Cash Flow and Appreciation in the Greater Milwaukee Area

[Marcus Auerbach]

I was just reading another interesting discussion about cash flow vs. appreciation and the Midwest vs. the West coast and I want to make a case for a balanced approach, and I think my backyard -  Milwaukee - is a perfect example.

I think we are really blessed here with a very unique situation: the ratio between market rents and (SF) home prices is very favorable here. For an investor that means number one positive cash flow and number two a lower entry threshold to get started. Good rental properties can be bought in the greater Milwaukee area anywhere from 60k to 200k (yes, also for less, but don't get me started on 30k homes).

With a 80% loan to value mortgages for investors getting started is relatively easy compared to many high priced markets out on the coasts. Part of the equity should be come with the property in form of a discount (that's the whole point of finding good deals), the rest can be made up with cash or forced appreciation (improvements, rehab, BRRRR). Either way it does not take a fortune to get started.

Positive cash flow should be a non negotiable for any RE investment. Without positive cash flow the investment outcome hinges solely on appreciation, which makes it a bet and not an investment. However how much positive cash flow is necessary for a good investment depends very much on the strategy. Generally speaking $200 per door after PITI, vacancies and maintenance expenses should be the minimum. It's hard to build a good cash flow stream with less, it simply takes too many units.

The greater Milwaukee area offers a wide range of choices: the general rule of thumb is that higher cash flow (or cash on cash returns) come with more headaches - essentially the investor is earning the additional cash flow by dealing with more issues. Rent to property values are often 2% or better. While cash flow can be excellent in the inner city, equity build up is slow and property taxes consume often a very large portionof the expenses.

The surrounding markets and suburbs offer great investment opportunities as well and are generally more passive and less stressful. While cash flow is generally lower, a larger portion of the monthly expenses goes towards the principal. Milwaukee is often seen as very low appreciation potential, but that is not quite accurate. We have also seen good appreciation in most of these markets in the last years. Year over Year August 2016 the mediaa sale price went up 9.51% to now $194,375. That is not bad for appreciation, especially combined with the still low price tags compared to many of the costal markets.

According to 2016 GMAR data Milwaukee County is up 11% (driven by hot markets along the North Shore area like Shorewood, Glendale, Brown Deer etc who made up for the lower performing areas) the markets in Ozaukee County show even stronger appreciation with +13% ( driven by Mequon, Thiensville, Grafton, Cedarburg etc). At the same time property values are still relatively low (rent to value usually arround 1%) and come with much lower property taxes and higher rents compared to Milwaukee. The same can be said for Germantown and Menomonee Falls area. 

Milwaukee is often times misrepresented as an investment in low income housing and that is simply not the case when looking at the big picture. My own rental properties are mostly around the mid price point with a good balance of cash flow and appreciation potential, but I am gradually moving north and into lower property taxed areas with slightly lower cash flow but better appreciation potential.

I hope this post helps to look at the Greater Milwaukee Area a little more differentiated and puts things in perspective, as there is a true variety of great investment choices available in and arround Milwaukee.

[Aleksandrs Vilumsons]

@Account Closed I think I may be starting to see what you mean. 

Are you saying that some investors do not need to see that cash flow from Day 1? That those investors can purchase into a market that is more expensive and as long as they can stay afloat and they made a wise decision, the cash flow will follow? 

If that is the case, then I think downtown Milwaukee, WI might be in that situation. From my understanding, there will be hundreds, if not thousands, of new units created in the next few years in the downtown proper. Many empty-nesters and millennials are seeking housing in that area and that kind of life style. So while those buildings and units are coming on line, the initial investors have to put up a large chunk of change. Once those units are complete, however, they have the option of exiting and getting their investment plus some interest based on the new, and higher, value of the property, or they could continue to hold onto those properties and receive the cash flow, plus be the owners of very expensive properties which have appreciated greatly since they made their initial purchase. 

With all that being said, I would say that having both cash flow and appreciation would be a great advantage. An investor would not want to invest in an area or neighborhood where the value of their investment would decrease over the years, but it is also very difficult to understand what areas/type of living will be popular in five or eight years, let alone fifteen or twenty. I think it is an incredible gift to be able to discern those types of trends before they happen. Hopefully, one day, I will be at a level of knowledge of my market(s) where I can take some of that extra risk, because in the world of investing, the greater the risk, the greater the reward.