Guys, is the time right to buy a rental property in the Midwest?

55 Replies

Friends, I've been wanting to buy a rental investment in any of the following states: IL, IN, GA, MI but im getting cold feet. Everyone is telling me to wait for a correction.  Your thoughts please

What's your investment criteria? and your return goal? for me is cash flowing $400 per month. if a property can meet that, I'll pull the trigger to purchase. For long term hold

I bet the names of those people you refer to as "everyone" are all the same..."Chicken Little".  I have found in life, that when you refer to this person(s) named "everyone" as your expert, you end up doing the wrong thing.  "Everyone" doesn't know anything, so why do so many say "everyone knows",...usually when they don't want to do something?

Find a different group of advisors...not named "everyone".

The answer to your  question isn't "yes" or "no".  It rarely ever is.  The answer is, it depends on the specific market you want to invest in.

...and what is this "correction" no speak of?  What is the wrong that needs correcting?

@Joe Villeneuve Thank you for your answer Joe, I do feel that my question is quite broad.  There are several forecasts referring to a recession and maybe a drop in prices in real estate.  We are already witnessing a slowdown in sales of real estate that might lead later on a price drop.  Some of my investor friends advice me to wait a year until the prices drop. 

Originally posted by @Hani Alomar :

@Joe Villeneuve Thank you for your answer Joe, I do feel that my question is quite broad.  There are several forecasts referring to a recession and maybe a drop in prices in real estate.  We are already witnessing a slowdown in sales of real estate that might lead later on a price drop.  Some of my investor friends advice me to wait a year until the prices drop. 

Find new investor friends. If the success of your REI depends on the economic situation, then you didn't buy well in the first place. Besides that, how many years now have the self proclaimed "experts" been saying "the sky is falling...tomorrow"? Eventually they will be right. I guess if you can make it into the Baseball Hall of Fame while failing 70% of the time, these experts only need to be right 3 times every 10 years. Trouble is, their current record is more like being right 1 out of every 15 years, so none of them would make the HOF.

So until the sky falls...just buy right in the first place...and then keep buying right some more.

@Hani Alomar  

Yes, think of it this way. Since the inception of what we now know as economies, there have been recessions, the Great Depression and the Great Recession. 

During these market downturns, some people won and some people lost everything. But at the end of the day, some of those who lost came back stronger than ever: there are a ton of podcast stories about these people. When there is life there is hope. 

Now, if you are thinking about an impending recession, you will be paralyzed and yoru brain will be hijacked by that thought and probably want to stash your cash under the mattress. 

To conclude, go a buy a property and buy it right 🤗🤗🤗

@Hani Alomar

Don’t wait... go look, run the numbers, if you buy right then you can semi recession proof your purchase.

I’m finding plenty of property that beats that criterion in southern IL and the rents are low. If I can make it work on the low rent already in place I can def make it work on increased rent numbers.

It was mentioned at the BPCON this year that people typically go broke (if they do) because of their financing. Get your financing right and you’ll more than likely be just fine.

But don’t wait... jump in.

Originally posted by @Hani Alomar :

Friends, I've been wanting to buy a rental investment in any of the following states: IL, IN, GA, MI but im getting cold feet. Everyone is telling me to wait for a correction.  Your thoughts please

I don't think Georgia is in the Midwest. 

As for your question, if you are investing out of state, I don't think that now is any better or worse time to invest in the Midwest.

@Hani Alomar ,

Midwest, aka, low-tier property? If that's the case, a "correction" isn't going to have the biggest impact on the volume of dollars you spend (i.e., a trash pit in Michican is still going to be a trash pit after the correction). Of course, it depends on the local market.

I'd refocus on more important issues such as identifying the market you want to invest in. If you're going for the classic California investor strategy of purchase 10 properties worth $40k a piece, your issue is going to be tenants and property management.

For reference to my earlier comment on volume of dollars - what happens when a market correction reduces the $40k property value in half? The impact is a $20k unrealized loss, whereas in your California market, that may be $200k with all your eggs in one basket.

@Hani Alomar  

That's a pretty loaded question. There are strategies for every market phase that allow someone to invest and succeed in any market. 

The reason a lot of people are investing in the midwest now is cheaper property, and higher cash flow than they can find in major markets that have appreciated heavily- like CA. Another reason is lower volatility- select midwestern markets don't appreciate or depreciate as much as the aforementioned major hubs. This means that, compared to more volatile markets, if you buy them at the bottom you won't get a lot of appreciation, and if you buy them at the top you won't get a lot of depreciation. 

The depreciation buffer doesn't matter so much though, because your goal is to hold this for it's cash flow and not sell it at the bottom. I would add that in working class midwestern neighborhoods, rental demand doesn't generally change a ton during recessions because of the blue collar nature of the subsection of the economy that you're investing in. SO, you should cash flow pretty similarly as you would today if you were to endure a recession with this property in your portfolio. If you were to sell it, you would ideally sell it during a favorable economy, and you wouldn't necessarily expect a profit from the sale. Your focus would be rental income. 

That last statement is really important. You're not going to cash flow in expensive markets, and you're probably not going to see significant appreciation until the next market peak... so no point in buying in those expensive markets until we're in a bit of a trough. However, that doesn't mean ANY midwestern market is a winner. 

If you're going to invest in the midwest, the rental income has to be substantial enough to account for the fact that you're not expecting much long term appreciation. Remember, you're buying high regardless of the market. Don't go invest in some major midwestern city that's been flooded with CA investors for the last 5 years. You're NOT going to get a winning cash flow deal this way. If someone tries to promise you appreciation in one of these sexier midwestern cities in order to compensate for lower cash flow... remember that appreciation is not a part of your strategy right now. 

***I generally recommend seeking out C+/B- rental properties with a 10% cap rate, or a 20%+ cash on cash return with financing*** You will probably find this in secondary markets. Not all secondary markets are good though- look for markets that have sale prices of a smaller city and rents comparable to big cities nearby. Seek out high rental demand, low taxes, low city water/sewer bills (you could end up paying this if you buy small MFR) and landlord friendly laws.

These markets are hard to find. They're hard to find because fewer investors are on BP talking about them, which in itself is part of the reason they still offer some of the returns that they do. 

Don't be fooled by the popular, big, OOS investor midwestern cities that everyone here started talking about in 2013 as soon as CA prices took off again. Our peers have been mining those markets hard for 6 years. Google "blue ocean theory".

I hope this long and drawn out post helps you and everyone else on this thread!

Originally posted by @James Galla :

@Hani Alomar,

Midwest, aka, low-tier property? If that's the case, a "correction" isn't going to have the biggest impact on the volume of dollars you spend (i.e., a trash pit in Michican is still going to be a trash pit after the correction). Of course, it depends on the local market.

I'd refocus on more important issues such as identifying the market you want to invest in. If you're going for the classic California investor strategy of purchase 10 properties worth $40k a piece, your issue is going to be tenants and property management.

For reference to my earlier comment on volume of dollars - what happens when a market correction reduces the $40k property value in half? The impact is a $20k unrealized loss, whereas in your California market, that may be $200k with all your eggs in one basket.

 Correct.  A trash pit, in Michigan or in Ohio, is still a trash pit...and probably cash flows if you buy it right.

@Hani Alomar when people give you advice, always ask for their supporting facts behind their statement. My guess is they will say, "we are due for a correction" or "the market can't go up forever" or they will reference the yield curve or tell you "the election is coming so wait". None of this is factual or substantial reasoning. It is people trying to sound smart. The real answer is nobody knows.

It is like playing roulette at the casino and betting on red or black. Odds are equal it could be red or black. But in reality it could hit black for ten straight spins, even though it may be "due" to hit red, it doesn't. Someone could track the last 100 spins and argue statistically it should be red or black. The problem is the roulette wheel doesn't care what the last 100 spins were. Every spin is new and the odds are the same each time. 

The economy is much like roulette. It is not a set pattern. Eight good years do not guarantee a bad year. My advice is don't gamble on the economy. Look at the fundamentals of the specific property and local market. 

Consider factors such as crime, schools, employers, type of industries, housing supply, population trends, government regulations and cost of living.

Lumping the entire midwest together as one market is a mistake (and Georgia is in the south). In the midwest there is a variety of different local economies and housing markets. Even when there is a recession, some cities are winners and some are losers.

Look for well performing properties in a good location. Do that in a good or bad economy and you will be fine. Invest early and often.

@Parker Eberhard Yeah for sure. I'm sure it's also hard for someone that's never done it to pull the trigger when everything is crashing down around them. Idk though man... I wasn't really old enough to be working and investing during the lead up and imediate aftermath of the last one so take my opinion for what it is, some random guy on the internet that might know what he is talking about but probably has no idea lol.

Originally posted by @Hani Alomar :

Friends, I've been wanting to buy a rental investment in any of the following states: IL, IN, GA, MI but im getting cold feet. Everyone is telling me to wait for a correction.  Your thoughts please

 A correction in the stock market does not equal a correction in the real estate market. You could wait around all day for the "coming correction" and it may never come. People have been calling for a real estate bust for 3 years now, and we have not seen it. I am not saying it is impossible, I am just saying that waiting may not work in your favor. 

You could look into a market where prices are not that crazy yet. Mid-markets in the Midwest is a solid bet. 

@Parker Eberhard You can hold your money, I always get killer deals my man. My thing is time. I'm a DIY rehabber and property manager. I have strong cash flowing c class rentals but I work for them after the purchase to get them ready to run with no issues. I'll be finishing up a massive renovation project soon and I really think I'm going to figure out a way to hire out a little more work before I tackle another monster rehab. As far as deals go... I can find deals all day for what I'm doing. Just no time to get them all up and running.

@Hani Alomar When I started buying 2 years ago all of my coworkers at JPMorgan told me that I was dumb and should wait for a correction. Now I own 4 properties (14 units) and the 3 stabilized properties. I will have significant cash flow for the rest of my life. Columbus is also one of the fastest appreciating midwest markets out there so I will be able to refinance soon.

I also got laid off 6 months ago and have had no worries. I am extremely frugal and the midwest is a cheap place to live.