Invest in Rural Midwest?

Question

First time poster. Have never owned a home, and I love my apartment in Chicago (which I rent). I’m saving for my first investment property and I’m thinking to either look for a house-hack in Chicago (which would be expensive, particularly as I need to be near good public schools) or invest in other markets with lower cost options, perhaps in Iowa or southern Wisconsin.

Does it make sense to invest in the rural Midwest for an inexpensive learning experience, with the goal to move to a larger market after getting a few rentals under my belt, or should I just save and make my first move in a larger market?

Jenna Herr · Answer

@Bryan Blankenship You answered my question with more questions. :) Good nuggets in there though. Challenge of rural midwest is that there's not often a varierty of industries, so there is certainly the risk that an employer will leave town.

@Justin Tahilramani Why start investing in a market that you don't want to be in long term? Because that's the market that I know. :) It's not that I wouldn't want to stay in it long term. I think I could build a successful portfolio there, but not one that's going generate the level of income that I want long term, so I'm thinking to start there and diversity into another more expensive market later.

Carl Cisler · Answer

@Jenna Herr

I live in Rural Iowa and have a fair amount of rentals here. Earlier in my life bought cheap house for cash flow. It worked out but here are a couple of things to consider.

A 20 k house cost about as much for a new roof, HVAC and service call as a 100 k in a bigger area. Rent will be much less. We do have some low price rentals but that is from my early purchases. If I was purchasing from outside my area I would want something more stable than a 20 k house. I’m my market that would be a 50 to 75 k house.

Saying all of this many of my newer purchases have been in another state in a larger populated area.

Regardless which ever way you go good luck and know you are on the right track real estate cash flow investing is the way to go.

Gloria Wiekert · Answer

@Jenna Herr, my partner and I considered this exact same thing for the past year and ended up house hacking in Chicago. I grew up in both the Rockford and Champaign/Urbana areas and he went to UIUC so we had two lower cost options that we both felt comfortable with and required much less capital to purchase in. We toured properties in both towns and found a few good options that would cash flow well, but ultimately we chose to house hack in Chicago first for two reasons:

1. We felt that our downpayment was being used more efficiently. For example: $25k is a 25% downpayment on a $100k property elsewhere, but could purchase up to a $700k 4 unit property in Chicago with an owner occupied FHA 3.5% down loan.

2. We realized that if we had purchased the small investment property first, that any cash flow from that would technically go in our landlord's pocket if we were still renting. Or, we'd still be paying rent out of our salaries. Either way, our money is going in another landlord's pocket instead of our own. With the house hack, we made sure that if we weren't cash flowing, then our monthly payment after collecting tenant rent was less than the market rental value for the apartment we occupy. In both scenarios, if your monthly payment after collecting rents is $1,000, then in the house hack scenario that $1k is building equity in OUR property, and in the smaller investment property scenario that same $1k is building equity for someone else.

All this being said, school districts were not a high priority for us since we don't have kids yet, just two lovable pups. Depending on where in Chicago you want to be this line of thinking might not apply in the same way, especially if 2-4 unit properties in your preferred school districts are priced higher than the FHA loan limits. There are plenty of other factors we considered, like the true cash on cash return rate for both properties and appreciation potential, but ultimately decided to focus more on the option that was better overall for our personal finances. We feel that we have more flexibility on future purchases now that we've secured an investment that doubles as a home.

TL;DR - go for the house hack!! :-D

Brie Schmidt · Answer

I own property in Chicago and bought cheaper properties in Milwaukee.  Like Carl said, a HWH, Furnace, roof, siding all cost the same but rents of $800 vs $1500 make a big difference, so you would need to plan out your capex carefully.

Darson Grantham · Answer

@Jenna Herr Just so I understand, when you say $20k house in small town you plan to pay cash for that?

Or the other option is continue saving up to pay cash for a $100k property in a city like DSM?

Between these two options, I think saving $20k for a downpayment on an investment loan at a local bank to buy a $100k property.

I can only speak to DSM, but If you (or your realtor) search hard enough, there are properties in DSM that cashflow as a rental.

There are many ways to dip your foot into real estate!

Please reach out if you want jump in a video call to go into more detail!

Best of luck!

Bryan Blankenship · Answer

@Jenna Herr It all depends on how much capital you have to start out with, how risk averse you are, and what your timeline and goals are. Are you planning on doing renovations yourself, or trying to outsource that from a distance? If you've never done this before, you need to make sure you have enough in reserves for unforeseen circumstances that pop up during rehab/leasing/etc. They happen!! :)

Alternatively you could purchase a turnkey property that's already renovated and leased up. That might be a great option for you so that you're learning things one step at a time. That will get you familiar with all of the paperwork bits and overarching concepts without having to dive into renovations and finding tenants and property management companies yourself. That does come with a higher price tag, though (depending on the market, anywhere from $110K-$180K for a solid B class SFR).

I could ramble on about all of the pros and cons of each strategy for about 24786 more paragraphs, so I'll just stop here and sum up LOL - Research markets you're interested in. If these are going to be investment properties, it all comes down to a few important factors:

1. Desirability of the area for renters (access to major roadways, attractions, shopping, nice neighborhoods)

2. Low crime rate

3. Solid economy with a variety of industries

4. Cost-of-Living/Household Income (obviously these go hand-in-hand. Can the class of tenant you want afford to live where you're investing? Do they have good jobs there? This reflects back onto #3 a bit)

5. Affordability for you.

Once you've narrowed your options down based on those factors, it's a matter of speaking to locals on the ground, whether that be a turnkey company if you're buying turnkey, or a real estate agent and his/her contacts and network if you're trying to do most of it yourself, etc. Some people will utilize friends & family and form partnerships, but that can get DICEY if anything goes awry (and it will).

Best of luck to you! :)

Jay Hinrichs · Answer

these can be very illiquid investments that you also cannot get financed.. so I would caution you on that one starting out.. there are TONS of cool brick duplex's in chicago i would house hack one of those FIRST and Foremost  @Brie Schmidt  ping Brie she is an awesome broker there and specializes in Small MF>

Justin Tahilramani · Answer

Why start investing in a market that you don't want to be in long term? Also, don't discount secondary markets - they can be great cash flow plays.

The most important aspect of investing is that you KNOW the area that you are investing in.

Caryn Roberto · Answer

@Jenna Herr

Feel free to message me. We specialize in small multi family and I’m from the suburbs. Like others have said, you need to get the best return. The schools in the burbs are great with the exception to a few areas. Pinpointing the best areas for you to invest then investigating the schools would be your best strategy.

Caryn Roberto · Answer

@Jenna Herr are schools your only priority? You don’t need to be near a job or family? If so, the suburbs are HUGE, have excellent schools & you can hit every economic picker you are looking for.

Invest in Rural Midwest?

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