Thursday, 19 October 2017

Investing in the Mid-West City Rental Market: Things to Consider

Written by Posted On Thursday, 25 May 2017 16:10

Take a moment to think about cities in the US. Nearly every city founded has changed what it is doing now. For instance, Chicago was founded to be a transportation hub between the west and the east due Lake Michigan, the railway, and the canals. Today, Chicago is a major financial center, as well as home to global Fortune 1000 headquarters. When looking at mid-west cities, this type of transformation, from trading posts on rivers to 21st century business is common.

However, some of these cities have had trouble changing from specific-industry to service economies. Think of Detroit that was once known as the auto capital of the world and how it is now in the process of a slow transformation. Cities, like Detroit, that have yet to make the transition are disrupting more than just the workplace. Real estate is also affected when economies are changed.

Here are a few things to consider when purchasing rental properties in mid-west cities.

Tip #1: Focus your property search to industry centers.

Most mid-west markets have a lot of available land, with housing spread out well beyond the city's center. Due to the suburb nature of these locations, home prices were low and home-ownership was high. With the economy still in flux, you will want to focus your search for real estate near economic centers. This will tend to be in higher-density locations where work is available, but home prices are a bit higher.

Tip #2: Job growth is low, which limits population growth.

In fact, in most mid-west cities, population growth is about 1 percent a year. This means that home appreciation as well as rental prices will increase slowly as well. Be sure to pay close attention to the cash flow on your property. Do not plan on a big surge in prices over the short term. Mid-west towns are perfect for the buy and hold philosophy.

Tip #3: What is considered the best place to live will be changing as the economy changes.

For years, living in the suburbs was the ideal location. However, as the economy changes to the service sector, finding properties near locations such as medical centers, government offices, schools and colleges, and tourist areas will be beneficial as these areas become the “hot” markets. The reason is that these sectors produce a lot of workers with modest incomes. They will need a place to live, but are more likely to be renters than buyers. The key is finding the right property to capitalize on this movement towards these sectors.

Tip #4: These markets may be very under-priced, but you still need to crunch the numbers.

Keep in mind that the prices are low, but so is the demand. You will want to make sure the cash flow makes sense in a market that will not make great strides for a longer period of time. The best thing to do is look for neighborhoods that are experiencing rejuvenation. Finding these pockets will help you create good cash flow.

Tip #5: Look for cities with more than one big employer or industry.

When looking at areas with low-growth, they automatically have higher risk. To minimize this risk, find areas that have more than one big employer or industry. For instance, Fargo is booming due to shale oil development. If that were to fail, your rental market would bottom out. On the other hand, areas like St. Louis have many different markets, meaning if one fails, there are others to shore up the rental market.

Tip #6: Develop patience.

Mid-west properties are not good for someone that wants to see big rewards in a small amount of time. Most of these locations will take several years to fully develop. However, if you find out where jobs are being created and buy rentals in these neighborhoods, you are likely to see a good return on your investment. The key is holding for at least the next 7 to 10 years.

I buy lots of rental properties in mid west cities. Following these tips will help you steer clear of the problems while capitalizing on the new growth. If you have any questions about a particular area, feel free to contact us if you are looking for help on where to get started.

 

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John Trautman

John Trautman has spent his entire adult life in real estate. Purchasing his first property at 23, he learned the process of flipping and real estate holding from the ground up. Real estate continue to be his passion while he spent eight years as an account executive and later a vice President for Washington Mutual in the mortgage division. Holding the position of President’s Council and several years of President’s Club, he learned the lending business from the mortgage office perspective and lender perspective. Throughout his life he has also been a small business owner, commercial real estate holder, property designer, and house flipper.

During the downturn, John followed the deal to Detroit, Michigan, where he invested in single family rentals and multi-family dwellings. Once his returns were realized, he moved quickly to Arizona to invest in another distressed market.

His passion for making a deal and real estate has lead him to create a hands-on real estate investment mentoring club called Real Estate Knowledge Institute

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