleveland Properties

Based on the cost analysis, the most appealing property to an investor is the single family

house at 1421 Edendale St in Cleveland Heights, OH. This property has the lowest price-to-rent

ratio at 4.51 and the highest CAP rate at 9.39%. It will provide an ROI of 0.21 compared to the

next highest of 0.09. This property is more profitable because it has the highest rent per bedroom

of the four properties, $1200 for a three bedroom. Combined with the higher rent, it’s purchase

price is only $4,000 more than the single family house in Garfield Heights. There are also less

expenses involved in the single family houses versus the duplexes.

Additionally, being in a higher level neighborhood, Cleveland heights is less likely to have

crime and more likely to attract tenants that are working professionals or University students.

Proper tenant screening needs to be along with the cost analysis but from a macro-analysis scale,

tenants from a higher income areas tend to cause less damage to the property. Combining all these

factors makes the SFH in Cleveland Heights the best property to invest in.

Common Expenses in Cleveland

The cost analysis of the houses in Cleveland makes some assumptions around common

rental property expenses. It includes an 8% vacancy rate; this assumption is made around the HUD

finding a vacancy rate of 8.6% in the Greater Cleveland Area. The property taxes are based on the

school districts in Cuyahoga county found on the Treasurer’s website. The property insurance

average of $864 is the average Ohio insurance. Offsite management fees are calculated based on
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10% of the total rental income, this was based on researching local Cleveland property managers’

costs. Maintenance, repairs and capital expenditures are based on 15% of total rental costs. These

expenses are found to be anywhere from 2%-18% on average, the 15% is on the higher end of the

spectrum for rental properties. But most Cleveland properties were built in early 20 th century so it

is expected they are to need more repairs. Utilities are not included because they are the tenants’

responsibilities. Lawncare is not included for SFH because they are the tenants responsible,

however, lawncare is included in multiplex and a flat fee of $80/month is used to calculate the

expense. Finally, a miscellaneous expense of $500 is added for unpredictable expenses.

Managing Long Distance Properties

After purchasing the property, the next steps in owning real estate involve the managing

of the rental properties. It is vital to have a property manager that an investor can trust because

they are the ones that will be able to physically check on the property. Included in the cost

analysis of the rental property is a property management fee based on 10% of the total rental cost.

However, there are many others additional costs that will be incurred with a property manager

that is not diligent. If a property manager does not screen tenants properly then there is greater

risk for high tenant turnover, missed payments, and damage to the property. Tenant turnover adds

costs as a property manager will typically take the 50% of a tenants’ first month rent.

Additionally, when maintenance is needed, a well-connected property manager can shop around

with multiple contractors rather than just going to one handyman that may charge an

unreasonable price. Any problem that could occur with a normal property and property manager

will be exasperated if the investor is not in the same state and can’t have physical eyes on the

property.

The long distance real estate investor needs to have an entire team in the location of the

property. This includes a realtor, a reliable contractor, and a property manager. It is important to
 35

note that these should be symbiotic relationships. While an investor wants to get a good deal, they

should not substitute quality for a low cost. An investor wants a long term relationship with these

partners and ultimately to work with the partners on more properties. The investors growth will

drive future sales for the realtors, give more projects to the contractor and more properties to

manage for the property manager.

Long-Term Strategy

Owning one rental property clearly is not going to make an investor wealthy. The

investor should always be looking to grow their business and maximize their equity. This means

the investor needs to constantly be evaluating the market and pivoting their strategy depending on

the health of the market. In an area of the country where real estate prices are rising it makes the

most sense to purchase a property, make some improvements and resell at a higher price. In an

area where prices have dropped, an opportunity to purchase the property at a low cost and hold on

to it for a long-term rental will make the most sense. While this project was completed to

optimally find a buy-and-hold rental at the current period, it is important for investors to keep

track of the health of the market in different areas of the country. This will allow them to find the

best opportunity for their equity.

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Chapter 5

CONCLUSION

In the project, it was found there is a very wide range of properties throughout the United

States. Investors with set cash constraints or specific risk limitations may not want to invest in

their own neighborhood. I provided analysis for housing markets throughout the entire country to

give glimpses of areas that are more prone to appreciate and ones that will provide more cash

flow after making the initial investment. Overall, there tends to be a major correlation between

areas with high price-to-rent ratio and areas that have appreciated a lot in the previous 10 years.

One major reason behind this is that people are willing to pay a premium on an area that they are

expecting to appreciate over time.

The real estate market is by no means a perfect market where supply can adjust to rising

for falling demand. In many parts of the United States, especially ones that are considered highly

desirable, cities can not build houses to create supply fast enough to match demand. There are

many regulation factors in place that slows the process of building and in turn, the prices of

houses in that area rise. For an investor to anticipate if house prices will likely raise in an area,

it’s important for the investor to look at both the regulatory restrictiveness and the job demand for

an area.

At this point in the study, I decided to draw a cutoff point in the market and only look at

areas with a price-to-rent ratio of 11 or less. This cutoff was in the bottom third of price-to-rent

ratios of the United States, meaning properties in this area would be more likely to cash flow than

other parts of the country. Among these cities, I looked up the average appreciation from 2010 to

2019 and the measure of regulatory restrictiveness. I came up with a short list of cities from here

which I was then able to dive into more precise data on employment trends.
 37

After going through all this data, I decided Cleveland, Ohio was the metropolis area I

wanted to look into at a neighborhood level. Cleveland offered an area with very low price-to-rent

ratios and an economy that had stabilized since the Great Recession. Within Cleveland, there was

tremendous variety in the types of properties and neighborhoods. I decided to look at B and C

level neighborhoods as they had more affordable properties than A level neighborhoods but less

risk than investing in a high crime area. At this point, I was able to determine a single family

house in Cleveland Heights, a B level neighborhoods that would positively cash flow and have a

ROI of over 20%.

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