When Investing In Middle America Real Estate – Do Your Homework

Pretty much every city in America does something different than it used to. Towns are founded for one reason, but once enough people live there they keep growing even when their original purpose disappears. This is especially true for this collection of Middle America markets, most of which at first were trading posts located at strategic river locations.

Far removed from river trading, many of these markets are now going through another change – from specific-industry to general-service economies – a disruptive but slow process that has large effects on real estate.

A key feature of these markets is that easily available land produced a spread-out geography, with modest home prices and therefore high home-ownership. (Chicago is an exception, only half as much land is available because it’s on a lake.)

In general, therefore, investments in rental properties should be limited to the higher-density spots that exist in all these markets, or to wealthier suburbs where some people would like to rent.

Another general feature of these markets is that overall job growth during the recent phase of transition is low, often limited to the population growth, around the US average of one percent a year. This means that rents and home prices will increase at only a modest pace for some years to come. So, investors need to be extremely careful about the prices they pay for a property. You must price according to the annual return, not in anticipation of a surge in value.

Local Market Monitor, Inc.

Underpriced Markets

Even though total growth may be low, within the markets there will be considerable rearrangement of the best places to live. In particular, downtown locations, places near medical centers, government offices or colleges, and scenic areas are likely to see stronger demand for rentals, while neighborhoods near industrial plants, commercial ports, or train facilities – where their workers formerly lived – won’t rejuvenate until those sites shut down.

In our list of Middle America markets, Wichita, Milwaukee, Davenport, and Lake County-Kenosha County still have a large manufacturing sector (which is not doing well). Des Moines (insurance), Sioux Falls (credit cards) and Omaha (insurance) have a specialized finance sector. But in ALL these markets, the longer-term growth of jobs is mainly in healthcare and in business services – sectors that provide basic population services, are labor-intensive, and provide modest incomes. In other words, sectors that produce lots of renters.

Note that most of these markets are still heavily under-priced because demand has been weak, not surprising in view of the low overall job growth. Likewise, our forecast for home prices is modest; a market that’s under-priced doesn’t necessarily snap back anytime soon.

The larger significance of a chronically under-priced market, however, is that there are pockets of rejuvenation WITHIN the market – that in fact you can still find bargain properties if you can identify those pockets, which are likely to be in the kinds of areas we listed above.

Smaller low-growth markets have higher risk – one big employer or industry can bring them down. So be more careful in Davenport, Sioux Falls, and Fargo (shale oil development) than in Chicago, Minneapolis or St. Louis. But the current situation of modest prospects shouldn’t keep you from finding excellent rental properties in most of these markets. Single-family rentals in upscale neighborhoods; apartments, townhouses, and divided single-family homes near medical centers and colleges (but not for undergraduates).

You’ll need extra patience – neighborhoods don’t turn around in a year or two – but if you spend the time to find out where new jobs are being created, you can lock in rental properties that will produce above-average returns for the next decade.

Ingo Winzer is the President of Local Market Monitor, Inc., a North Carolina based residential real estate forecast company that provides MSA, county and zip code analysis nationwide to investors.

Source: https://www.forbes.com/sites/ingowinzer/2017/05/11/when-investing-in-middle-america-real-estate-do-your-homework/#21b212b636d9

Category : Blog &Market Trend

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