Investing in middle America

[Ed Lopez]

I've really just dabbled with SFH rental properties in the past but am now looking at making more significant moves with a goal to be done with my 9-5 job in 6 years.

I started looking at smaller town properties in Kentucky, Illinois etc mostly because the buy in was reasonable and I could at least get proof of concept without too much risk.  

I'm ready to make some purchases but had a slight hesitation. A fair number of these deals seem to cash flow exceptionally. To the point if you are paying cash you could have a 100% ROI in 5 years or less. I understand the property values In these areas will probably not increase much overtime, but I feel like I'm missing something.

I always wonder why people would rent instead of buying when the rents are so much higher than a mortgage.  Mind you, I’m from a California market where the complete opposite is true.  You rarely if ever meet the 1% rule however my last property literally doubled in value over the last 5 years.  

Some of these investments just gave me pause because they seemed to be too good to be true from a cash flow standpoint.  

Thoughts? Opinions? 

Thanks. 

[Darius Ogloza]

I completed a 10 year "experiment" along the lines you are describing back in 2004-14.  I had the same questions you ask here.  Often, what you will find in these locations is that (i) property taxes are crazy high compared to home values; unlike mortgages, property taxes are "forever."  Many of these places have declining and aging populations and hence a diminishing tax base.  Tax increases in the future - assessed against "outsiders" like you - are certainly in the cards.  (ii) the housing stock is very old and weather beaten.  Fresno gets hot in the summer.  Wet in the winter.  Have you ever experienced 3 months of solid snow and wind?  A roof that in Fresno could go 40 years may go 10 in Buffalo.  Many of these houses were built before farming came to the central valley.  Knob and tube wiring anyone?  Octopus furnaces from before World War 1?  The capital expenditures will far exceed your wildest imagination unless your plan is the play the slumlord game.  Three, unlike the appreciation your have experienced, in many of these areas houses are more like cars or VCR's - they are depreciating assets that fail to meet the rate of inflation.  Putting your money into one of these is like burying it in your backyard.  Last, ask yourself who stays in an area like this when there are vibrant and growing parts of the country they could move to.  Old people, sick people, disabled people, people who did not finish high school, meth heads - the list goes on.  Your tenant base is likely to be high drama and slow paying.  

No disrespect intended here to anyone but these facts were borne out of my experience.  Had I invested the half million I sunk into this experiment in the Bay Area, I would have been ahead by at least $1 million or likely more.  Instead, I was relieved to break even when all the shouting was done.