Texas vs Midwest for buy and hold investing

26 Replies

Hey BP,

I'm in my 20's and have 200k to invest. I want to make the investment that will give the best returns over my lifetime, so 50+ years. 

I already own a house in Cleveland, OH which cashflows well at close to 2%. I am considering going and buying a ton of more properties in Cleveland, but I am concerned about it in the long term, as it is losing population and home prices are more or less stagnant.

Enter Texas. There is a lot of growth happening in the 4 big cities, and they appear to have a much more solid future than Cleveland at the moment. The downside is that the cashflow is much lower than Cleveland, and most of my gains would be locked into equity which is harder to access.

You're probably wondering why I put "midwest" in my title, and so far have only mentioned Cleveland. I will mention a few others. Chicago appears to have some potential, as it is such a large city with much cheaper houses relative to NY/LA, etc. Indiana(polis) in theory has some good deals, but it has been super competitive and I haven't been able to land any, and Cleveland has better cashflow. Columbus looks excellent, but I've heard it is insanely competitive right now. I won't touch Detroit.

For Texas, all of the big 4 cities minus Austin look appealing as a mixed csahflow/appreciation play. In Dallas, San Antonio, Houston, you can get deals pretty close to 1%, most of what I'm finding is 0.8-0.9%. Most of the properties I've checked either break even or lightly cashflow with conservative numbers. Like I said before, this would be a play betting on Texas' future, as in the present the midwest offers much higher returns.

I'm probably going to embarrass myself here by showing some theoretical math. I'm going to compare my preferred midwest cashflow city (Cleveland) with my preferred Texas future growth city (Dallas) for turnkey properties:

I'll be estimating 15% maintenance, 10% vacancy, 8% property management, 20% down @ 3.6% mortgage costs for both properties*

Cleveland SFH, B neighborhood:

Purchase Price 65k (15k down)

Rent 1050

Cashflow after all costs: $320/ mo

CoC Return: 25.5%

Cashflow pays purchase costs in 4 years. 

1500% ROI after 30 years (186k Cashflow, 0% appreciation of house)

Dallas SFH:

Purchase price 170k (39k down)

Rent 1600

Cashflow after all costs: $100/mo

CoC Return: 3%

Cashflow pays purchase price in ~13 years

1220% ROI after 30 years (127k cashflow and 412k equity. 3% appreciation per year for 240% total appreciation)

It seems like Cleveland beats Texas even in the long-term, unless there is something that I am missing. I would prefer to go with a better long-term option, and Cleveland, my representative for the midwest, appears to have the best returns both in the long term and the short term.

There are a few variables that could change these calculations quite a bit, and feel free to let me know your thoughts on them. 

1) There may be better deals available in each market than those I listed, which were just what was readily available on the MLS. Better number could easily sway things in Texas' favor.

2) Texas may grow better than expected, and beat that 3%/yr appreciation number. It may also underperform that number.

3) Cleveland's population loss could cause decreased demand/ rental prices which eventually sway things in Texas' favor.

4) Repairs on the cheaper Cleveland houses will cost the same as the more expensive Dallas ones. Assuming same cost of repairs for both houses makes the 30yr ROI about the same for both.

5) Cleveland/ midwest will run into traditional loan limits faster than Texas.

Either way, the best option appears to be investing in the high cashflow, midwest markets. Not only do the returns appear to be better in the long term, they are much better in the short-term which will allow me to acquire more cashflowing properties faster. I'd like this to be an open discussion, please let me know if there is anything I missed in my analysis. I'd love to hear the opinions from both sides.

@Tyler D'Alessandro very well thought out here. Have not posted on BP in quite some time but here is some food for thought from another 20 something yr old investing in the midwest with an interest in Texas:

About 2 weeks ago I purchased a one way flight from Indianapolis (my hometown) to San Antonio. I was in a similar headspace as you with the idea that Texas is experiencing exponential growth... so why would you not want to invest there? I decided to make the trip down and find out for myself what all the hype is about. In my short time here in Texas (currently in Leander.. just outside of Austin) I have toured properties in San Antonio along with some of the surrounding cities. I've found exactly what you are describing above.. 1% rule with slim cash flow if any at all. That being said, Texas is big talk right now and there is no question that it is the place to be. I can't lie as I would move to the state of Texas in a second. 

However, something keeps me wanting to have long lasting ties in the midwest. That something? Strong cash flow my friend! You are describing above that you are experiencing solid cash flow with your home in Cleveland but are worried about the long term play. While Cleveland may be experiencing a dip in population, I do not assume that you are buying on behalf of a REIT or PE firm that has the fire power to purchase thousands of homes. If the population in Cleveland were to drop to 300k and you have plans to purchase more than 3,000 homes perhaps there is a larger concern here.

Everyone has their own criteria for how they want to approach investing. Personally, I have found that focusing on cash flow for the long term has been tough to beat. Texas is more of a hybrid market and for some folks it works great because they can leverage more appreciation. It sounds like you ultimately know the answer here even though it is not the most exciting approach. Best of luck moving forward!

Cheers,

Zach 
 

What's the age of the home you buy in Cleveland and how old will it be when you exit vs Texas?

Any difference in maintenance costs?

Originally posted by @Bruce Lynn :

What's the age of the home you buy in Cleveland and how old will it be when you exit vs Texas?

Any difference in maintenance costs?


I was more using them as a general example of the two markets, We don't need to get too down in the weeds on the details of these specific properties. 

I put a blurb in the bottom about if maintenance costs were equal, and it would make the 30yr ROI of both cities about equal. However, Cleveland's would be more accessible as cashflow than stored equity.

Originally posted by @Zach Hoereth :

@Tyler D'Alessandro very well thought out here. Have not posted on BP in quite some time but here is some food for thought from another 20 something yr old investing in the midwest with an interest in Texas:

About 2 weeks ago I purchased a one way flight from Indianapolis (my hometown) to San Antonio. I was in a similar headspace as you with the idea that Texas is experiencing exponential growth... so why would you not want to invest there? I decided to make the trip down and find out for myself what all the hype is about. In my short time here in Texas (currently in Leander.. just outside of Austin) I have toured properties in San Antonio along with some of the surrounding cities. I've found exactly what you are describing above.. 1% rule with slim cash flow if any at all. That being said, Texas is big talk right now and there is no question that it is the place to be. I can't lie as I would move to the state of Texas in a second. 

However, something keeps me wanting to have long lasting ties in the midwest. That something? Strong cash flow my friend! You are describing above that you are experiencing solid cash flow with your home in Cleveland but are worried about the long term play. While Cleveland may be experiencing a dip in population, I do not assume that you are buying on behalf of a REIT or PE firm that has the fire power to purchase thousands of homes. If the population in Cleveland were to drop to 300k and you have plans to purchase more than 3,000 homes perhaps there is a larger concern here.

Everyone has their own criteria for how they want to approach investing. Personally, I have found that focusing on cash flow for the long term has been tough to beat. Texas is more of a hybrid market and for some folks it works great because they can leverage more appreciation. It sounds like you ultimately know the answer here even though it is not the most exciting approach. Best of luck moving forward!

Cheers,

Zach 
 

Thanks for the response Zach. The midwest is surely unsexy and comes with some possible long-term pitfalls but the math seems to point to it being the better option. Are you planning to buy anything in SA, or staying in Indy?

 

I’m like you, many doors in Ohio, so to balance it out I added A class in OKC to my portfolio. It doesn’t have to be 100% one way or another.

Most want strong cash flow to replace a W2. Buying for appreciation is more “long term wealth building “. Both are good goals, but if you have a job you want to quit cash flow is the way to go.

P.S. Don’t write off a whole city (Columbus) because you heard it’s too competitive. Plenty of great deals in Columbus come across my desk
(mostly from @Remington Lyman)

Likewise in my 20s interested in Midwest & Texas... 

Loved Chicago but it’s losing population/ taxes increasing fast/ covid pushing people out of larger metro areas (does this create a window of strong investment opportunities? Probably but that’s another convo) 

Personally, can’t decide between cash flow or equity growth but pushing towards Phoenix & Texas and counting on them growing most (50 years down the road) 

@Tyler D'Alessandro I like the way that you are approaching your investment strategy and building long term wealth and income.  That being said you need to budget in major capital projects like roofs, driveways, HVAC, appliances, etc. and make sure that you keep some cash reserves for that because its its expensive to access the capital in the house to pay for some of those expenses. 

Also you don't have to stay locked into the same houses for 50 years.  That would obviously be ideal but make sure that you are keeping tabs on the neighborhoods and that you don't hang onto a property in an area that might go down hill.  Today's lower end areas were very nice 50 years ago and today's best areas might have been farms then.  You can also jump markets, who know what cities might be hot in 20 years, we could all be investing in Idaho then (sorry to whoever I offended from Idaho, I'm sure that there are great properties and returns there but someplace had to fill that spot in my example).

As I tend to repeat myself on the forums I'll say this again here.  Focus more on simplifying your life, if you have system in place in one market then it might be easier to grow there.  Also keep in mind that the deal is more important than the location, you can buy a terrible deal in a great market and vice versa.

One last thought on appreciation versus cash flow would be to think about net present value.  There are some calculators and I hardly see anyone talking about it but as an active investor you should take that into account.

Originally posted by @Andrew Weiner :

@Tyler D'Alessandro I like the way that you are approaching your investment strategy and building long term wealth and income.  That being said you need to budget in major capital projects like roofs, driveways, HVAC, appliances, etc. and make sure that you keep some cash reserves for that because its its expensive to access the capital in the house to pay for some of those expenses. 

Also you don't have to stay locked into the same houses for 50 years.  That would obviously be ideal but make sure that you are keeping tabs on the neighborhoods and that you don't hang onto a property in an area that might go down hill.  Today's lower end areas were very nice 50 years ago and today's best areas might have been farms then.  You can also jump markets, who know what cities might be hot in 20 years, we could all be investing in Idaho then (sorry to whoever I offended from Idaho, I'm sure that there are great properties and returns there but someplace had to fill that spot in my example).

As I tend to repeat myself on the forums I'll say this again here.  Focus more on simplifying your life, if you have system in place in one market then it might be easier to grow there.  Also keep in mind that the deal is more important than the location, you can buy a terrible deal in a great market and vice versa.

One last thought on appreciation versus cash flow would be to think about net present value.  There are some calculators and I hardly see anyone talking about it but as an active investor you should take that into account.

 Hey Andrew, 

I have accounted for CAPEX. It is 15% of gross rent along with monthly maintenance. As far as my plan of keeping the same properties for a long timeframe (at least 30 years), is for two reasons:

1) With mortgage rates at record lows that we will likely not see again in our lifetimes, I'd rather find great properties now and hold them than trade them in 2030 for something new with a 6% interest rate.

2) Simplicity. My goal with this is for it to be as passive as possible. Instead of constantly optimizing for the best returns, I want a steady, long-term income stream that I can set up now and benefit from for the rest of my life.

When you mention net present value, are you talking about the value of money now vs money in the future? That's a big part of the reason I'm leaning toward cashflow, because that profit can be immediately reinvested as opposed to equity which can only be accessed after a long period of time.

Originally posted by @Michael P. :

I’m like you, many doors in Ohio, so to balance it out I added A class in OKC to my portfolio. It doesn’t have to be 100% one way or another.

Most want strong cash flow to replace a W2. Buying for appreciation is more “long term wealth building “. Both are good goals, but if you have a job you want to quit cash flow is the way to go.

P.S. Don’t write off a whole city (Columbus) because you heard it’s too competitive. Plenty of great deals in Columbus come across my desk
(mostly from @Remington Lyman )

 I'm thinking about doing a combination as well, in the long-term.

Start with a high cashflow portfolio, and from that cashflow buy some more expensive properties for appreciation. 

By the way, how do you handle getting loans once you've reached 10+ properties? I've heard of some alternative options, which would be ideal as you could finance many homes, but not sure exactly how to go about it.

Interest rates are a great point that I didn’t factor in, I’m getting spoiled by these rates for the past few years.  
That is what I meant by net present value.

Originally posted by @Tyler D'Alessandro :
Originally posted by @Andrew Weiner:

@Tyler D'Alessandro I like the way that you are approaching your investment strategy and building long term wealth and income.  That being said you need to budget in major capital projects like roofs, driveways, HVAC, appliances, etc. and make sure that you keep some cash reserves for that because its its expensive to access the capital in the house to pay for some of those expenses. 

Also you don't have to stay locked into the same houses for 50 years.  That would obviously be ideal but make sure that you are keeping tabs on the neighborhoods and that you don't hang onto a property in an area that might go down hill.  Today's lower end areas were very nice 50 years ago and today's best areas might have been farms then.  You can also jump markets, who know what cities might be hot in 20 years, we could all be investing in Idaho then (sorry to whoever I offended from Idaho, I'm sure that there are great properties and returns there but someplace had to fill that spot in my example).

As I tend to repeat myself on the forums I'll say this again here.  Focus more on simplifying your life, if you have system in place in one market then it might be easier to grow there.  Also keep in mind that the deal is more important than the location, you can buy a terrible deal in a great market and vice versa.

One last thought on appreciation versus cash flow would be to think about net present value.  There are some calculators and I hardly see anyone talking about it but as an active investor you should take that into account.

 Hey Andrew, 

I have accounted for CAPEX. It is 15% of gross rent along with monthly maintenance. As far as my plan of keeping the same properties for a long timeframe (at least 30 years), is for two reasons:

1) With mortgage rates at record lows that we will likely not see again in our lifetimes, I'd rather find great properties now and hold them than trade them in 2030 for something new with a 6% interest rate.

2) Simplicity. My goal with this is for it to be as passive as possible. Instead of constantly optimizing for the best returns, I want a steady, long-term income stream that I can set up now and benefit from for the rest of my life.

When you mention net present value, are you talking about the value of money now vs money in the future? That's a big part of the reason I'm leaning toward cashflow, because that profit can be immediately reinvested as opposed to equity which can only be accessed after a long period of time.

 

Hello Tyler! I might be able to answer why people are investing in Texas. The answer is the power of leverage. Texas has been appreciationg strongly, with some areas appreciating up to 6%. Now, with leverage you can buy a property with 20 or 25% down but get appreciation on 100% of the property. If you have $200k, you can maybe buy 8 properties worth $100k each giving 25k downpayment in each.

at 4% appreciation (which can be attainable here). That is:

32k in equity growth in year one (8 properties x 4k each)

384k in year 10

960k in year 20

That is only appreciation. There is homes that will sell for 1.1,1.2,1.3% of rents and therefore cashflow as well.


That being said. Your number for the Midwest at very good too! If you live there and know the area better... I'd probably just invest there.

Originally posted by @Leopoldo Vazquez :

Hello Tyler! I might be able to answer why people are investing in Texas. The answer is the power of leverage. Texas has been appreciationg strongly, with some areas appreciating up to 6%. Now, with leverage you can buy a property with 20 or 25% down but get appreciation on 100% of the property. If you have $200k, you can maybe buy 8 properties worth $100k each giving 25k downpayment in each.

at 4% appreciation (which can be attainable here). That is:

32k in equity growth in year one (8 properties x 4k each)

384k in year 10

960k in year 20

That is only appreciation. There is homes that will sell for 1.1,1.2,1.3% of rents and therefore cashflow as well.


That being said. Your number for the Midwest at very good too! If you live there and know the area better... I'd probably just invest there.

Leverage works for the midwest too ;). You get more properties with higher CoC that collectively cashflow harder.

That aside, I really want someone to convince me to invest in Texas, as it's the sexier option and I could invest more $ with a smaller amount of properties to manage. If the numbers work, I'm interested. 

A couple of questions for you:

Is that 4% appreciation sustainable over the long term, or is it only happening now in the short term?

Would you be willing to recommend some neighborhoods where I can find those properties at 1% and higher?

 

Originally posted by @Tyler D'Alessandro :
Originally posted by @Michael P.:

I’m like you, many doors in Ohio, so to balance it out I added A class in OKC to my portfolio. It doesn’t have to be 100% one way or another.

Most want strong cash flow to replace a W2. Buying for appreciation is more “long term wealth building “. Both are good goals, but if you have a job you want to quit cash flow is the way to go.

P.S. Don’t write off a whole city (Columbus) because you heard it’s too competitive. Plenty of great deals in Columbus come across my desk
(mostly from @Remington Lyman )

 I'm thinking about doing a combination as well, in the long-term.

Start with a high cashflow portfolio, and from that cashflow buy some more expensive properties for appreciation. 

By the way, how do you handle getting loans once you've reached 10+ properties? I've heard of some alternative options, which would be ideal as you could finance many homes, but not sure exactly how to go about it.

Mixture of cash purchases, private lending from family, conventional loans, also speaking with commercial lender currently about a six unit I have my eye on.

Chicago you will get a mix of appreciation + cashflow but to be honest probably less cashflow then you are looking for. The areas with cheap houses here are high crime and not places I recommend. Our bread and butter is 300-800k 2-4 units where you get cashflow + strong appreciation in gentrifying areas. 

I have looked a bit at Indiana/wisconsin the cheap houses tended to be janky with lower grade tenants and not something I was interested in. Lots of old porches, settling of buildings and tenants living in filth. Seemed almost a liability I would worry about and not worth the headache. If you are looking for 50 years return I always like appreciation+some cashflow will give you the highest total returns and not be headache tenants.

@Tyler D'Alessandro Everybody has different goals and this is why you will get so many varied responses. I see no harm in building a portfolio in Cleveland that cashflows well. You can always sell them later and move the money to another market OR use the current cash flow to save for purchases in a new market. Either way, you are doing great. Don't overthink it and best of luck!

Nobody can predict even 5 years out let alone 50. Your plan has to be flexible.Tract houses built in 50s, 60s and 70s exposed to midwest weather don't age well. If you buy a home built in the 70s and hold another 30 years it will be 80 years old! 

Originally posted by @Andrew Weiner :

@Tyler D'Alessandro I like the way that you are approaching your investment strategy and building long term wealth and income.  That being said you need to budget in major capital projects like roofs, driveways, HVAC, appliances, etc. and make sure that you keep some cash reserves for that because its its expensive to access the capital in the house to pay for some of those expenses. 

Also you don't have to stay locked into the same houses for 50 years.  That would obviously be ideal but make sure that you are keeping tabs on the neighborhoods and that you don't hang onto a property in an area that might go down hill.  Today's lower end areas were very nice 50 years ago and today's best areas might have been farms then.  You can also jump markets, who know what cities might be hot in 20 years, we could all be investing in Idaho then (sorry to whoever I offended from Idaho, I'm sure that there are great properties and returns there but someplace had to fill that spot in my example).

As I tend to repeat myself on the forums I'll say this again here.  Focus more on simplifying your life, if you have system in place in one market then it might be easier to grow there.  Also keep in mind that the deal is more important than the location, you can buy a terrible deal in a great market and vice versa.

One last thought on appreciation versus cash flow would be to think about net present value.  There are some calculators and I hardly see anyone talking about it but as an active investor you should take that into account.

 Andrew nailed it here. Keep it simple. If you are winning in the Midwest, and you like the returns, why change?

Originally posted by @Tyler D'Alessandro :

Hey BP,

I'm in my 20's and have 200k to invest. I want to make the investment that will give the best returns over my lifetime, so 50+ years. 

I already own a house in Cleveland, OH which cashflows well at close to 2%. I am considering going and buying a ton of more properties in Cleveland, but I am concerned about it in the long term, as it is losing population and home prices are more or less stagnant.

Enter Texas. There is a lot of growth happening in the 4 big cities, and they appear to have a much more solid future than Cleveland at the moment. The downside is that the cashflow is much lower than Cleveland, and most of my gains would be locked into equity which is harder to access.

You're probably wondering why I put "midwest" in my title, and so far have only mentioned Cleveland. I will mention a few others. Chicago appears to have some potential, as it is such a large city with much cheaper houses relative to NY/LA, etc. Indiana(polis) in theory has some good deals, but it has been super competitive and I haven't been able to land any, and Cleveland has better cashflow. Columbus looks excellent, but I've heard it is insanely competitive right now. I won't touch Detroit. 

For Texas, all of the big 4 cities minus Austin look appealing as a mixed csahflow/appreciation play. In Dallas, San Antonio, Houston, you can get deals pretty close to 1%, most of what I'm finding is 0.8-0.9%. Most of the properties I've checked either break even or lightly cashflow with conservative numbers. Like I said before, this would be a play betting on Texas' future, as in the present the midwest offers much higher returns.

I'm probably going to embarrass myself here by showing some theoretical math. I'm going to compare my preferred midwest cashflow city (Cleveland) with my preferred Texas future growth city (Dallas) for turnkey properties:

I'll be estimating 15% maintenance, 10% vacancy, 8% property management, 20% down @ 3.6% mortgage costs for both properties*

Cleveland SFH, B neighborhood:

Purchase Price 65k (15k down)

Rent 1050

Cashflow after all costs: $320/ mo

CoC Return: 25.5%

Cashflow pays purchase costs in 4 years. 

1500% ROI after 30 years (186k Cashflow, 0% appreciation of house)

Dallas SFH:

Purchase price 170k (39k down)

Rent 1600

Cashflow after all costs: $100/mo

CoC Return: 3%

Cashflow pays purchase price in ~13 years

1220% ROI after 30 years (127k cashflow and 412k equity. 3% appreciation per year for 240% total appreciation)

It seems like Cleveland beats Texas even in the long-term, unless there is something that I am missing. I would prefer to go with a better long-term option, and Cleveland, my representative for the midwest, appears to have the best returns both in the long term and the short term.

There are a few variables that could change these calculations quite a bit, and feel free to let me know your thoughts on them. 

1) There may be better deals available in each market than those I listed, which were just what was readily available on the MLS. Better number could easily sway things in Texas' favor.

2) Texas may grow better than expected, and beat that 3%/yr appreciation number. It may also underperform that number.

3) Cleveland's population loss could cause decreased demand/ rental prices which eventually sway things in Texas' favor.

4) Repairs on the cheaper Cleveland houses will cost the same as the more expensive Dallas ones. Assuming same cost of repairs for both houses makes the 30yr ROI about the same for both.

5) Cleveland/ midwest will run into traditional loan limits faster than Texas.

Either way, the best option appears to be investing in the high cashflow, midwest markets. Not only do the returns appear to be better in the long term, they are much better in the short-term which will allow me to acquire more cashflowing properties faster. I'd like this to be an open discussion, please let me know if there is anything I missed in my analysis. I'd love to hear the opinions from both sides.

My opinion- Create a balanced portfolio & invest in Cleveland, then use your passport to cross the border and also invest in Texas. 

Seriously though- A few weeks ago Roofstock put out a report on the top 20 states to invest in. Roofstock sells turnkey investments around the country. It could be a good benchmark for you. Ohio was number 17 on their list (w/ investments in Cleveland & Toledo). While Texas was 19 w/ most of their investments around Houston & San Antonio. No investments in Austin.

 

@Tyler D'Alessandro - Cash flow is overated. Go buy below replacement cost in San Antonio where the population is growing, supply and demand says that rents and property values will go up. New construction can't compete since your all-in cost is so low from buying below replacement cost. You'll get market appreciation and you can force appreciation. You'll have a ton of equity that you can trade up for cash flow later. Clevaland is dying, you'll probably have to sell your properties for less than you bought for so you won't be able to trade up into anything useful. 

(Note that I don't necessarily agree with above, it is just me convincing you to invest in Texas, as you requested)

If I'm you, I'm sticking to my plan in the Mid-West. Cash is king - don't gamble on appreciation. The clock could stop there at any time. I live in Houston, and you are spot on that it is hard to find properties that hit the 1% rule. You'll get more bang for your buck in the mid-west (as far as # of properties you can leverage with $200k), and your cash flow is better.

@Tyler D'Alessandro I think your concerns about Cleveland with a declining population are valid, there are other alternatives besides TX which has high property taxes and insurance rates. I recommend taking a good look at Indianapolis and Kansas City. Both cash flow well but both also have good economic and demographic fundamentals. 

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