Midwestern Madness: November 2020 Markets of the Month

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One of the most important things you can do as an investor is use your time effectively. There are so many markets, strategies, asset classes, and niches to look into that if you can’t narrow it down and pull the trigger, you may end up suffering from paralysis by analysis. 

Here, we’ll look at how to focus in on markets that may be interesting for investing—and I identify a few Midwestern markets worth a closer look.

Using BiggerPockets data, I’ll walk you through how I narrowed in on 21 markets that I think are worth investigating. 

Narrowing it down

The first thing I did was compute a rent/price ratio using the average rent and median home value in the area. I got rid of anything that came in below 0.55%, making the broad, sweeping assumption that a ratio below that number means the available rent relative to the prices in that market would make for a more challenging investment. It should go without saying that market experts should be able to find dislocations in any market to exploit, but for our purposes we assume we aren’t an expert anywhere yet. 

Next, I eliminated any market where the occupancy percentage was lower than 92%. If we want to be able to raise rents, we need a market where there is not a large supply of potential housing options available. 

Lastly, in order to ensure that the market would be large enough to find opportunities and have some level of liquidity, I eliminated any markets with less than 50,000 housing units. 

Then I eliminated Midland and Brownsville, Texas, because I don’t like oil towns or border towns. Here’s what we’re left with.

From here, there are a number of ways you could further reduce this down to focus on a few markets. What jumps out to me is that there are a handful of geographic areas here that have similar characteristics. 

Many of the Texas towns shown above are around Dallas, which has been one of—if not the—hottest markets over the past decade. It seems like every other day I read a headline about a new company or a new development going on in the area. Durham, North Carolina, and Phoenix also fit within that bucket. These markets will likely be the most competitive for investors, as everyone knows that we know these cities are among the fastest-growing areas in the country. 

Another cohort of cities showing up in the list, like Springfield, Missouri, and Joliet, Illinois, are likely making the list for different reasons. The probability in cities like this is that they are affordable places to live but don’t have a dynamic growth story to drive future increases. There is still money to be made in these markets if you can find the right deals. 

The interesting section of markets I’d like to dig into further is the Midwestern markets of Omaha and Minneapolis.

Where’s the action?

Sometimes in investing you’ve got to skate to where the puck is going, not to where it is. Since the Great Financial Crisis, the rental real estate market has really exploded, with the lion’s share of the growth going to what is commonly known as the “smile.” 

Imagine a big smile across the United States stretching from Seattle, down the West Coast, across through Texas and Florida, and up the East Coast through Boston. That’s the smile, and where all of the investor focus has been. Well, that plus Denver. 

Even before COVID-19, there was more and more discussion about businesses and jobs leaving the Northeast and West Coast for Midwestern markets. The idea was that as the cost of living and doing business in these thriving markets continued to increase, and as technology allowed people to work from anywhere, there would be incentives to create employment growth in areas with good connectivity, access to an educated workforce, and a low cost of living. 

In other words, the same phenomenon we saw play out in places like Nashville, Atlanta, and Charlotte would also begin to spill over into cities like St. Louis, Minneapolis, Omaha, and Indianapolis. The Midwest is also known as a good place to raise a family, which is becoming increasingly important as millennials age into parenthood. 

Minneapolis, for example, has been garnering tons of attention from real estate investors. The city is home to 16 Fortune 500 companies, including well-known names like UnitedHealth Group, Target, Best Buy, 3M, General Mills, and Ameriprise Financial. These are businesses with real staying power that will continue to grow and thrive, and there is a highly educated workforce from which to hire. 

Omaha has a similar dynamic going on. I know a few people in the city that moved from elsewhere; every one of them raves about the city and will likely never leave. Omaha has a small-town feel with some city-like amenities, Creighton University and the University of Nebraska churn out an excellent workforce, and there is a small but thriving start-up scene in the city. 

Take a look at the unemployment rate in Omaha. It’s like the city is immune to unemployment. The rate peaked at 5.9% after the financial crisis and appears to have shrugged off the COVID-19 recession, with a September reading of 3.8%. This is the type of resiliency you love to see as a real estate investor. 

Long-term trends

The country is in the very early stages of some significant shifts in how we live, work, and play. One of the main themes over the next several years will be where people want to live and how they get their recreation. The allure of expensive, crowded city life is fading, and taking its place is the desire for more space, more safety, greater access to outdoors, and the ability to escape what now feels like the very real threat of disease. Midwestern markets play well into this thesis, as they possess many of the attributes both businesses and employees look for. 

With that, I’d encourage you all to look into certain Midwestern markets that may have been overlooked in the past. Many likely have some of the same tailwinds I’ve described above, and may show some other positive data trends if we dig into more data. As you do your own research, here’s a list of attributes to look for and what to avoid. 

Look for:

• Employment growth in industries with a bright future–technology, medicine, finance, etc.
• Low cost of living.
• Thriving recreational communities (trails, bike paths, water activities).
• Highly educated workforces that can support wage growth in those “bright future” industries.

Avoid:

• States and municipalities with serious budget problems. The ability to attract businesses and permanent residents is significantly hampered in areas with high taxes that are likely to rise in the future. 
• Towns on the tail end of a boom-and-bust cycle. Cities like Akron, Ohio, may turn the corner someday, but currently lack the dynamic spark that other Midwestern towns have.
• “Value traps” where the price of the homes seems so low that the perceived risk is lower than reality. A $30,000 home with $500 rent may seem great on paper, but the capital expenditures and lack of price appreciation can be hard to overcome. 

Midwestern markets may be overlooked, but they offer stellar opportunities for savvy investors. The key to finding ideal markets for investment: looking into the future of rising metro areas. Cities like Minneapolis, Omaha, and St. Louis offer promising investment opportunities, thanks to growing industry and thriving recreation—which help attract a bright, driven tenant pool.

What markets intrigue you for 2020?

Tell us in the comments below.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.