Which Regions are Moving in What Direction?

The latest S&P/Case-Schiller Home Price report was released last week. Case-Schiller measures the residential housing market, tracking changes in the value of the residential real estate market in 20 metropolitan regions across the United States. I was curious to see what regions were starting to reverse trends and move upwards.

Here are the top 20, listed in order of increase/decrease since January 09.

1. Dallas +7.20%
2. San Francisco +6.06%
3. Denver +5.94%
4. Cleveland +4.22%
5. Washington DC +3.84%
6. Boston +3.35%
7. San Diego +3.32%
8. Minneapolis +1.88%
9. Atlanta +1.57%
10. Los Angeles -0.01%
11. Charlotte -0.16%
12. Chicago -0.19%
13. TOP 20 Composite -0.24%
    
14. Portland -2.22%
15. Seattle -3.23%
16. New York -3.46%
17. Tampa -4.03%
18. Miami -6.80%
19. Phoenix -8.03%
20. Detroit -8.34%
21. Las Vegas -18.77%

Since January 09, the top 10 regions on the list above have either stabilized or have started to actually increase according to Case-Schiller. While this isn't the only data to analyze when determining if a market is worthy of investment, it's a good place to start. These top markets are starting to claw their way out of the 2008 hole and trend upwards.

Since it's impossible to correctly pinpoint the exact bottom of any market without hindsight or a good set of tarot cards, a good time to buy is when the market starts it's upswing. I'd say these top 10 markets are worthy of further consideration.

Cleveland No Longer "The Mistake By the Lake"

By now, you've probably heard that you can buy a house in some Midwest cities for $10,000. While inexpensive, does it make for a good investment? We've been working to answer that question for the last few months and my research culminated with a visit to Cleveland last week. My findings? $10K houses cost a lot more than $10k, but they can make great investments....especially in Cleveland.

What Does a $10K House Look Like?
Pretty beat up as you would imagine. While the bones of the place may be sound, the vital organs and skin are badly diseased. These types of investment properties require major renovations to make them livable...and rentable. But while these renovations need to be complete, you don't need to go over-board with granite counter tops and brushed nickel hardware. You need a contractor that can maximize a smart renovation budget to make the house clean and comfortable. Another $15K-$25K in proper renovations are usually needed.

Why Cleveland?
The market I was most interested in exploring was Cleveland. Cleveland is a market that has faced extreme contraction over the last 50 years. As its heavy manufacturing economy became unstable, Cleveland began searching for alternative industries. Over the last 10 years, they have been diversifying their economy with strong development of service industries (most notably insurance and medical), biomedical and fuel cell research. Case Western University is a huge employer and at the center of the next generation of Cleveland's history. Cleveland, via Case Western, is among the top recipients of investment for bio-tech start-ups and research. Case Western Reserve, the Cleveland Clinic (another huge employer), and University Hospitals have recently announced plans to build a large biotechnology research center and incubator on the site of the former Mt. Sinai Medical Center, creating a research campus to stimulate bio-tech start-up companies that can be spun off from research conducted in the city. Unlike many of its mid-west counterparts (see Detroit,) Cleveland is beginning to replace last centuries economy with this centuries technologies. Here is a great article about the future of Cleveland.

Cleveland's Housing Market
Please don't misunderstand, Cleveland has problems. Every city does. But what I like is what's being done about them. This Forbes article describes some of the problems Cleveland is facing, but also some of the solutions. One of the neighborhoods listed in the article, Slavic Village, is an area that I like because of the quality of the existing citizens and the non-blighted properties. The residents are forming clubs, planting gardens, patrolling the streets...taking back their neighborhood. Cleveland is also issuing $50MM in bonds to buy and demolish derelict homes, phase one in their redevelopment plan. I saw 2 in the process of deconstruction while I was there. How are these efforts impacting housing prices? I did an analysis of Case-Shiller's index from Jan 09 - August 09 (the most recent data.) When you look at the largest movement in the numbers among Case's top 20 markets for the year, Cleveland is in 2nd place (+9%), trailing only San Francisco (+9.12%). Average for the top 20 markets is +1.98%. Worst market? Las Vegas is down -14.45% for the year. From what I've seen, this market is moving in the right direction and will continue to attract a range of investment dollars.

A Trusted Partner
To squeeze the most out of your real estate investment, you need quality property management. Besides enforcing timely rent collection and tenant selection, you need someone doing periodic checks on the property and taking care of small problems before they become big issues. In Cleveland Property Management Group (CPMG), I found a tenured, trusted company to help manage any property put into their service. Here's what I like about CPMG:

• One Stop Shop: With their sister company Cleveland Restoration Group (CRG) these guys are involved in the deal from acquisition, to renovation, to management through liquidation. Besides having one contact through the whole process, CRG/CPMG also "touch" the deal...or make money...all along the way. That allows them to keep specific fees low and reasonable.
• Positive Reputation: CPMG is primarily a property management company. The properties they manage are newly renovated, so tenants like renting from them. So when vacancies arise, they have the ability to fill a property very quickly.
• In for a penny, in for a pound: Once they find a specific street in a specific neighborhood that they like, they buy up as much as they can in that area. We were on a street in the Slavic Village looking at a property that is for sale and there were 3 other properties on the street that were their deals. That type of involvement is good for them, the investors, the tenants and the neighborhood. I love win-win situations.
  
• They Invest Their Money: If they find a deal they like, but don't have an investor lined up, they purchase it themselves. Trust me, if they're risking their own capital, you can bet it's a pretty strong deal.
• Quality Construction: CRG is responsible for the renovations and they do it wisely. They focus on major systems: electrical, plumbing, heating/cooling, roofs and windows. These properties will not be selected for Better Homes and Gardens. But they are solid rental properties that shouldn't require major renovations in the next 3-5 years.
  

Buying in Bulk
Everyone knows that you can get better deals by buying in bulk. Real estate is no exception, but certainly requires more capital. Since Freedom Growth has a few investors lined up, I was able to negotiate concessions that can affect the overall return on the investment. So even if an investor could only buy one property, they can get it at a bulk rate by placing it through us.

Getting Started
All of these properties are priced in the mid $40k range AND come with a tenant and lease already in place. Rents are in the $650 - $700 price range, so the return on the investment from the monthly cash flow is strong. Any appreciation you earn on the deal is gravy. These properties work equally well either inside or outside an IRA, so if you've gotten this far and are interested in seeing specifics on an actual deal, please let me know.