Hi guys, it’s Mo here 👋,

What’s next?

I’m taking a break from explaining new/intermediate topics and focusing more on personal life.

I’m writing this on 2/23/2024. My 29th birthday is tomorrow (2/24) if you’d like to email me. The best present I got was selling my 14 unit and co-GP’ing a retail deal.

Haven’t been in the real estate game for that long (<5 years), but I’ve staked my own money in my first two deals. My first ever property, a single family house which I gutted remotely (don’t do that), is the only property I own in the Cleveland market.

So recently, I sold my 14 unit. The transaction officially closed on 2/16/2024. We bought it for $375k back in Jan ‘21 and have put about ~$100k into it. Our cost basis is about $485k. We put down $200k of equity and were collecting some cash flow and issued some distributions to our investors.

So we’ve sold it and now we’re going to get $265-270k. Initial equity was about $210k so we have a pretty good return. I’d estimate net IRR was probably 35-40% before taking out management fee.

This leaves us with… what are we going to do with the $270k lump sum?

We have a few options:

• House hack a 2-4 unit in San Francisco

• Buy another Cleveland deal

• Expand into Columbus and buy a $4-5mm property.

Let’s go down, one by one and evaluate it.

Househacking in San Francisco.

If you’ve been on the internet recently, it seems like the city of San Francisco is getting closer and closer to Gotham City. Riddled with crime, drugs, inefficient government and rampant homelessness, the city seems to have toppled its once grandeur image.

As a result, people are moving out. Combine that with sky high interest rates and seems like real estate prices are falling too.

From within my Bay Area real estate circles, it seems like an opportune time to buy in San Francisco. I recently saw a 11 unit in San Francisco go for $2.515mm. $229k/unit and one beds can usually rent for $2800 minimum. My friend Dimitris is an expert in that market.

Househacking seems to make sense at this current moment. If I could buy a 2-4 unit for $1.5mm with an FHA loan, I’d need 5% down. It also helps that my partner is a mortgage broker and a realtor (inactive) so we can get access to cheaper financing and seller credits for representing ourselves.

Assume we need $80k to put down on a $1.5mm house and another $15k/unit to make it rent ready and/or do some light renovations. It may be over/under. So we need $110k of liquid cash to do that.

I think SF is close to the bottom (not financial advice) and would love to enter the market with high leverage. Long term, SF has so many hindrances to new builds so the existing housing supply is going to be very valuable in 10-20 years time.

I also need to move out and it makes sense if I can breakeven and/or build equity for myself.

Long term, if it appreciates, you can also tap into the equity. This would be more of an appreciation play, not much cash flow.

But tier 1 cities in real estate are Chicago, New York, Los Angeles, Boston and San Francisco. Tier 2 markets are Phoenix, Atlanta, Charleston, and Columbus. Tier 2 market pricing hasn’t made any sense in the last 5 years.

Also, I’m very weary of how many construction units are going to go online in the next 3-5 years once all the construction is done. Is demand going to remain stable to ensure developers hit pro forma rents?

Buy another Cleveland deal

I love Cleveland with all my heart. It’s a great little market where I have great relationships with brokers. I have a good management team, I know the laws, and it’s been my playground.

The thing with Cleveland is that the cap rates are great and cash flow is great until it isn’t.

Let me explain.

Probably 70-75% of the housing supply in the Cleveland MSA was built before 1980. This means galvanized steel, lead paint, and older materials was used. It also SNOWS which can mean your 1960s boiler can go out and they don’t make as many parts for it or there aren’t many technicians to service it.

This is mitigated by strong rent to price ratios and I’ve been able to weather the storms, metaphorically speaking.

Property taxes are also high, but if you plan on keeping a building (like I wanted to), then large capital expenditures must be allocated. This can cut into your cash on cash return.

Cleveland is great, but there wasn’t much appreciation. Rent growth compared to the national average is pretty good.

According to Hoff Leigh, Q1 rent growth in Cleveland was 2.2% while the national average was 0.8%. This is a great sign for Cleveland but there are lots of new construction projects going in and that rent growth number might get hampered in a few years time. Office to residential projects were also a huge focus in Cleveland last couple years.

I’m open to Cleveland if the deal makes sense. There are certain neighborhoods which are pains in the ass to buy in. Any of the “Heights” neighborhoods have a “Point of Sale” clause.

Point of Sale is a punch list of items that have to be repaired before a sale is final. This could be small things like patching in gravel and making sure all outlets are GFCI certified. Either way, the city is really slow to respond and it’s just infuriating to deal with. Particularly when you have a closing as a buyer or seller.

This can affect 1031 timelines and the like.

Expand into Columbus

This is probably what we’re going to do. I’ve talked about what makes Columbus so great in previous editions.

TLDR, huge school (OSU), professional jobs coming in, $2bn plant from Intel, and lots of newer construction. Columbus was the belle of the ball and still remains to be the apple of my eye.

It’s also got a TON of growth coming in. The $2bn Intel factory in New Albany is not to be understated. Think of how many high paying jobs are going to be coming in. They all need daily services, shops to eat and dine at, and activities to do.

Someone needs to provide housing for all the auxiliary workforce that’s about to be coming in the next 2-4 years when the factory is done. I’m happy to be that person.

You can still find deals <$100k/unit. But in nicer cities, that might be closer to $150-170k/unit. Rents for class A apartments can reach $2200 and even higher.

Rents for Class C are hovering around $1200 for 2 bedrooms. So if I can buy an asset for $95k/unit and put another $15k into it, I’m sitting pretty under the 1% rule.

According to Yardi Matrix (Jan 2024), the Columbus rent growth was 4.4%, just barely under NYC and NJ. Also according to Yardi, the average rent-to-income ratio was 27.3%.

I’m glad it remains <30% because then you have to worry if tenants can stomach rent increases. It starts to get iffy as renters approach the 30% housing-income ratio and they might get priced out.

Having strong rent-to-income ratio means tenants can achieve high quality of life and still have enough money for cars, lifestyle, dining out, and saving too.

Conclusion:

So… I’ve outlined a few plans. On the punch list, it seems like investing in Columbus & househacking in SF take the cake. I’m actively looking at Columbus deals.

If you’d like to invest with us and/or shoot the shit, email me and let’s hop on a call.

Thanks,

Mohit