Investment Memorandum
I · Executive summary
1847 E 86th Street is a three-bedroom single-family asset in Cleveland's Hough submarket, offered at $82,000 — 12% below the trailing 90-day comp set. The investment case rests on a structural rent arbitrage: HUD's Fair Market Rent for a 3-bedroom in ZIP 44106 stands at $1,428/mo against a private-market estimate of $1,150/mo, a $278 monthly premium underwritten by the federal government rather than the local tenant pool.
At the guaranteed voucher rent, the asset produces an 11.2% cap rate and a 14.8% cash-on-cash return with conservative expense loads (2% vacancy on Section 8 tenancy, 8% management, 8% maintenance, 5% capex reserve). Debt service coverage of 1.61x leaves substantial headroom against rate or expense shocks.
II · Market context
ZIP 44106 sits between University Circle and the Cleveland Clinic's $1.3bn expansion corridor. Institutional buyers absorbed 9% of SFR stock here in the last 24 months, compressing entry yields citywide while HUD payment standards for Cuyahoga County rose 11% in the 2026 FMR cycle. Voucher waiting lists remain multi-year, keeping effective vacancy on compliant stock near zero.
III · The spread, visualized
Spread: +$278/mo — underwritten by HUD, not the tenant pool
IV · Underwriting summary
| Purchase price | $82,000 |
| Rehab budget | $6,500 |
| HUD FMR (3BR, 44106) | $1,428 / mo |
| Market rent estimate | $1,150 / mo |
| FMR spread | +$278 / mo |
| NOI (yr 1) | $9,184 |
| Cap rate | 11.2% |
| Cash-on-cash | 14.8% |
| DSCR | 1.61x |
V · Year-one cash flow
| Gross scheduled rent (FMR) | $17,136 |
| Vacancy (2%, Section 8) | −$343 |
| Management (8%) | −$1,371 |
| Maintenance (8%) | −$1,371 |
| Taxes & insurance | −$4,010 |
| Capex reserve (5%) | −$857 |
| Net operating income | $9,184 |
| Debt service (75% LTV, 7.1%, 30y) | −$5,702 |
| Pre-tax cash flow | $3,482 |
VI · Five-year cash accumulation
Cumulative pre-tax cash flow on a 25% down basis, before appreciation and principal paydown.
VII · Risks & mitigants
1922 vintage implies latent capex — knob-and-tube wiring and a 60-amp panel are common on this block.
Mitigant — Rehab budget carries a $2,000 electrical allowance; inspection contingency priced into offer.
HUD payment standards reset annually; a spread this wide can compress.
Mitigant — Even at market rent ($1,150), the deal holds a 8.4% cap rate and 1.29x DSCR — the arbitrage is upside, not the floor.
Hough remains a C-class block with elevated turnover cost when tenancy breaks.
Mitigant — Voucher tenancy averages 7+ years nationally; unit is pre-inspection compliant after rehab scope.
VIII · Score composition
This memo was the free sample
6 more deals scored 80+ hit the pipeline this week. One is a 91.
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