Does Midwest lower appreciation = lower downside?

Question

Hi, Everyone. I'm a Missouri boy now living in the national parks/desert area of Southern Utah.

I would love any input from any Midwestern, cashflow, multifamily investors with some insight for me.

I'm researching my second buy and hold in Missouri, fifth overall, this time multi-family. I know a large percentage of BP-ers are "wealth is from appreciation" and "value added" types, but this one will be turnkey, cash flow kind of deal -- already rehabbed and stabilized in a B-, well-cared-for-but-not-sexy area that has not appreciated much in years either in valuation (beyond value added) or in rent increases.

Of course, number one is, Do the numbers work for me (showing potential so far if banks come through), and Is it what I want? (that's where the research comes in, and comparing it to more local options).

However, as I think of other benefits, I see a couple that I wanted to run by those with experience in this realm.

1) Am I right or delusional in thinking that the properties that have not participated in rocket-like appreciation will not suffer to the same degree if there is another downturn if the cash-creating spigot ever turns off?

(of course, just as likely as a downturn is that we may never see numbers as low again)

2) Am I able to count on more stable insurance and tax numbers in this more reserved environment?

3) Any other wisdom you can share with me?

Thanks.

JJ

PS

Thanks to those who weighed in previously with recommendations for area financers. I'll get back with a report of all I've learned there when the time is right.

Spencer Gray · Answer

Booms are followed by busts. In markets that are steadily growing but not "booming" they don't get hit nearly as hard when the bust does occur. That being said not all Midwest markets are created equal.

JJ Jackson · Answer

@Evan Polaski @Mike Dymski  @Spencer Gray  @Alex Olson @Rick Martin @Bryan Mitchell

I am very grateful to each of you for the insight shared. I have plenty of numbers to crunch and plenty to think about. In each of your cases, in the different directions of your thoughts, they all ultimately came back to the reminder that it's ALWAYS about the fundamentals.

Bryan, do you have a favorite data source you can point me to for the info you cited? I'm finding the info locally but not diced comparatively across regions or over extended periods of time.

JJ

Mike Dymski · Answer

If your rent to price ratio is south of around 1.4%, long-term profits could be lean.

Most B- locations have appreciated over the past ten years; so, you may want to evaluate your classification.

Rick Martin · Answer

A stable, cash flowing market can equate to a lower downside, not necessarily lower appreciation. Of course there are plenty of other factors - lower leverage, market metrics.

John Casmon · Answer

Great insights in the thread. Cash flow is less risky than hoping for appreciation. That doesn’t necessarily mean good cash flowing properties will see less appreciation. We still like desirable neighborhoods with strong fundamentals that will increase demand. The fact that they also provide good cashflow makes these ideal for us and our strategy.

Evan Polaski · Answer

@JJ Jackson, current cash flow is always lower risk than banking on appreciation.  But being in riskier areas (B- vs B+ or A) means lower quality tenants, potentially more turn over, higher turn costs.

If you get into older properties, your cash flow is going to be eaten up very quickly with Capex items, and so when you take out as much appreciation to counter the Capex costs, you could be behind.  Then again, more affordable areas with amenities are in demand relative to the coastal cities, since the pandemic.

Last bit, is if you are cash flowing and plan to hold, does it really matter if you are seeing great appreciation or not?  You are living off your cash flow, so having a paper gain doesn't matter as much.

Alex Olson · Answer

I look at what your capitol, equity, or cash can produce for you on a regular basis in a market like KC. Still affordable but appreciating well. It has an economy that is very diversified and the rent to income ratio is currently some of the lowest.

Bryan Mitchell · Answer

@JJ Jackson, I watched several markets very closely from 2011-now. Your most desirable areas sprung back quickly while others nose dived and stayed down 5+ years longer. A good example is more affluent cities in North Atlanta versus lower economic areas in south Atlanta. Both areas affected by the downturn, but those neighborhoods in South Atlanta struggled a lot longer. Do a comparative analysis looking at depreciation of those assets versus the time it took to recover. The data is out.

Aaron W. · Answer

@JJ Jackson  Congrats on your current portfolio!

Buying for cash flow can mitigate some of the downside risk during a market crash as you are reliant on tenants and cash flow than on betting/expecting the market to appreciate. This does not mean there is no risk. Take the current pandemic where millions of tenants are not paying or unable to pay rent. This affects the cash flow investors.

In general you just have to buy right, have a reserve, and stay focused on your why in investing and the goals to get you there.

Good luck!

Does Midwest lower appreciation = lower downside?

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