Why I’m Betting on the Arizona Real Estate Market (Over the Midwest)

by | BiggerPockets.com

Some of you may have noticed my relative absence from this blog in the past month and a half. Indeed, I’ve been busy. Buying a home to live in, rehabbing it, and moving in tends to occupy a lot of time — and we are still not finished.

But having sold our primary in Lima, OH and purchasing another in Chandler, AZ, I’ve gained an interesting cross-country perspective on the dynamics of the marketplace. Long story short, I am very bullish on Arizona, and I’ll provide you with some broad strokes as to why in this piece. I hope you find my experiences from the last 6 months helpful in formulating your own perspective and strategy.

Selling My Primary Residence in Lima

I built our Lima home in 2006. It was a well-built house with 3 beds and 2 baths. Though not large, at 1,560 sq.ft., there were hardwoods throughout, good quality windows, and a well-appointed kitchen with electric cooktop and double ovens. It did not, however, have granite countertops in kitchens and baths. Nor were there tile surrounds. “Clean but fiberglass” was the name of that game. My property taxes for this home ran about $2,500/annum in 2016 when we sold the house.

The biggest drawback with this house was the location. It’s funny, but a friend and I went out for steak last night at this place called The Keg Steakhouse — which is fabulous and I recommend if you are ever in Chandler — and the server tells as she grew up in Dublin, OH (suburb of Columbus). Likely overhearing our real estate talk, she chimed in (’cause everyone is a real estate expert, you know). According to her, Columbus is the only place worth anything in Ohio — everything else is, as she put it, is the “armpit of the world.” Be honest now — how many times have you heard me say this!? It’s true, and the bartender was right, with the only obvious exception, naturally, of Toledo. (Yep, I went there.)

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Ohio Pricing (Michigan, Indiana, North Carolina)

I sold my 1,560 sq.ft clean-but-no-frills house in Lima for $174,000, meaning I sold it for $111.50/sq.ft. Here’s the thing — you pick that house up and move it to Upper Arlington, Dublin, Gahanna, or any other suburb of Columbus with decent school districts, and without changing a single screw in the house, it immediately becomes worth $225,000 or more. The same is true of any part of Cincinnati, Indianapolis, or Charlotte you’d want to live in.

In other words, from $111/sq.ft., we’d have to jump up to about $140/sq.ft. in order to be in a more affluent, more convenient, larger market with decent educational opportunities for children. This is without changing anything about the amenity package in the house itself. You add granite countertops, stainless steel appliances, travertine on the shower walls, etc., and you are looking at another $15/sq.ft., putting you at a $155/sq.ft. valuation.

The above means that in order to relocate to a better market in the Midwest, I’d have had to spend $240,000-$250,000 to replace my exact house. If I were wanting to add a bit of square footage, say 2,400 sq.ft., I’d need to spend $372,000 at $155/st.ft. Additionally, that $2,500 of annual property taxes that I was paying in Lima would instantly double and triple (NC) in a larger market in Midwest.

Intrinsic Value

What I described above can be referred to as the intrinsic value of housing. Simply put, folks who want to live in these markets pay this money for the privilege. Naturally, there are fluctuations, but all and all, things cost what they cost — intrinsic value.

And for this money, here’s a list of things that I could buy in the Midwest:

  • Messed up roads and infrastructure
  • High property taxes
  • Cold six months out of the year
  • Snow/sleet
  • The particular pleasure of scraping windows on my car for four months out of the year
  • Aging and declining population
  • Stagnant incomes
  • And all the rest of the nonsense

Phoenix MSA

I just bought a house in gorgeous Chandler, AZ — about 20 minutes from Sky Harbor Airport and the stadium where just a few days ago Clemson handed Ohio State their butt. Guess how much I paid?

I paid $150/sq.ft., for this 2,400 sq.ft 2005 home. I am spending $10/sq.ft. on upgrades, and at $160/sq.ft., I’ll have a private pool, travertine on all 3 baths, granite in both kitchens and baths, with a bonus of sunshine, blue skies, and the highest-rated school system in the United States (google Basis Charter Schools). My property taxes here are $2,400/annum, which is less than I was paying for a house half the size in Lima, OH — and much less than I’d be paying in Columbus or Charlotte. And to top it off, there is an interesting feature in this house that I’ll talk about in a future article.

For now, understand, I am living in Chandler, AZ — 12 minute drive from Intel, PayPal, Wells Fargo, and thousands of tech jobs in the works. I am looking at blue skies and palm trees, with every modern convenience known to man within 10 minutes from the house, and most within 2 minutes (you have no idea how much dead time we spent getting to and from things while in Lima).

And here’s the kicker — I am getting all of this at intrinsic value. I am getting all of this for $160/sq.ft — the same $160/sq.ft it would have cost me to stay in the Midwest.

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Is Phoenix Inflated?

I could have bought this house for $100,000 less 5 years ago. I didn’t! Today, prices have recovered toward intrinsic value. Considering the explosion of population in Phoenix MSA, considering the employment dynamics, and considering the fact that housing cost the same here as it does in Ohio, it is very hard to say that it is inflated.

In fact, lots of people expect Phoenix MSA to be the #1 performing market in 2017, and if we experienced 8%-9% YOY appreciation, I would be neither surprised nor alarmed. Maricopa County ranked posted population growth of 1.9% in 2015 according to the Census — second only to Houston. The fundamentals here are strong — much stronger than the Midwest,– but pricing levels today are the same.

Just my uninformed firsthand take. Hope you find it helpful!

What markets are YOU finding to be most promising?

Let me know your thoughts with a comment.

About Author

Ben Leybovich

Ben Leybovich has been investing in multifamily residential real estate since 2006. His area of expertise is creative finance. Ben works extensively with private as well as institutional financing. Ben is a licensed Realtor with YOCUM Realty in Lima, Ohio. He is also the author of Cash Flow Freedom University and creator of a cash flow analysis software CFFU Cash Flow Analyzer.

44 Comments

  1. tim boehm

    Brad
    Another aspect you failed to touch on is snowbirds. Many from northern climates get a second home or retirement home in the warmer climates. Since the excessive overbuilding has calmed down and prices nation wide have stabilized and in many cases even exceeded prices of the 2007 crash more retired boomers now have the cash to buy that place in the sun. I agree with you, go west young man!

  2. Stephen Sokolow

    Great article Ben! As someone living in South Bend, In I think about these same issues a lot. If everything is equal, or as your article shows maybe not so equal why do people stay in the Midwest. The biggest problem I see here in Indiana is declining and aging population as well as 0% appreciation. I think the Midwest will always be a great market for buy and hold rentals. While they do not have appreciation in home value I have seen rents rise over the past 2 years at least in South Bend. My real question that I have though is what is driving the economy there? Why are big employers moving there? Also, are most of the people moving to Arizona moving for jobs? I saw this happen with Houston. Do you think Arizona is becoming the new Texas?

    • Ben Leybovich

      Stephen – there are a lot of questions here. Fundamentally, if you think about it, our lives are about creating environment for ourselves which makes our heart sing. As much as possible, anyway. What this entails is the views, the income opportunities, the conveniences, the nature, the restaurants, etc.

      Employers recognize this, and go where there happens to be the greatest confluence of other factors which make up this mix. Today Phoenix has all of the elements. As recently as 20 years ago it did not. Funny enough, the advancements in central AC have made this possible in part 🙂

  3. Alex Craig

    I think you hit it right, catch it on the way up. If the cash flow works now, then it is a great opportunity for buy and hold investors. If it doesn’t then it doesn’t work for most investors as they do not have the cash to sustain possibly years of negative cash flow until that appreciation happens…if it happens. Personally if I was going to speculate, I would pick stocks where you can at least have a stop loss and is certainly more liquid.

    As for the server and bartender, I would to put much stock into her comments. Locals can be the worst to ask as there perception is based on the first 9 minutes of the local news instead of reading local business journals and networking at their local REIA or other professional networking opportunities. I used to bartend in college and most of my co-workers were broke 2 hours after they got off work.

  4. Edward Synicky

    I own many homes in Phoenix and I can tell you purchasing there at any time will work if you are a buy and hold investor. I really do not care what the value of the home is today or tomorrow, the rents just keep coming in and going up. Even in 2008 when the market tanked 50% rents only dropped 10%. I can ride the roller coaster and if I have some spare cash I will purchase again in the next downturn and hold forever.

  5. Christopher Smith

    I think its mostly about timing and specific site selection where ever you go.

    I bought heavily into upper end middle income properties during the 2011-2013 time frame when prices in the far East San Francisco Bay area (about 60 miles inland) were totally crushed. Weather here is really great about 10 months of the year, so its a very popular destination like Arizona. But buying now to me is pretty much a non starter since prices have appreciated well over 100% from their low. You simply can’t effectively cash flow at these elevated levels (even though rents have risen 40% over the same time frame), and I fear most of the easy money appreciation has already been had – all the very positive trend items in the article notwithstanding.

    In contrast, I actually bought a couple of properties recently (June) in Ohio (Springboro). It was rated by Nerd Wallet relatively recently as the number 1 area in the state for families with children, super great schools, high incomes and solid growth history and prospects despite the facts that many other areas of Ohio have tepid growth. Also considered Hilliard outside Columbus, but didn’t go there. Cash flow has been really good and appreciation has been very strong. My last buy was in June at 185K, now comps at 220 to 225. About half of that was attributable to a below market pick up, but the rest is simply area wide appreciation.

    The Good news is that these price increases have been great for what I already own (both places). Bad news is that I went to that specific area of Ohio because of its solid prospects generally, but even more because prices were still relatively low, but now even this area’s prices are running away from me (again). Now priced out of another market. This game is getting tougher by the day.

  6. I live in Phoenix…. Lot’s of people are moving here because of the awesome weather, mountains, and people are moving out of LA.

    Also the job growth here has been trending upwards. It’s ranked the #1 market in USA for a reason. Baby Boomers are moving here in masses, it’s better than Florida with no humidity.

    I think it’s still a great place to invest we are not close to all time high’s and when you consider weather, safety, things to do, jobs….it’s very hard to beat!!

    • I worry about water shortages as well, but luckily Arizona has city support for conserving water. For example, the City of Scottsdale sends out an engineer for free when you move into a home to perform an audit and advise you on how to conserve water. They only allow desert adapted/native species in your front yard and give rebates to remove grass, install low flow water toliets and showers, etc.

  7. Gary Nakauchi

    Hello from Phoenix, and thanks Ben, I loved your interview, it was better than Serge’s! You remind me of a concept called Margin of Safety, by Seth Klarman; perhaps it’s applicable here in the great investor attempt of trying to purchase real estate here, below intrinsic value and going forward in time with job growth and population inflow…

  8. Tyler Sherman

    Intrinsic value. Such a conclusion must come from fundamental analysis that you have touched on. Glad to hear of another data point on the sustainability of the Phoenix market. Especially my personal interest in investing in my own backyard (I bought my first home in Chandler myself after growing up in North Mesa). Looking forward to hearing of your future dealings in Phoenix!

    • Ben Leybovich

      And the kicker is – I am 2 minutes from the Chandler municipal airport, standing ready to receive your Cessna. I have a Casita with your name on it. Our love and hate thing – it’s been a while…

      Thanks Brian! Being here puts a lot of what I’ve learned from you in perspective. I get it now!

  9. Anthony Gayden

    I love Arizona. However I left a year and a half ago and moved back to the Midwest. You definitely get more for your dollar in Arizona, and the taxes are far less. The weather is great, and the place is shiny and new.

    Things I don’t like about Arizona include the extreme heat in the summertime, the lack of water (very few lakes or rivers), and the lack of a feeling of place. There is no real defining feature to Phoenix metro. It is like a giant suburb. It’s downtown is a soul less office park. There is very little older housing stock, since Phoenix was relatively small up until the 1950’s.

    Still the benefits outweigh the downsides. When you look at the kind of hopmes you can get in outer suburbs like Tolleson, Buckeye, or Queen Creek for very reasonable prices you can live like a king.

  10. Nick Medina

    Tech is accelerating at a rapid pace in the East Valley. Many of these companies are expanding or relocating to the Silicon Desert. Intel just announced a $7 Billion expansion of their Fab42 facility out in Chandler that will create 3,000 jobs. Downtown Phoenix, Scottsdale, Gilbert,etc are also experiencing a boom. High paying jobs is what drives higher and faster appreciation in any market. Just look at San Francisco.

  11. Just came across this post, Ben. Three years ago my husband looked at me and said, “Are you ready for high heat and low taxes?” I’d been living in San Francisco for 25 years and my initial reaction was something like, “Whhaaat?” It took me a couple of days of consideration before I was totally on board, with the promise I’d have plenty of visits back to the Bay Area. I love it! Housing is affordable, lots of jobs, little ageism, great restaurants, and more. As a Realtor basically starting a new business, I have to say it is so much easier here than in SF, where there are very few sales, and I love my new brokerage. Glad you are enjoying our great little burg.

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