Could the Midwest “Startup Surge” Fuel Price Growth in These Cities?

Dave:
Do you want steady returns? The Midwest startup surge is changing real estate forever. Today we’re exploring why the Midwest is attracting attention for startup growth, solid job markets, and resilient housing, all while remaining relatively affordable. You all know this if you listen regularly, but I like a lot of Midwest markets for the fundamentals. I invest there myself and regularly look at data for new opportunities. And there are countless Midwest cities fueling job growth and tech expansion while still offering some of the most affordable housing in the country. But is this momentum just a short-term buzz or is it a game changer that could reshape the real estate investing market for years to come? I’m Dave Meyer, and in today’s episode of On the Market, I’m joined by Midwest real estate expert Dan Nelson and our in-house analyst, Austin Wolff to break down all the numbers. Let’s get into it. Dan Nelson, welcome to On the Market. Thanks for being here.

Dan:
Thank you. Yeah, it’s nice to be here.

Dave:
Well, I’m glad to have you here because Austin and I look at this stuff very academically. I do invest in the Midwest, but it’s good to have a native and who’s someone on the ground talking about these Midwest markets. So appreciate that. And Austin, as always, thanks for coming back.

Austin:
Happy to be here.

Dave:
You sort of put together this list for us on markets that you like, that you think offer good potential, good fundamentals. Tell us how you went about picking the markets that we’re going to be discussing today.

Austin:
Yeah, so there is a website called midwest startups.com and they like to rank all of the different sort of cities and metros in the Midwest for how friendly they are to startups. And why I think that’s important is because if a city is friendly to startups, theoretically, they should also be friendly to businesses. People may want to go there, businesses might be growing. I mean, that was the sort of first data set that I looked at. I actually looked at the top five cities that they ranked that were best for startups. And then I looked at all of the different underlying fundamentals within those cities to see how they might stack up for specifically out-of-state real estate investors. But investors in those cities as well might benefit from this information too.

Dave:
Got it. And what does that mean, startup friendly? Can you just tell us what some of the metrics are and tell us a little bit more about the underlying policies or climate in these cities that make it attractive for businesses?

Austin:
So first variable that we look at is the actual number of startups that are started each year within the city. If there’s a lot that’s good, if there’s not a lot, maybe not so good. We also look at the university system just because typically a business wants educated workers. So if businesses are around a lot of very good schools, they have a very good workforce to pull from. We also look at government support and then the tax climate as well.

Dave:
Great. So let’s get into it. What is our first market here?

Austin:
Yeah, so I wanted to start at the top. The number one city that startups ranks as the best city for startups is Chicago.

Dave:
Yeah, I heard this. Yeah, we were talking about planning the show and I heard this, that Chicago is number one, which is one of the main reasons we’re bringing on Dan, who is an agent in Chicago. So we’ll get his take in just a minute, but what are the principles that you see here that make Chicago a desirable place for businesses and perhaps for investing in the Midwest?

Austin:
So Chicago ranks number one in terms of number of startups as well as number of exits. So if you have a startup there, just statistically you’re more likely to have an exit in Chicago than other cities in the Midwest. There’s also the highest number of VCs and the highest number of capital being invested into startups in Chicago

Dave:
Out of the Midwest. Right

Austin:
Out of the Midwest, correct. Yes,

Dave:
Sure. Okay. And I’m curious, Dan, is this something that you keep track of as an investor and as a agent in Chicago?

Dan:
Yeah, there’s a lot about Chicago that is unique, but one of the things that happened, I think it was like 2012, was JB Pritzker started this project called 1871, which basically exploded startups in Chicago. It was already a great startup area, but it really encouraged VCs to come here, and VCs have come here and they’ve had more success here than they’ve had in the other areas. Obviously it’s more affordable. Just as Austin said, there’s tons of universities around Chicago. It’s also a place where if you get a college degree, you’re very likely to move to Chicago. So it’s a really great hub for that.

Dave:
Yeah, I mean Chicago has so much infrastructure. I guess the thing that you hear about Illinois in general is that population is declining. Is that something that concerns you, Dan, or that you notice in your underwriting or your investing?

Dan:
So there are a few things about Chicago that scare people outside of the city invest, and that’s one of them. The reality is the people that are moving out of Chicago generally are older and moving to warmer clients, and there’s more older people than there are younger people right now. So any city where it’s a colder area and they’re migrating out, you’re going to see that. The other thing is the majority of people that are moving in are college educated and the majority of the people that are moving out are not. So you are seeing a new rental base that has more money, that generally has more white collar jobs than what’s been the case in Chicago. So they’re willing to pay more and they’re looking for bigger units than what people did in the past.

Dave:
Alright, and you said there are other things that scare people off. I imagine there’s a lot of narrative about crime in Chicago. Is that another one?

Dan:
That’s a big one. When I come on a podcast like this and I talk about this, investors in Chicago get so mad at me because it’s a secret. So many people are afraid to come Chicago, they don’t realize what a great environment is and a lot of places in the Midwest. So yeah, if you just look at raw numbers, it’s a big city. Of course there’s a lot of crime, but when you look at per capita, it does not rank very high. When you listen to some of the news, you’ll think people are driving up and down the street shooting Uzi out the window to everyone. And any place where there’s more poverty, there’s more crime, and where there’s less poverty, there’s less crime.

Dave:
Yeah, that makes sense. And Austin, can you tell us a little bit about some of the major industries that are driving some of the fundamentals in Chicago?

Austin:
I would really like to point out finance as one of the leading industries. Chicago is a huge finance hub and there are a lot of great jobs in finance in Chicago. May not be the leading industry, but it’s certainly top three.

Dave:
Dan, in your experience in Chicago, what’s the move for investors? What are strategies that work today?

Dan:
Yeah, so Chicago is a funny place because we don’t have a lot of vacancy. Our vacancy rate is 45th in the nation for a city that is third or fourth in population, but there is still a decent amount of supply. So when I talk to people in Chicago, they’re local, they’ll say, man, there’s nothing on the market. When I talk to someone from California or anywhere outside, they go, oh my God, I can’t believe how many properties on the market. How are there properties that have 45, 60 days on the market? What’s wrong with them? So there’s lots of opportunity here, particularly if you focus in that two to four unit space because Chicago was set up a place for immigrants to move here and rent. There was no idea of ownership. Initially when Chicago was built, you were going to move here and you were going to rent.
So they built all these two to four unit properties. But also after World War ii, all these people came back and people had single family homes and all these soldiers came to Chicago and there’s no place to do so they started renting out their basement. So they have these sort of homemade ADUs all over the place, but they have been tearing these down in areas that are gentrifying. So you might go, oh, they’re taking a single family home and they’re replacing with another single family home, but the new Sam family home doesn’t have someone renting in the basement. So we’re constantly losing rental as a part of it. So if you can get into that market and get that two to four unit property, you have a unique property with a very low vacancy rate.

Dave:
Generally speaking, is it possible to achieve at least break even cashflow with some of these deals?

Dan:
Yeah, I mean everything depends on where you look and there’s that lever that I know you talk about all the time, Dave, which is do you want straight on cashflow or do you want straight on appreciation? And every level of that exists in Chicago. Chicago is a city of neighborhoods and every neighborhood has its own unique thing. So there are areas where it’s really easy to cashflow, and then there are other areas where there are straight appreciation plays and most people kind of pick that middle ground where they’re going to cashflow a little bit in the beginning, but over time they’re going to see that increase dramatically, but they’re also going to get that appreciation on the property.

Dave:
Great. Well thanks for explaining. I just think it’s important because a lot of times when we talk about the Midwest, the attraction from many people is the potential for cashflow and totally agree that it’s up to each person what their strategy is, where they want to fall on that spectrum of cashflow versus appreciation. But a lot of the reason we’re talking about Midwest markets today is because it’s hard to find cash on the southeast and the west and the Midwest, generally speaking, offers better opportunities for that. And it sounds like Chicago might have those options coming up more on why Midwest markets are heating up. We’ll be right back. Welcome back to On the Market. I’m Dave Meyer here with Dan Nelson discussing all the ways the Midwest is booming. Alright, Austin, it looks like a second market here on your list is Minneapolis. Tell us about it.

Austin:
So Minneapolis, when it comes to startups specifically, it ranked number two and it actually had a lot of similarities to Chicago. It had a lot of number of startups, a lot of number of exits and vc, a lot of capital there. In terms of the tax climate, it’s not so friendly. It’s actually similar or worse than Chicago, which is pretty interesting and similar to Chicago, if you look at the metro area, not the actual city of Minneapolis or St Paul, but the broader metro area, the collection of counties that make up this area, it has still experienced essentially job loss and population loss. Not by much, but it’s still not at the height where it used to be in 2019 and maybe January of 2020. So I find that interesting, but what me even more is the overall appreciation in Minneapolis is actually higher over the past five years than Chicago for the metro area, not the actual city itself. I think Chicago had a 27% median price increase over the MSA as a whole, whereas Minneapolis had a 36% median price increase over the MSA as a whole. So I found that to be quite interesting. I actually don’t know why it would have a higher appreciation than Chicago, but that’s certainly something to take a look at.

Dave:
Alright, well I mean Minneapolis to me, it’s one of those sneaky markets that has all these giant companies. I think target’s based out of there three M’S based out of there. There’s a lot of Fortune 500 companies that are based out of Minneapolis, and so that combined with startups, I can see job growth going on there. Now you said that tax situation is worse in Minneapolis, is that just corporate taxes?

Austin:
Yeah, it is one of the least friendly states when it comes to taxes for companies.

Dave:
What about the situation with income taxes or property taxes? Dan, you might know this, but I think Chicago has super high property taxes, right?

Dan:
Well, it depends on how you look at it. So my answer is no. If you’re buying a single family home, then you’re going to see pretty high property tax, particularly if you improve the property, the city kind of puts their thumb on the scale for two to four unit owners because they know that you’re just going to pass it on to the renter. So they keep them artificially low. Now you have to fight your taxes to know that you can fight your taxes every three years in Chicago, but you’ll have a lot of success if you own a two and four unit property. I’ve had mine go down as much as half. Oh, wow. Yeah, so there’s lots of opportunity there, but most people don’t. So they don’t understand opportunity they have. But if you had a single family home and a multi-unit sitting right next to each other and they were pretty much the same property, the taxes on the single family home are going to be higher even than a four unit property.

Dave:
So Austin, do you have any sense, I know you don’t invest there yourself, but from what I understand, Minneapolis is a pretty expensive market, particularly by Midwestern standards. Is this a place that you can get cashflow? What’s the move for investors?

Austin:
Just based on the median house price and the rents there, it’s arguably going to be a little harder to find cashflow in Minneapolis than other Midwest cities, but the appreciation was a little higher as well. So yeah, hard to say, but appreciation’s going to be a little higher than cashflow, let’s just say that.

Dave:
Alright, well, there obviously are investors who want to focus mostly on appreciation, so Minneapolis could be a good market for that. Dan, I know you’re in Chicago, but do you have any thoughts on the Minneapolis market in general?

Dan:
Yeah, so the thing that Midwestern cities have in common is that there’s lots of land and there’s very few big cities. So people are drawn to those bigger cities. Even if you’re in Kansas, you’re going to be drawn to Wichita, which is a smaller city compared to other things. Or Kansas City, you’re going to be drawn by that. And in Minneapolis it’s the same thing. You’re surrounded by a lot of plain states. So part of the reason you’re seeing that appreciation is a lot of people have moved there from the smaller towns. There is still a limited amount of property in Minneapolis compared to another Midwestern sized town.

Dave:
Yeah. Two things I want to mention too is a lot of people I think when they look at data for markets, look at state level migration and stuff, which to me is completely useless. It doesn’t really matter, and you should be looking at individual markets. For example, in Chicago, I think I read something at least during the pandemic that people were leaving the market Chicago, but a lot of them were just moving to the suburbs, right? Outside of Chicago. This is true of a lot of places. You see this in New York too. People are saying, oh, people are leaving New York, but then the suburbs of New York are truly right now the hottest housing markets in the country. And so you need to look at individual dynamics. It’s not just what’s going on in the individual city. So I think that’s probably, to Dan’s point, some of what’s going on in Minneapolis is that there are places that people who are moving from other places in the Midwest there.
The other thing that’s interesting, I don’t know too much about it, but I know St. Paul, this is right across the way from Minneapolis, did implement rent controls. And so from what I’ve heard, that is a much less favorable if you want to be in this kind of general area. St. Paul’s a less favorable area for landlords, whereas Minneapolis is a bit more landlord friendly. All right. Let’s move on to our third market, Indianapolis. This is one we talk a lot about on the show, but Austin, tell us why, according to your research on startup and business climate, Indianapolis is in the top three.

Austin:
Yeah, so Indianapolis actually has a lot less big exits than Chicago or Minneapolis, but it actually ranks number one for support. The government there really wants businesses to grow in Indianapolis and Indianapolis really is the economic engine for the entire state. The government is very overall business friendly. That being said, the tax environment, number two, best tax environment in the Midwest. Overall, those curious number one was Sioux Falls, South Dakota, Indianapolis as a metro area has experienced population growth, 6% population growth over the past five years and 9% job growth over the past five years. And if you just look at the city, the city has actually seen a population loss. But like we were saying earlier, if you look at all of the outer suburbs, they’ve all grown. I’ve heard this being called as the donut effect, where people start to leave the inner city and they go for the outer suburbs, and there are more jobs being added into these outer suburbs. Like Carmel, for example, is adding a lot of finance and insurance jobs in that place specifically. So there are less startups there and the university system isn’t as good as Chicago, but we have Purdue University about an hour away from Indiana. So a lot of good aerospace, a lot of good hard tech education going on in this specific market.

Dave:
Indianapolis, the nice thing is that it’s relatively affordable. The median home price here is 275,000, 150 grand less than the national median. So there’s a lot of things that people like. Dan, do you have any thoughts on Indy?

Dan:
So I grew up in Fort Wayne, Indiana and I’m in Indianapolis, another hot market. Yeah, yeah, absolutely. What’s also happened in Indianapolis, which I’m sure Austin has seen too, it’s kind of a sports mecca. So the NCA’s headquartered, a lot of things are headquartered. They also, there was a town right outside Indianapolis called Carmel that sued for the right to not allow Airbnbs and the state said, no, no, it’s your land. You can do whatever you want with it. And that’s kind of what Indiana is, is like, it’s your place, you do what you want with it. So there’s a lot of freedom in that

Dave:
Area. They have a lot going on there. So yeah, it’s definitely a very interesting market. It’s one of these markets that you constantly see as fastest growing in the Midwest, and there’s a lot going on there. My question always about a place like Indianapolis, is there constraints on supply? Is it just going to keep growing out and out and out and out? And for me as an investor, that makes it harder to figure out where to invest in a market like that, but I’m sure people who understand the market with more nuance than I do can figure out where to buy. And even if you’re an out of state investor, if you work with a good investor friendly agent and dedicate yourself to learning it, I’m sure you can figure it out as well. All right. We do have to take a quick break, but after this we’ll come back with more Midwest markets right after this. Welcome back to On the Market, we’re here with Austin Wolff and Dan Nelson talking about good Midwest markets, at least according to startups and job growth. And the way Austin has done some of his analysis. We’ve talked so far about Chicago, Minneapolis and Indianapolis. Austin, what’s our fourth market?

Austin:
We got Pittsburgh, Pennsylvania.

Dave:
Okay. I like Pittsburgh. I’ve talked about it a lot, at least on this show and on BiggerPockets real estate. But tell me more.

Austin:
It’s very affordable. It’s relatively easier to find cashflow in Pittsburgh than you may in other cities across America. It also has more big companies than Indianapolis, of course, less big companies than Chicago or Minneapolis. I don’t think that’s a surprise to anyone, but it’s also ranked number two for its university ecosystem. Again, Chicago’s number one. There’s a lot of educated workers coming out of the university that startups might find valuable or companies might find valuable. And again, it’s affordable. It’s actually more affordable than Indianapolis. The median home price is $238,000. Meanwhile, it’s experienced a 36% five-year price growth. So it’s still appreciating 36% is a big number, but it might be inflated because the price was relatively low to begin with, but it’s still appreciating, which is always nice to see. The only thing I don’t like about it is it’s essentially experienced about zero population growth since the pandemic. So that’s my only ding against it, but it is more affordable and it is ranked number two as far as universities are concerned. So it has a lot of pros for it as well.

Dave:
Did you know that there’s a survey that they do every year to rank the most affordable housing markets in the world? And Pittsburgh was number one last year, and I think is repeatedly number one in the world.

Dan:
Wow.

Dave:
Because Pittsburgh, it has relatively high incomes compared to the cost of living there. Like Austin said, median home price, 238,000, that’s very cheap for a large city like Pittsburgh, but it’s also one of the sort of epicenters of robotics in the United States, which personally I would bet on people graduate with good jobs and there’s also good manufacturing jobs. So I think Pittsburgh’s interesting. There is flat population growth, so that’s always curious and something that as an investor you want to keep an eye out for. But when you see stuff like that that there’s just good jobs and it’s relatively affordable, that at least intrigues me. Dan, what are your thoughts on Pittsburgh?

Dan:
Yeah, and Pittsburgh is one of those sleepy cities. If you’ve never been there, you think of it as like a steel town literally. But it’s a beautiful area, it’s very hilly, and when people end up there, they do find it to be very attractive. And obviously you mentioned Carnegie Mellon. Carnegie Mellon is a really unique university and that most universities are trying to teach you to learn something and Carnegie Mellon is trying to teach you to think and build and be creative, and that’s why so much innovation comes out of there.

Dave:
Alright, so that is our fourth market that we went through. Austin. Tell us about the fifth.

Austin:
Yeah, number five, we have Columbus, Ohio Classic, obviously. Yeah, many investors love Columbus, Ohio. It’s affordable. It’s relatively easy to find cashflow. You have a lot of big companies moving in. It’s actually ranked number four in terms of the amount of big companies there. I mean, you have a lot of big tech companies building offices there. We have a chip manufacturing plant moving into the area, so that’s really attractive. What I don’t find attractive is the tax climate. It’s better than Chicago or Minneapolis, but it’s ranked number 47 out of 64 on this list, so the bottom half. But that being said, it’s still seeing population growth. It’s seeing job growth is very similar to Indianapolis. There are businesses moving there, and it’s still relatively affordable at, we have a 312 median house price with a 59% appreciation over the past five years. So solid fundamentals here,

Dave:
It is affordable, but I actually went there to consider investing there, and I just found that the potential growth was already really baked in. That was my concern, was that we weren’t seeing the rent growth and the rent prices that would justify some of the prices. So if you’re in the market, I’m sure you can do well and if you want to be patient, but for me at least, I felt like I was overpaying for things there. I totally could be wrong, but it just felt like once they announced this chip plant, people were just buying up everything like crazy and it felt hard to find value in Columbus, even though you’re absolutely right, the fundamentals are strong, the market’s going to grow, the economy’s going to grow. I’m sure people will tell me in the comments that I’m wrong, but that was just my experience that when I went to Columbus, myself, Dan, have you been there?

Dan:
Yeah, so obviously they have Ohio State University,

Dave:
Which is great.

Dan:
Beautiful

Dave:
Campus.

Dan:
It’s a great university and also a lot of people stay in Columbus from the university. It’s a great school. So you do get those sort of young people starting out. Yeah, I actually do occasionally have somebody that says, I have a property in Columbus is doing great. I’m trying to buy another one. I’m not really find anything. So they go through the agent finder and reach out and look in Chicago. So that has happened to me as

Dave:
Well. Yeah, yeah. That’s not to say that you can’t do it just as an out-of-state investor, I found it a little bit hard to find something. So just some things to consider, but again, really strong fundamentals there. Alright, so those are our top five. We do have a couple other ones we just want to mention here quickly for people. Austin, can you just tell us quickly, we won’t go into detail what some of the other mid-west markets are?

Austin:
Yeah, number six through 10 work. Detroit and Arbor, Madison, Wisconsin, St. Louis and Cincinnati.

Dave:
Okay. Well, Detroit is always so polarizing people. I’ve honestly never been so I don’t know much about it, but it’s super polarizing. But Ann Arbor is a market that just seems to be growing like crazy. I think it’s another place hard to find cashflow, but there’s so much tech investment going into that market. That’s a great appreciation market. Dan, do you have any thoughts on any of these? Five?

Dan:
Yeah, I think Detroit is a great city, but it is challenging because of the population and what’s happening there. But to me it’s a really fun city. But yeah, Ann Arbor is great and also the area around Ann Arbor is also a great place to invest in, not just in the city, but even as you start to go many miles outside, there’s great opportunity there.

Dave:
Awesome. Great. Well that’s good to know. Yeah, I’ve been investing in southern Michigan myself. I think there’s a lot of interesting stuff there. Another example of a state that has very low population growth, but if you look at these pockets, they are really attracting a lot of young people in affordable markets. So definitely something to consider. Austin, any thoughts on these last five?

Austin:
Yeah, the only thing that concerns me about the Detroit MSA and the St. Louis MSA is the population decline. But again, there are pockets where people want to move to and there are only so many houses within these neighborhoods. So real estate is hyper-local. Do your research on which neighborhoods might be a good fit for you.

Dave:
Alright, well before we get out of here, I’m going to make you each pick one of these markets. Dan, you’re not allowed to pick Chicago because that’s cheating.

Dan:
Okay.

Dave:
Dan, what would be your pick if you weren’t in Chicago, which of these markets would you like?

Dan:
Yeah, I would focus on Ann Arbor and it would be the southern area, not necessarily right in the center, but around. Look for opportunity out there. When you think of Ann Arbor, where the University of Michigan is, you think of students, but there’s plenty of people that aren’t students there to focus on. And if you’re looking for short-term rental, I think Indianapolis is a great place to look to.

Dave:
Awesome. What about you, Austin?

Austin:
I would choose Indianapolis. I really like the 9% job growth. It’s really attractive to me.

Dave:
Alright, well I would pick Madison, Wisconsin just because I hear that has really high quality of life and I believe in that and investing and never actually been there. But I like a lot of the fundamentals of that market. Alright, well Austin, thank you so much for doing this research. We appreciate you being here.

Austin:
Happy to be here. Thank you.

Dave:
And Dan, thanks for diving deep into Chicago and giving us some of your insider tips about being a Midwest agent. We appreciate it.

Dan:
You bet. Absolutely.

Dave:
If you want to dive deeper into these topics, make sure to check out biggerpockets.com for more resources. And as always, we’d love your thoughts, drop a comment, share this episode and let us know how you’re preparing for whatever lies ahead. I’m Dave Meyer and you’ve been listening to On the Market. We’ll see you next time.