- THE MIDWEST OFFERS A LOWER PRICE PER SQUARE FOOT THAN COASTAL STATES IN THE U.S.
- HOMES FOR SALE IN TOLEDO ARE 105% CHEAPER THAN THE AVERAGE U.S. HOME FOR SALE
- WORKING WITH AN AGENT WILL LESSEN INVESTMENT RISKS IN THE MIDWEST
- CHECK OUT MORE INFORMATION AT LINDSEY MAHONEY’S PODCAST AT THE BOTTOM OF THE ARTICLE
The Midwest is making a comeback and attracting investors from both coasts and big cities. These days, TV networks like HGTV remain more popular than ever and podcasts like Bigger Pockets are gaining new fans every day. It’s no surprise that more Americans are turning to real estate investing to diversify their investment portfolios. This strategy is growing more steadily with the millennial population, who have become more wary of investing in the stock market after witnessing the 2008 recession.
In 2007, RealWealth Network found that around two-thirds of investors were primarily focused on the stock market. That number has fallen to 50% with many millennials choosing to invest in real estate instead.
The increased attention around real estate investing and the current housing market has made it more challenging to find a good deal. With homes continuing to appreciate and the continued downward pressure on interest rates, the housing market has become super competitive in most major markets. With the US experiencing one of the longest periods of growth with the housing market, many are bracing for a recession.
As a real estate agent and investor myself, I understand the appeal of investing in the Midwest because I am one of the millennials who left a booming city (Denver) to begin building my wealth through real estate in a smaller city. If you are looking to get started in real estate investing, smaller cities offer many benefits.
The barrier to entry is much lower than large metro areas and in most markets like Toledo, the rental market is strong. In areas closer to the coast, the price per square foot of a home can easily be $200+/SF, while cities like Toledo are often less than $100/SF. In layman’s terms, a single home on the west coast could easily cost you $500,000 while that same home in the Midwest could cost you $100,000 or less.
This year, NAR stated that the median home price in Toledo was $134,400 while the median home price for the US was at $276,800.
Big businesses are also seeing the benefits Toledo has to offer, including the centralized location and convenience to major US highways. Amazon officially announced that its new fulfillment center will be located in Rossford, Ohio creating up to 3,000 new jobs. The new distribution center is set to open in August 2020. This big announcement along with the major revitalization efforts by Promedica has a lot of locals in Toledo excited about the future of our city.
The Midwest not only makes it easier to jump into the real estate investing space with the low price point, but the return on investment is strong when investors buy right. The most common metric investors use to evaluate a deal is the cap rate (capitalization rate). The cap rate is used to measure and compare the rate of return on an investment property. The cap rate ratio can be found by taking the net operating income and dividing it by the price of the home.
Depending on the type of investment property, investors tend to look for investments with a 10-20% cap rate. Investors will often accept a lower cap rate (less than 10%) for properties like mobile home parks, which are scarce and have big potential cashflow opportunities. Investors interested in single family and multi-family homes usually want a cap rate between 15-20% but may go as low as 10-12%. Anything lower than 10% is usually passed on since you can get a very similar return by investing in the stock market with a lot less work.
Investors on the coasts are betting that homes in high appreciating areas are close to their peak and are cashing out to invest in the Midwest. While the Midwest has not seen the rapid appreciation of properties like the big cities, they often offer higher ROI and cashflow opportunities. I have worked with out of state investors who were able to sell a single income property on the coast for $500,000 and invest that same amount in Toledo to create a portfolio of 10+ income properties with a higher cap rate.
Risks of Investing in the Midwest
While investing in the Midwest housing market is appealing, it does come with some risk. It is extremely important to work with someone who understands that market and the locations where you want to buy. Working with an experienced real estate agent will prevent you from buying a money pit or worse– a worthless piece of property.
I once worked with an out of town investor who wanted to sell a few plots of land that was purchased through an online auction. We quickly learned that these lots were essentially worthless. The locations of each plot were in areas with extremely low property values. We also found errors on the deed that could not be rectified due to the manner in which the property was purchased. Because of these issues, the investor could not even give the properties away for free. They had to continue to pay the property taxes on useless land to ensure their credit remained intact and continue borrowing money for future investment opportunities. If this same investor worked with an expert in the area, they would have warned him about the location of the plots and the non-existent return on investment.
Planning Your Investment Strategy
If investing in the Midwest is something that interests you, I would recommend you first come up with your desired investment strategy and then find a real estate professional to work with in your desired market. There are many investment strategies to choose from depending on your end goal and it is important to get clarity on this first. Once your strategy is determined, this will narrow down the type of real estate expert that will help you achieve your goals.
Here are a few questions you will want to ask yourself when figuring out your investment strategy:
- Do I want to focus on single family and/or multifamily units?
- Do I want to buy them one by one or purchase a large portfolio?
- Do I want to focus on larger properties like apartment complexes and mobile home parks?
- Do I want turnkey properties or distressed properties where I can add value?
- What is my desired return on investment and how will I be securing funds?
Not all real estate professionals are created equal and not all agents know what makes a good investment property. Make sure to find someone who is well versed in this area or even better, is a real estate investor themselves. They will be able to provide insight and recommendations on market rent, property management companies and other important details to make your investments as successful as possible.
Still intrigued by in investing in the Midwest? Start planning your strategy today and add real estate investing to your 2020 New Year’s resolution list! For more information about investing in the midwest, the risks, and strategies to consider, listen to my podcast “From the Nest” below!