Texas vs Midwest for buy and hold investing

[Tyler D.]

Hey BP,

I'm in my 20's and have 200k to invest. I want to make the investment that will give the best returns over my lifetime, so 50+ years. 

I already own a house in Cleveland, OH which cashflows well at close to 2%. I am considering going and buying a ton of more properties in Cleveland, but I am concerned about it in the long term, as it is losing population and home prices are more or less stagnant.

Enter Texas. There is a lot of growth happening in the 4 big cities, and they appear to have a much more solid future than Cleveland at the moment. The downside is that the cashflow is much lower than Cleveland, and most of my gains would be locked into equity which is harder to access.

You're probably wondering why I put "midwest" in my title, and so far have only mentioned Cleveland. I will mention a few others. Chicago appears to have some potential, as it is such a large city with much cheaper houses relative to NY/LA, etc. Indiana(polis) in theory has some good deals, but it has been super competitive and I haven't been able to land any, and Cleveland has better cashflow. Columbus looks excellent, but I've heard it is insanely competitive right now. I won't touch Detroit. 

For Texas, all of the big 4 cities minus Austin look appealing as a mixed csahflow/appreciation play. In Dallas, San Antonio, Houston, you can get deals pretty close to 1%, most of what I'm finding is 0.8-0.9%. Most of the properties I've checked either break even or lightly cashflow with conservative numbers. Like I said before, this would be a play betting on Texas' future, as in the present the midwest offers much higher returns.

I'm probably going to embarrass myself here by showing some theoretical math. I'm going to compare my preferred midwest cashflow city (Cleveland) with my preferred Texas future growth city (Dallas) for turnkey properties:

I'll be estimating 15% maintenance, 10% vacancy, 8% property management, 20% down @ 3.6% mortgage costs for both properties*

Cleveland SFH, B neighborhood:

Purchase Price 65k (15k down)

Rent 1050

Cashflow after all costs: $320/ mo

CoC Return: 25.5%

Cashflow pays purchase costs in 4 years. 

1500% ROI after 30 years (186k Cashflow, 0% appreciation of house)

Dallas SFH:

Purchase price 170k (39k down)

Rent 1600

Cashflow after all costs: $100/mo

CoC Return: 3%

Cashflow pays purchase price in ~13 years

1220% ROI after 30 years (127k cashflow and 412k equity. 3% appreciation per year for 240% total appreciation)

It seems like Cleveland beats Texas even in the long-term, unless there is something that I am missing. I would prefer to go with a better long-term option, and Cleveland, my representative for the midwest, appears to have the best returns both in the long term and the short term.

There are a few variables that could change these calculations quite a bit, and feel free to let me know your thoughts on them. 

1) There may be better deals available in each market than those I listed, which were just what was readily available on the MLS. Better number could easily sway things in Texas' favor.

2) Texas may grow better than expected, and beat that 3%/yr appreciation number. It may also underperform that number.

3) Cleveland's population loss could cause decreased demand/ rental prices which eventually sway things in Texas' favor.

4) Repairs on the cheaper Cleveland houses will cost the same as the more expensive Dallas ones. Assuming same cost of repairs for both houses makes the 30yr ROI about the same for both.

5) Cleveland/ midwest will run into traditional loan limits faster than Texas.

Either way, the best option appears to be investing in the high cashflow, midwest markets. Not only do the returns appear to be better in the long term, they are much better in the short-term which will allow me to acquire more cashflowing properties faster. I'd like this to be an open discussion, please let me know if there is anything I missed in my analysis. I'd love to hear the opinions from both sides.