Cashflow vs Appreciation - Debunking David - Midwest wins!

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Cashflow vs Appreciation - Debunking David - Midwest wins!

Greg ScottPro Member
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
In a recent podcast David Greene answered the question of a young person from San Diego.  He commented that total returns in the Midwest are poor because they don't appreciate and rents don't go up.  He specifically called out "places like Indiana" and said this person would be better off buying one expensive property near where he lives vs several less expensive properties in the Midwest. 

I will use data to dispute.

In January 2015, the median home in Indianapolis was $97K.  At that same time the median home price in San Diego was $478K, so you could roughly buy 4 Indianapolis properties for every one San Diego property.  At that same time, the average rent for a typical Indianapolis property was $934 per month and the San Diego average was $1,781 per month.  So, would it be better to have bought one San Diego house or four Indy houses???

If you sold in Feb 2023, here is how your investment would have performed over those 8 years.

Appreciation
- Indianapolis - Those four houses would be worth $852K, a $464K increase in value or a 119% increase
- San Diego - This one house would be worth $884K, a $406K increase in value or a 84% increase

Rent Appreciation
- Indianapolis - Rents rose to an average of $1,458 over this time  period or a 56% increase
- San Diego - Rents rose to an average of $2,959 over this time period or a 66% increase

Gross Rents - Since cash flow would be difficult to calculate without expense data, it is much easier to look at gross rents as a surrogate.
- Indianapolis - Total rents for 8 years from these four houses would be $429K
- San Diego - Total rents for 8 years from one house would be $215K

All total, the four Indy houses look like a better investment than one San Diego house.  As an added benefit, you could sell one of those properties if you want.  With the San Diego house, you can't easily sell 1/4 of it!

Data sources - All Zillow
https://www.zillow.com/home-va...
https://www.zillow.com/home-va...
https://www.zillow.com/researc...
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
3y
Quote from @Twana Rasoul:

@Greg Scott I would agree with David Greene generally....I sold off my few midwest properties to buy more personally in San Diego as my initial negative cashflow properties here had a higher overall return than my initial cashflow properties in the midwest and I had less expenses here as 1 property here had the same value as 5-15 homes there and replacing a roof on a $50k-$100k property cost nearly the same as a property worth $800k.

That said, I believe most people should start in their local market regardless of where that is in the US. Starting local is typically easier and there are more favorable financing options.


Yup  you have to factor in one roof as oppossed to maintaining 4 indy properties given weather conditions and age of product.  But if folks simply bought in the mid west at the Median price points or above.. they would do better.. the folks that get hurt most are buying the lowest priced properties not understanding the renter demographic and how they treat the properties.
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  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    3y
    Quote from @Greg Scott:
    In a recent podcast David Greene answered the question of a young person from San Diego.  He commented that total returns in the Midwest are poor because they don't appreciate and rents don't go up.  He specifically called out "places like Indiana" and said this person would be better off buying one expensive property near where he lives vs several less expensive properties in the Midwest. 

    I will use data to dispute.

    In January 2015, the median home in Indianapolis was $97K.  At that same time the median home price in San Diego was $478K, so you could roughly buy 4 Indianapolis properties for every one San Diego property.  At that same time, the average rent for a typical Indianapolis property was $934 per month and the San Diego average was $1,781 per month.  So, would it be better to have bought one San Diego house or four Indy houses???

    If you sold in Feb 2023, here is how your investment would have performed over those 8 years.

    Appreciation
    - Indianapolis - Those four houses would be worth $852K, a $464K increase in value or a 119% increase
    - San Diego - This one house would be worth $884K, a $406K increase in value or a 84% increase

    Rent Appreciation
    - Indianapolis - Rents rose to an average of $1,458 over this time  period or a 56% increase
    - San Diego - Rents rose to an average of $2,959 over this time period or a 66% increase

    Gross Rents - Since cash flow would be difficult to calculate without expense data, it is much easier to look at gross rents as a surrogate.
    - Indianapolis - Total rents for 8 years from these four houses would be $429K
    - San Diego - Total rents for 8 years from one house would be $215K

    All total, the four Indy houses look like a better investment than one San Diego house.  As an added benefit, you could sell one of those properties if you want.  With the San Diego house, you can't easily sell 1/4 of it!

    Data sources - All Zillow
    https://www.zillow.com/home-va...
    https://www.zillow.com/home-va...
    https://www.zillow.com/researc...

    I do not know how the Indianapolis market has performed since the rate increases, but San Diego had its first decline since the Great Recession. Prices are down ~10% since May.  The San Diego average RE using your numbers would have been close to $1m prior to the rate increase.

    I suspect your start date was chosen to help make your point.   I therefore decided to see what neighborhood scout showed for the long term (since 2000) for each of these cities.  Indianapolis is rated 4 out of 10 with total appreciation of 100.79%. San Diego 240.97% and 10/10 in appreciation. San Diego has almost 2.5 the appreciation of Indianapolis for this century. 

    I recently saw someone cherry pick dates that showed detroit had appreciated more than San Diego.  It is not difficult to find some time span where a city out appreciates the various coastal CA cities.  It is however difficult to find cities that have appreciated more for the long term.

    Personally if I can make the same profit from less properties, that has advantages.  Owning residential RE is not passive even when using a PM.  

    If I was the podcast host, I would have used a different city other than Indianapolis or gone more generic such as midwest city that has rent that has not kept up with inflation.  His point is accurate, even if his example was not perfect. 

    I believe it is possible to succeed or fail in virtually any RE market and advocate 1) starting local 2) educate as much as you can on your market and RE approach 3) leverage those with experience in your market and RE approach.  If you can get them to actively mentor, that would be bonus. 

    4Reply
  • Billy Daniel
    Rental Property Investor · Russellville, AR · Member since 2014 · 688 posts · 509 votes
    3y

    I don't think David was wrong.  Especially from the standpoint that the caller was looking at getting into their first property.  A beginner investor doesn't really know what they are getting into despite how many books and forum posts they read.

    Also, the mid-west is an investing hot spot and much of the region has seen incredible growth in value and rents over the last couple of years.  Just make a comment about investing in Ohio and watch the responses pile up.

    3Reply
  • Brandon GoldsmithBusiness Member
    Real Estate Agent · Columbus, OH · Member since 2020 · 1k+ posts · 1k+ votes
    3y

    Thanks for sharing the breakdown! @Greg Scott

    [email protected]614-963-3340
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  • Greg ScottPro Member
    OP
    Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
    3y
    Quote from @Dan H.:

    I suspect your start date was chosen to help make your point. 


     
    Incorrect.  I used the entire data set available on Zillow.

    I'm actually location-agnostic.  I have investments in 7 states and 10 cities and will invest wherever the numbers make sense.
    1Reply
  • Steve K.
    Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
    3y

    Ironically, I have a colleague who bought some properties in Indy in 2015, at about the same ~$100k price point that you've used in your example. I started investing in Denver (primarily an appreciation market like San Diego) at the same time. I had some properties before then but went full-time in 2015. Anyway my colleague and I met monthly over drinks and compared notes about our investments. Initially he was very positive about investing in Indy, and even tried hard to convince me to work with the same turnkey company he was working with there. His monthly cash flow (on paper) was initially higher than mine and purchase price much lower. In less than 2 years, he had sold those properties at a sizable loss. It was one nightmare scenario after another for him: bad tenants, scammy salespeople, inept/corrupt property managers, consistent monthly losses due to unexpected cap-ex, higher than anticipated management fees, maintenance and repairs, turnovers/evictions/tenant issues, etc. It all looked good on paper and according to his "boots on the ground". But when he actually flew to Indy, nothing was as they said it was. Meanwhile my properties here had appreciated multiple six figures, and thanks to rents increasing quickly, I now had great monthly cashflow as well (actually much better cashflow than his Indy properties and of course much, much higher total returns thanks to appreciation, principle pay-down, tax benefits, rent increases, lower turnover rates and lower actual operating expenses). 

    This is anecdotal for sure, your mileage may vary and I understand not everyone suffers the same fate as my friend. But If you've been on BP for a few years then you've likely seen dozens of scenarios with people excited about investing in the midwest/cashflow markets, who end up losing money for the same reasons as my friend (who now invests locally and is doing much, much better). I know investing remotely works well for some, but in my experience after having been in the game a little while now, the failure rate and risk level is much higher investing remotely, which is something that isn't apparent on the front end when just looking at a spreadsheet or data set to compare market types but is very real when the rubber meets the road IME. 

    Long-distance challenges aside, class A markets/ appreciation markets are more conducive to success for beginners IMO, as compared to other asset classes which certainly have a higher rate of failure/ carry more risk which is part of why the price difference is what it is. I used to focus a lot on spreadsheets and market data and analyzing properties on paper, but now I rely almost entirely on one thing to make a buying decision: location. Properties in good locations are money-makers, while properties in bad locations... typically not as much. I think that's what David was getting at?   

    4Reply
  • Mark Jones
    Property Manager · Indianapolis, IN · Member since 2022 · 150 posts · 59 votes
    3y

    @Steve K. agree with your point that location is key! I have been investing in Indianapolis for almost 25 years and have seen some really great investments, and some not so good ones.  When I crunched numbers and the home cash flowed, the success of it all came down to that location.  I still have several today that I first purchased.  They have done well because of the location.  I didn't pay attention to that as much when I was getting started and have dealt with more than one train wreck! 

    As far as your friend that invested here, it seems to me that he did not have the right boots on the ground team.  When you are investing from a distance that will make or break you.  We have had many investors come to us after purchasing 1 or several homes from a turn key dream team to realize it was nothing more than a nightmare.  That due diligence is crucial when you are not investing locally.  I have been hesitant to invest in areas that I don't know well and don't have a reliable team set up for that reason.  I have since invested in Florida, but I took my time in gaining market knowledge and making sure I had the correct team to help since I wasn't there.  I also visit frequently to make sure everything going well.  

    1Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    3y

    I invest in both linear and cyclical markets (and in between) and they both have their pros and cons.  One thing is certain, the amount of appreciation experienced in certain markets over the past ten years and particularly over the last few years (40+% in some markets) has been life changing for many homeowners and investors...and catastrophic for nonhomeowners or owners in areas where inflation is outpacing values.

    1Reply
  • Mike D'ArrigoPro Member
    Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
    3y
    Quote from @Dan H.:
    Quote from @Greg Scott:
    In a recent podcast David Greene answered the question of a young person from San Diego.  He commented that total returns in the Midwest are poor because they don't appreciate and rents don't go up.  He specifically called out "places like Indiana" and said this person would be better off buying one expensive property near where he lives vs several less expensive properties in the Midwest. 

    I will use data to dispute.

    In January 2015, the median home in Indianapolis was $97K.  At that same time the median home price in San Diego was $478K, so you could roughly buy 4 Indianapolis properties for every one San Diego property.  At that same time, the average rent for a typical Indianapolis property was $934 per month and the San Diego average was $1,781 per month.  So, would it be better to have bought one San Diego house or four Indy houses???

    If you sold in Feb 2023, here is how your investment would have performed over those 8 years.

    Appreciation
    - Indianapolis - Those four houses would be worth $852K, a $464K increase in value or a 119% increase
    - San Diego - This one house would be worth $884K, a $406K increase in value or a 84% increase

    Rent Appreciation
    - Indianapolis - Rents rose to an average of $1,458 over this time  period or a 56% increase
    - San Diego - Rents rose to an average of $2,959 over this time period or a 66% increase

    Gross Rents - Since cash flow would be difficult to calculate without expense data, it is much easier to look at gross rents as a surrogate.
    - Indianapolis - Total rents for 8 years from these four houses would be $429K
    - San Diego - Total rents for 8 years from one house would be $215K

    All total, the four Indy houses look like a better investment than one San Diego house.  As an added benefit, you could sell one of those properties if you want.  With the San Diego house, you can't easily sell 1/4 of it!

    Data sources - All Zillow
    https://www.zillow.com/home-va...
    https://www.zillow.com/home-va...
    https://www.zillow.com/researc...

    I do not know how the Indianapolis market has performed since the rate increases, but San Diego had its first decline since the Great Recession. Prices are down ~10% since May.  The San Diego average RE using your numbers would have been close to $1m prior to the rate increase.

    I suspect your start date was chosen to help make your point.   I therefore decided to see what neighborhood scout showed for the long term (since 2000) for each of these cities.  Indianapolis is rated 4 out of 10 with total appreciation of 100.79%. San Diego 240.97% and 10/10 in appreciation. San Diego has almost 2.5 the appreciation of Indianapolis for this century. 

    I recently saw someone cherry pick dates that showed detroit had appreciated more than San Diego.  It is not difficult to find some time span where a city out appreciates the various coastal CA cities.  It is however difficult to find cities that have appreciated more for the long term.

    Personally if I can make the same profit from less properties, that has advantages.  Owning residential RE is not passive even when using a PM.  

    If I was the podcast host, I would have used a different city other than Indianapolis or gone more generic such as midwest city that has rent that has not kept up with inflation.  His point is accurate, even if his example was not perfect. 

    I believe it is possible to succeed or fail in virtually any RE market and advocate 1) starting local 2) educate as much as you can on your market and RE approach 3) leverage those with experience in your market and RE approach.  If you can get them to actively mentor, that would be

     I agree with @Greg Scott We've been involved in Indianapolis and Kansas City for about 10 years and the growth has been great. We sold properties for Mid $50K and renting for $750 10 years ago. Today, those properties sell for $120K and rent for $1200. Will investors continue to see thay kind of growth? Of course not, but I don't know of any markets where they will. Having said that, not every Midwest market is a good investment market. Many will have little to no appreciation. Indianapolis and Kansas City do well because they have growing populations, job growth and modern/diverse economies which sets them apart from many of the other Midwest markets.

    0Reply
  • Steve K.
    Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
    3y
    Quote from @Mark Jones:

    @Steve K. agree with your point that location is key! I have been investing in Indianapolis for almost 25 years and have seen some really great investments, and some not so good ones.  When I crunched numbers and the home cash flowed, the success of it all came down to that location.  I still have several today that I first purchased.  They have done well because of the location.  I didn't pay attention to that as much when I was getting started and have dealt with more than one train wreck! 

    As far as your friend that invested here, it seems to me that he did not have the right boots on the ground team.  When you are investing from a distance that will make or break you.  We have had many investors come to us after purchasing 1 or several homes from a turn key dream team to realize it was nothing more than a nightmare.  That due diligence is crucial when you are not investing locally.  I have been hesitant to invest in areas that I don't know well and don't have a reliable team set up for that reason.  I have since invested in Florida, but I took my time in gaining market knowledge and making sure I had the correct team to help since I wasn't there.  I also visit frequently to make sure everything going well.  


     100% and I have been on the other side as well having had the opportunity to help several investors from out of state buy and sell investment properties here, even a few times completely sight-unseen. They have done well despite being out of state/ in a foreign country. Finding the right boots on the ground, due diligence, market knowledge, and verifying everything is indeed critical. My friend's story speaks to the importance of all the above more than anything and he certainly would have had the same result in any given market with the same people involved (I'm sure you know the "team"), so nothing at all against Indy/ the midwest. There may have been a softer landing for him in a market where higher natural appreciation would have bailed him out a bit more, maybe he wouldn't have had to sell for quite such a loss... but no amount of appreciation can make up for the worst case scenario of complete operator failure/ outright fraud. This definitely wouldn't have happened if he could have driven by these properties more frequently or knew the market and it's players as intimately as one tends to know their local market.  

    0Reply
  • Twana RasoulBusiness Member
    Real Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
    3y

    @Greg Scott I would agree with David Greene generally....I sold off my few midwest properties to buy more personally in San Diego as my initial negative cashflow properties here had a higher overall return than my initial cashflow properties in the midwest and I had less expenses here as 1 property here had the same value as 5-15 homes there and replacing a roof on a $50k-$100k property cost nearly the same as a property worth $800k.

    That said, I believe most people should start in their local market regardless of where that is in the US. Starting local is typically easier and there are more favorable financing options.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    3y
    Quote from @Twana Rasoul:

    @Greg Scott I would agree with David Greene generally....I sold off my few midwest properties to buy more personally in San Diego as my initial negative cashflow properties here had a higher overall return than my initial cashflow properties in the midwest and I had less expenses here as 1 property here had the same value as 5-15 homes there and replacing a roof on a $50k-$100k property cost nearly the same as a property worth $800k.

    That said, I believe most people should start in their local market regardless of where that is in the US. Starting local is typically easier and there are more favorable financing options.


    Yup  you have to factor in one roof as oppossed to maintaining 4 indy properties given weather conditions and age of product.  But if folks simply bought in the mid west at the Median price points or above.. they would do better.. the folks that get hurt most are buying the lowest priced properties not understanding the renter demographic and how they treat the properties.
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  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    3y

    I hear people bring up this guy a lot (D. Green).   Does he own and manage a large portfolio or is he popular from talking about RE?  

    Just curious -- not trying to hate on the guy

    1Reply
  • Harmeet Dhaliwal
    Real Estate Broker · Indianapolis · Member since 2022 · 10 posts · 6 votes
    3y

    Greg,

    I think Indianapolis is a great market and it has a steady increase in appreciation(about 3%) annually.

    2Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    3y
    Quote from @Cody L.:

    I hear people bring up this guy a lot (D. Green).   Does he own and manage a large portfolio or is he popular from talking about RE?  

    Just curious -- not trying to hate on the guy

    Yes, flips, LTR, STR, note funds, shares in apartment complexes, owns a KW brokerage, and a mortgage company, wrote four real estate books, and is the host of the BP podcast. I believe he started in a west coast market, moved into FL in a big way, and not sure where else. He started off as a police officer, rented a room in a house from another officer to save money, then house hacked I believe to continue to save, and built up a portfolio from savings and hard work.

    There was a recent post with other members tearing him down for benefiting from an environment of low interest rates and criticizing his opinions on the podcast because he is willing to take a point of view (rather than take the easy path and not have one).  "The only taste of success some people have is when they take a bite out of you.” -Zig Ziglar

    0Reply
  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    3y
    Quote from @Mike Dymski:
    Quote from @Cody L.:

    I hear people bring up this guy a lot (D. Green).   Does he own and manage a large portfolio or is he popular from talking about RE?  

    Just curious -- not trying to hate on the guy

    Yes, flips, LTR, STR, note funds, shares in apartment complexes, owns a KW brokerage, and a mortgage company, wrote four real estate books, and is the host of the BP podcast. I believe he started in a west coast market, moved into FL in a big way, and not sure where else. He started off as a police officer, rented a room in a house from another officer to save money, then house hacked I believe to continue to save, and built up a portfolio from savings and hard work.

    There was a recent post with other members tearing him down for benefiting from an environment of low interest rates and criticizing his opinions on the podcast because he is willing to take a point of view (rather than take the easy path and not have one).  "The only taste of success some people have is when they take a bite out of you.” -Zig Ziglar


    Thanks for the background.  Glad that he's walked the walk.  I keep having youtube videos suggested to me that are done by people who are big on youtube but when you look into their experience in the given topic, it lacks.

    Why criticize someone from benefiting from low interest rates?   That's the whole 'trick' to this game. Find a way to maximize your benefit from whatever economic environment you're in.  

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