219: Real Estate Investing in Cleveland

SHOW NOTES FOR EPISODE 219: REAL ESTATE INVESTING IN CLEVELAND

Cleveland, Ohio is rated the number one city in the US for rental returns.  Today’s guest, James Wise, who was born and raised in Cleveland and has been investing there since 2008, is also the number one seller of investment homes in the city.  In this informative episode, James shares insider tips on where and where not to buy in Cleveland and the ups and downs of landlording.

What You Will Learn

• What are the good and bad places to invest in Cleveland
• What is the hottest market in Cleveland
• Why investors usually lose with traditional turn-key investing
• 3 step process to identify why your property isn’t renting
• Pros and cons of Section 8
• What it means to “get rich slow”
• The risks of buying cheap properties
• What you need to do when you need more money for capital
• How to deal with “tenants from hell”

About Our Guest

James Wise

James Wise is the #1 seller of investment properties in the Cleveland, Ohio area, co-founder of Holton-Wise, which oversees a rental portfolio valued over $50M dollars.  His specialties are the selling and underwriting of Commercial and Residential Investment Property.  James provides free educational content to all who are interested in the areas of Real Estate Investing, Sales, Property Management, Tenants from Hell and even Personal Finance.  His educational content can be found on The Holton-Wise YouTube Channel.

More About James

• James Wise was born and raised in Cleveland, Ohio.
• He still currently resides in Cleveland, Ohio.
• He is the #1 seller of investment properties in Cleveland, OH area.
• Co-Founder of The Holton-Wise Property Group, which oversees rental portfolio valued over $50 million.
• His specialties are the selling and underwriting of residential and commercial investment property.
• James also provides free educational content to all interested in the areas of real estate investing, sales, property management, and personal finance.
• His educational content can be found in Holton-Wise YouTube channel.

How James Got Involved in Real Estate

• The large real estate crash in 2008 led James into real estate investing.
• As a young buck (21 years old), managing a Radio Shack, during 2008 – 2009, he purchased his very first real estate residential property in Ohio worth $85,000, using an FHA loan and for only 3% down.
• It was his mother who brought to his attention that houses in Cleveland were so cheap and urged him to buy a house rather than spend money renting.
• Houses in Cleveland, at the time, were so way cheaper than anywhere else in the nation.
• As a manager in radio shack, he was only earning a gross annual of $30,000. At the same time, he do not have enough money in the bank. So he used an FHA loan, with 3 ½% down payment.
• At that time, President Obama’s administration offered an $8,000 credit to buy a house and, at the same time, Parma, a suburb of Cleveland offered a credit as well.
• Effectively, James was paid $16,000 to buy his very first house.
• He built an in-law suite in the basement and rented it out to his first tenant, who was his brother-in-law.
• His wife likes the lifestyle that real estate gave them, except the idea of having a tenant close to them.
• James was caught by the real estate bug and continues to buy (but no longer have any tenants that lives with them).
• He kept working odd jobs, after couple of years later, he saved up to purchase a duplex – paid all cash.
• He hired a contractor he knew (John Holton) to do a little bit of renovation, which he previously did by himself but could do no more.
• He hired his contractor friend back when he was working in a gas station.  John Holton already had his own rental property as well.
• James was a real Estate Licensed sales agent and John was a contractor. Together, they started buying properties, fixing them up, and renting them out until they ran out of money.
• During that time, they built up a decent portfolio, but they needed more capital.
• He put together a website, start to do marketing, and wanted to reach out to investors in California and other states so they could buy, rehab for them.  But nobody give them any money.
• This opened up an opportunity. This was when Holton-Wise was conceived.
• People didn’t want to give any money but they wanted to own the property because they saw the opportunities.
• The crash is over but Cleveland is still one of the lowest priced housing markets in the US.
• Holton-Wise was created as a full turn-key solution for investors.  They will sell the property, do the renovation, and do the property management.
• Today, James run a $50 million portfolio and continue to help investors from all over the world.
• The crash is over but Cleveland remains cheaper than anywhere else in the world.

Cleveland – # 1 in America for rental property investment

• Cleveland is one of the cheapest markets.  You can buy houses in Cleveland for $5k – $15k , but it is not recommended
• Holton -Wise does B & C class properties, which are more expensive, where you will spend $75K – $80k, but you can rent them out for $1,200 – $1,300 a month, which means amazing return
• “The Ultimate Guide to Grading Cleveland Neighborhoods” is a list of every suburb in the greater Cleveland, created by James, wherein he grades the nighborhoods on a scale of “A”  to “F”.
• James advises people to overlook those class “A” areas because most of the houses here are primarily owner-occupant. Houses are too expensive to profit as a landlord.
• James advises to look at the “B” & “C” areas where you can clean up real good.
• The hottest area he is seeing right now is a little suburb called “Euclid” – you are looking at $60k – $75k which you can rent out for $ 1,000 – $1,200 per month.  Prospective tenants from the 3,000 jobs that will be infused by Amazon, which is currently building a gigantic facility.
• Inventory of larger multifamily is very limited and demand is a high, but there’s ton of single family and duplexes.
• Rental rates for multifamily ranges from $650 – $750 per month, while single family ranges from $1,000 +

Holton-Wise’s Approach to Turn-Key Investing

• In the beginning, Holton-Wise was just trying to get people to loan them money, but that is not what the market wanted.
• The market’s wanted boots on the ground, investors wanted to get into the Cleveland market.  That’s why they set up Holton-Wise the way they did, to be the eyes and ears of the investors.
• Holton-Wise’s Turn-Key does it differently from the traditional turn-key route
• The traditional turn-key:
  • Markets to sellers in distressed situations.
  • Purchases the home.
  • Renovates the home.
  • Place a tenant in the home.
  • Sells the home to investor.
  • Handles the property management.
• The Holton-Wise turn-key way:
  • They are real estate brokers.
  • They are the #1 seller of investment properties in the market.
  • They market to the sellers and spend $25,000 a month on marketing.
  • Instead of buying that property, renovating that property, and selling it at a premium, they make money in volume.
  • He markets to the sellers and doesn’t buy it.  Instead, he lists the property fopr his sellers.  Seller signs a “listing agreement.”
  • He says to the seller, “This is the value of the property in its current condition.”  He films a complete video tour and shows the investor exactly what they have.
  • He shows them exactly what you need to pay Holton-Wise to fix and then he sells the property to the seller.
  • He is not making a large premium because he’s acting as a broker.
  • In the traditional turn-key relationship, someone has to lose and it’s usually the buyer.  When the turn-key company buys and renovates (or basically flips) the property, it’s not worth it unless they’re making a minimum of $20K.
  • They skip the process where there is $20,000 coming out for the middle man, which would mean less on the bone for the end investor.
  • Instead, they do 5 of those deals, without having to put in their own money, and make $5K on each home in the same amount of time.
  • Because he has a full-service construction operation within his company, this is cost effective.
  • In this turn-key investing the Holton-Wise way, everybody wins.
  • The seller gets to sell his property for the most money possible.
  • James make money at $5,000 for each house he sells and does 5 deals to 1 deal.
  • The end investor makes money because they do not have to put a bill for $20,000 turn-key provider profit.
  • The investor is not stuck buying only the homes he has renovated.  He has access to the entire market.
  • They offer a list of single family or multifamily properties to the investors and the investor gets to select a house they like and see the renovation that they want.

Typical Deal

• The average bill-out to get a property rented depends on what type of phone call you’ll get, because every deal is different. Holton-Wise presents to investors what they have (what is available) and what you can do and how they assess the situation.
• The average cost of a home is $75k – $80k and that includes rehab and construction.
• If the property has existing tenants in it, it might not need rehab cost.

Landlording and Making Good Investment Decisions

• What investors should know about being a a good landlord:
  • It is not for everybody.  You can check out  his “Tenants from Hell” YouTube videos.
  • You are dealing with distressed property and, as an investor, you need to see how to add value on your property.  You need to know how to get the seller out of that situation by handling his problem.
  • Get the property appraised, not just comps.  Holton-Wise is selling its list everything at market value.
  • There is always a risk. A property is cheaper, because it is cheaper for a reason and you need to ask why it is cheaper.
  • Don’t buy a turn-key property for cash.  If a turn-key company says you have to do that, it’s a BIG RED FLAG! It usually means you are paying way over market value.
  • It is advisable to get a bank loan. With a bank loan, the bank loans makes sure you are not paying over what a property is worth.
  • Get a third party inspection to go through the property very well so you know exactly what you are getting.

Property Management

• For James, property management is not an easy business. It is a savage, tough, difficult business.
• As a property manager, you are going to upset someone – either the tenant or the investor.
• Property Management deals with both the investor and the tenants, both of which have completely opposite goals.  Investors want to get as much money out of that property as possible.  Tenants want to pay as little as possible.  The property management is in the middle of these two groups but usually sides with the investor.
• He seeks to fill a vacancy in 30 days.  If they have no prospects, 2 weeks in, they know they need to make an adjustment.  They can do one of three things:
  • Lower the price.
  • Make an improvement to the property (i.e. add appliances, etc.).
  • Let it ride for 2 more weeks and re-evaluate.Do the same evaluation every 2 weeks.
• Other reasons it’s not renting:
  • The turn-key provider that sold you the property could have told you that the running value is $1,200 but the real market value is only $800
  • Problem with property manager
• Holton-Wise is a one-stop shop and does it’s own in-house property management and will not kick an investor to another property management business.

Section 8

• Holton-Wise has a decent amount of Section 8 rentals.  And this comes with pros and cons.
• Section 8 allows you to buy properties in a risky neighborhood and get a much more stable income because it is government guaranteed.
• Section 8 rents ($1,100) are a little bit higher than market rents ($800).
• But the challenge is the process to get a tenant to move-in.  Today it is tedious, as oppose to regular cash paying tenants.

Biggest Mistakes

• Occurred at the very beginning, when he got attracted to the lowest possible value properties.
• He paid for it with his own money and own heartache.
• They went into a property that cost $15,000, in a pretty sketchy area, and tenant is paying an x amount of money.
• He thought that with $15,000, it couldn’t be that bad, and he was proven wrong.
• The area is usually really bad (prostitution, drugs, criminals) that you cannot imagine how to manage it.
• Spreadsheets don’t calculate this kind of situation because real estate is dealing with people.
• Currently, James still has some of properties in his portfolio.  He was able to liquidate most of the properties but he still has a few and he is still making good money.
• To invest in low income areas, you need to get ready for a war.  Holton-Wise will still present this to investors.  If investor is still willing to get in, Holton-Wise will do business with you, but the investor is warned.

Biggest Success

• For James, real estate investing is a “get-rich slow” game.  You need a massive/huge portfolio.  You cannot change your life by just buying one building.
• James prides himself on his grind – that’s what has made him successful.  You build in your income into your approach.  Never given up.  Every step you take forward, it feels like you’re going to get hit with couple of steps backwards.
• So you have to keep going, keep grinding, keep investing, but over the long term, all those little blips on the road will not mean anything because this business is lucrative and a great business overall.
• That’s why more millionaires are made in real estate investing than in any other industry in the world.

Advice to Audience

• If you are age 50+, go to higher quality investments that are steady and stable.
• 50 plusers should not chase 17% cash-on-cash returns because that comes with increased risk.  Lower returns are slow and steady.  You may get a 7% return but you will get that same return year-after-year.
• With a more high-risk property, you may 17% the 1^st year, 18% the next year, but the succeeding year you lose 14%, and the next year 6%.  This doesn’t work if you have to live off of that income.
• If you are age 25, you have 40-50 years before you are ready to retire.
• You have time to make up for a lot of miss-steps or rough stuffs. You can recoup money lost for a short-term in a good long-term game.
• You need to chase those lower returns because they are slow and steady, e.g. you can get as low as 7% return but you will get it every single year as oppose to a more risky property.
• When you go into a new market, you need to be at the upper echelon properties of that market.
• When you get towards the end of your investing career, and you are getting ready to retire, and you need to live off of that money, buy something that is steady and stable.

Where He Sees His Business in the Future

• Continue to grow, expand and help investors from all around the world.
• Continue to teach, spread the word in his YouTube channel and Instagram.
• Teach investors what this business is really like, as opposed to what everybody else out there sells — a beautiful bow, wrapped in a fancy little package which bothers him.

Rap-It-Up

• Favorite Real Estate book:  The Millionaire Real Estate Agent by Gary Keller
• Favorite business book: Multiple Streams of Income by Robert G. Allen
• Most valuable web site for success (other than your own):  DotLoop
• Favorite app:  Instagram
• Favorite quote(s):
  • “Real estate investors need to understand that spreadsheets don’t rent properties, tenants do.  And tenants don’t care about your spreadsheets.”
  • “Landlords are the only victims of theft who are regularly vilified by society when they are stolen from”.
• If you had to start all over, knowing what you know, and you only had $1,000 cash, what would you do to launch your real estate investing business?  Start the exact same way when started in the first place – he would house hack.  Because you need to live somewhere.  Have your tenant pay your own mortgage instead of paying somebody else’s mortgage.  Continue to save and build the thing back up.

How to Reach James

• jameswisehwpg (Instagram)
• Holton Wise Property Group YouTube
• #AskJamesWise
• Holton Wise Website

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