What is going on in Milwaukee? What am I missing?

Question

As a new investor in Southern California, I'm on the hunt for a midwest city to invest in where RCR on multifamilies is a little better.  I've been looking in Milwaukee and I keep seeing all these properties that look amazing on paper.  Like an 8-unit in a B area for $250-350k and will cash flow $200/door even after estimating high on all expenses and paying a manager.

There also seem to be ALOT of these type of buildings.  Before I start buying all of them (:D), I thought I'd ask here.  I feel like I'm missing something.  I know nothing about Milwaukee, so maybe some of you know what's going on.  Is the city trending down? Or is unemployment high?  Is there some hidden cost/drawback I'm not seeing?

Marcus Auerbach · Answer

Milwaukee has been slow and steady over the last 10 years with a very noticable upswing in development in the recent years. We see a lot of commercial development in all categories, but in particular class A appartment buildings. Institutional investors have recogized the opportunity 2 or 3 years ago and it is evident today by all the new luxury appartment buildings comming online.

We see a completley new type of concept, which is vastly different from what has been built in the 60s. With building cost as high as $200 per sq.ft. the appartments have very smart layout, but are kept small. The allure comes from very generous common spaces, lounge areas, outdoor space, pool areas, gyms and - I have even seen an indoor golf simulator. The lifestyle is very different to the classic appartment building setup and the architecture and interior design are often nothing short of spectacular. Rents are accordingly - often over $1500 in the city and as high as $2000 to $2800 downtown (Third Ward) and in the outskirts. It makes me wonder where all the tenants are comming from, who have the income to support this. Some of the developers have told me they are not entirely sure either, but so far it's working.

I am sceptical about this development as it is catering to the top end of a tenant base that is shaped like a bell curve. If supply outpaces demand we will see incentives and rent cuts very quickly. Also I would not want to be in a position where I have to compete with these new developments with a dated MF building lacking the anemnities and quality in construction (think noise insulation between apartments and floors).

The single family market is a very different story. I have written about this in other places. SF under 250k are like bitcoin; we have only what we have, no more supply is created. Municipal development plans don't allow for small inexpensive lots anymore, one to three acre minimums are common. Consequently new construction is almost exclusivley limited to 450 to 650k homes. The lowest priced subdivision with new homes I know of is in Port Washington 15 minutes outside city limits with brand 1400 sq.ft. homes selling for low 300s. We are currently building a spec home in Mequon in the 600k range and I would have loved to build at a sub 500k or sub 400k price point, but the between the cost of land, labor and materials it turnes out to be impossible. Therefore any single family home with decent square footage in a good school district is bound to go up in value and rent.

In general I am very optimistic for Milwaukee. The location on one of the largest fresh water reservoirs will provides for great long term perspective - water will remain a key ressource for many industries, not only for Foxconn. Milwaukee also has become hip for a young crowd, who enjoy the quality of living, economic opportunities and an entrepreneurial vibe combined with a relativley low cost of living.

As mentioned before choice of area is critical. There is a perfect area in Milwaukee Metro for almost any investment strategy - all the way from low income neighborhoods to luxury and new construction and everything in between. The character of these areas is very different as well as their economic trajectory. Some neighborhoods have been a turn arround story since forever and they just haven't turned. Others have like the Third Ward, but that was mainly driven by corporate investors. While Milwaukee propper has been stagnant to negative in population growth, the suburbs have seen steady growth over the last years. This has not been driven by one single development (like Foxconn) but is comming from abroad base and is therefore much more resilient to changes.

My personal investment startegy follows the classic idea of school districts. Milwaukee propper is served by MPS the MPS school system and while there are some better schools in there most parents will move out of MPS if they have the choice. Of course this comes with higher property values and also higher rents. Appreciation over the last years is a reflection of the school districts - we had an average of 7.4% according to MLS for the metro area, with strong groth in the outskirts and areas along the lake shore and flatline in many parts of the inner city. My very first purchase from 10 years ago is the perfect example; while great in cashflow (actually $250 in rent increase per door) has not appreciated at all. It also has not lost much in value in 2010-2012.

In summary I feel very blessed that my life has brought me to Milwaukee. I think area is a slow and steady play wit some interesting dynamics at the moment. I don't think we will ever see price developments as we see on the East and West Coast or cities like Vegas or Austin, we also won't see a crash as pronounced as these high flyers have experienced in the last down turn.

John Franczyk · Answer

I live in Racine and am in a southeast Wisconsin market that, right now, is overheated with FoxConn hype. I've been actively looking for deals in Milwaukee.

The city has charms and quirks that people from outside of Wisconsin would never expect. My young adult son characterizes the city as the "Portland, Oregon of the midwest". The locals, for example, take great pride in local flavor. There are more local coffee chains (including the big 3 -- Collectivo, Alterra, and Stone Creek) than there are Starbucks, at least in the downtown area.

The city is also very segregated. There are sections on the northwest side that experienced property managers won't touch. Tensions between local police and some segments of the city's population run very hot. That said, I don't think it's any worse than any other big city. I realize that isn't a glowing endorsement, but it is a reality. The worst part is that I can't tell what the local politicos are doing about it, apart from each party blaming the other party for inadequate responses.

Although Milwaukee is a short 80 miles north of Chicago, the two cities are dramatically different. History explains the difference. After Chicago burned down in the late 1800's, it became a railroad town with all of the industries that railroads supported. Milwaukee, on the other hand, retained its character as a city that was built on Lake Michigan shipping with large populations of German, Slavic, and Italian immigrants. If you know where to look, you'll see that history in lots of the city's buildings, all the way from small SFH's to the old downtown office buildings.

Most of Milwaukee's hot neighborhoods (Brady St., UW Milwaukee, Riverwest, Walker's Point) are at their peak in terms of real estate prices. The opportunities will be found in up and coming neighborhoods, probably around the Fifth Ward on the near southwest side, and maybe other areas south of the city's downtown. Riverwest is pushing further west into the neighborhood known as "Harambee". The risk is a bit higher there, but it's not war-zone high.

Good luck with your investing.

Donald D Michna · Answer

I am from the Racine area, live in the Milwaukee area and work in the 3rd ward, which is near the downtown area and has developed a lot in the past 10 years. Milwaukee is a great place to invest with lots of opportunities.

Some of the best neighborhoods I see that are developing include Harborview, 5th Ward, West Allis, The Village of West Milwaukee, Greenfield, Riverwest and Greendale areas. Areas that are hot include Downtown, Bayview, Brookfield, Wauwatosa, the Lower Eastside to the Upper Eastside as well as north of UWM. I am probably missing a few neighborhoods in this list but it’s a good starting point. I would also reference the Trulia crime map as it is a good indicator for the most part.

With all the new business from large to small they are helping to develope the Milwaukee area. Yes, Milwaukee is a segregated city and has had tensions for decades, but it is like any large city, each neighborhood needs to be looked at to see where the development is occurring and where it will be going in the future. If you are able to invest in one of the up and coming areas with a cash flowing property it will definitely appreciate  from what I am seeing in the growth of southeastern Wisconsin.

Tom Shallcross · Answer

@Elliot Saks - Milwaukee has great cashflowing properties as  there are a disproportional amount of renters (roughly 40% of households) and a solid inventory of low-priced housing.  However, there's obviously risk that comes along with this.  Neighborhoods change block-to-block and a B neighborhood can quickly downgrade.  Majority of the buildings are typically older units so you you need to adequately put aside for capital expenditures.  Your $200/m per door can be eaten up pretty quickly on one-two cap ex projects.  Lastly, appreciation may be tough to come by so need to find value-adds in a market already saturated with rent options.

I typically stay North of 190 but there are definitely other pockets that make sense (it's also all relevant to your risk tolerance so don't want to make a firm statement here)  Dawn Anastasi is a Milwaukee investor who was on a BP Podcast and has written a solid short eBook on Milwaukee.  I would highly to help better understand the area zip code by zip code:

http://www.lulu.com/us/en/shop/dawn-anastasi/inves...

Hope that provides a starting point and feel free to reach out.

Thanks,

Tom

Matt Smith · Answer

Took a trip there a few months ago to investigate the area...mainly around Racine and Kenosha.  Milwaukee revitalizing downtown...lots of construction. Over the years there's been slight loss of population, loss of a major beer distributor.  The Bucks have new stadium and recently agreed to new NBA G League stronghold in OshKosh.  I felt the same way about prices.  Could be things are turning around for the better after many years of blight...possibly connected to politics.  Locals I spoke with did confirm a reality of the area.  It is somewhat racially segregated as if by preference by each group.  Aside from this, there was hint at some drug problems in areas outside Milwaukee.  And then there's a claim from someone in Texas, where I'm from, that Wi is 95% white....except for Milwaukee.  I drove up from Chicago to Milwaukee and stopped at Kenosha, and Racine along the way.  I didn't notice the 95% part, but wasn't thinking about it either.  I was thinking about Real Estate.  Hope someone from there can elaborate.  I had/have the same questions, but based on my short experience during a freak snowstorm in middle of Spring, I kept thinking that I would really like to be a part of this renaissance.  But there is concern of a barbell economy.  Foxconn and Amazon are definitely game changers, and this is not like Detroit.  I'm rooting for good things to come.  Best to you moving forward.

https://www.bizjournals.com/milwaukee/news/2018/07/30/sba-celebrates-65th-anniversary-reflects-on-growth.html

Marcus Auerbach · Answer

@Daniel Monk not that I am aware of; I think school districts change very slow, if at all. I am speculating here that a school district rating is influenced by two things (and I dont know if this is true or accurate): the quality of the students and the quality of the teachers and admin team. Both would take a very long time to change, probably generations.

School districts matter most, if you tartegt families with kids. If you rent 2 BR appartments, you are more detached from the school district.

Brock Mogensen · Answer

I'm from Kenosha and invest in the Kenosha area also.  The Kenosha market is definitely hot right now with all the economic growth coming to the area.  Don't know who told you the whole 95% things because that is way off, Kenosha is a very diverse city.  There are many parts of Kenosha where you can go from excellent location to horrible location within a two block radius so just be careful.  If you have any more specific questions about the Kenosha market feel free to reach out to me!

Daniel Monk · Answer

@Marcus Auerbach Thank you for the detailed and helpful insights. Bay View seems to be a popular/appealing area, but the schools rate poorly. Over the years have you noticed the public schools improving or have they been getting worse?

Brock Mogensen · Answer

@Elliot Saks Id definitely recommend coming to Milwaukee and walking those areas prior to investing.  A seller may tell you it's in a B class area but for that price I highly doubt it.

Although Milwaukee is a great city with a lot of potential, there are many bad areas also.  If you do decide to invest in these type of areas you definitely want to factor in a higher management fee because I know management companies will charge a higher rate knowing what their getting themselves into with dealing with those areas.

What is going on in Milwaukee? What am I missing?

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