I’m a Midwestern kid. Born and raised in Cleveland. Went to college in Dayton. Lived and worked in both Chicago and Detroit. And I currently live in Cincinnati.
With that noted, I’m a firm believer of live where you want, invest where it makes sense. So it may come as a bit of a surprise that I prefer to invest in the Midwest as well. But here’s the thing – you should too. Yes, I know the Sunbelt is the darling of multifamily investing, and rightfully so. But don’t sleep on the Midwest. There are excellent markets with sound fundamentals and compelling narratives that rival some of the hottest markets in the country.
But don’t just take my word for it, here’s what George Tikijan of Cushman and Wakefield had to say about it:
“Investors who previously focused on coastal markets, especially New York and New Jersey, shifted focus to more stable locales, and that’s benefited markets such as Indianapolis; Cincinnati; Louisville, Ky.; Kansas City, Mo.; Columbus, Ohio, and Nashville, Tenn.”
And here’s more from Tyler Hague of Colliers International when describing the allure of the Midwest:
“Great yields, less competition, and steady rent and income growth. Investors can realize 75-150 basis point premiums in the greater Midwest for a similar product on the coasts…The demographic and market fundamentals are sound in almost every large secondary market in the Midwest.”
While some may be quick to dismiss the region as “flyover country,” savvy investors are eager to explore the returns available in the region. And the Midwest offers investors more than just cash flow, kind folks, and cornfields. The region delivers a unique blend of culture, affordability, and stability. Here are eight reasons you’ll love investing in the Midwest.
Eight Reasons You’ll Love Investing in the Midwest
1. Attractive Markets
When some people think of the Midwest, they may think of farmland, but there are major metros with thriving nightlife, culture, and universities to attract the ideal renter demographic. 11 Midwest MSAs have populations of more than 1 million people. Some of the world’s largest companies call the region home, like McDonald’s, Walgreens, Caterpillar, Procter & Gamble, General Motors, Eli Lilly, and many more.
The Cleveland Museum of Art is widely recognized as one of the best in the world. Minneapolis ranks 2nd in the nation for live art per capita after New York City. Detroit is reinventing itself as a burgeoning tech hub. Summertime Chicago is the best place on the planet! And as far as the farmland, it’s worth noting that California has more farms than Ohio.
2. Superior Yields
If cash flow is king then the Midwest serves as a bountiful palace. Cincinnati, Cleveland, and Detroit are perennial stables on the list of top multifamily markets for yield. This means that you will see a higher return when investing in a similar quality of properties compared to other markets. Even through COVID, the region performed well as investors prioritized cash flow over appreciation potential. According to CBRE, the following Midwest markets were among the best in the country for 2020: Indianapolis, Detroit, Columbus, Cleveland, Cincinnati, Kansas City, Louisville, and St. Louis.
3. Less Competition
Investing is about finding opportunities and creating value. There are excellent markets across the country that are seeing population growth, job growth, and have a diverse economy. The only drawback is every other multifamily investor is seeing the same data, causing enormous competition and driving up acquisition prices. This is great for sellers, but not so good for buyers.
Some markets are seeing return expectations reduced to the 4% range for B-class properties. Instead of accepting this lower return, explore better returns in other cities with less competition. The Midwest offers some great alternatives with Columbus and Indianapolis being the most popular. Other options for higher returns with less competition are Louisville, Cincinnati, and Kansas City.
Many value-add strategies rely on increasing rents, but there is a point where residents can no longer afford the hikes. Recently, there has been a fair amount of residents fleeing expensive cities such as New York and San Francisco in search of more affordability. This is where the Midwest shines, boasting 7 of the top 10 most affordable states. These markets are positioned well for potential inflation with room to absorb increased rents. For comparison, check out the chart below with the average rents for select Midwest markets and key destinations in the Southeast according to RentCafe.
5. Less Volatility
There is a perception that properties in the Midwest do not appreciate in value. This simply isn’t true, although other regions certainly experience greater appreciation. While the area may not shoot up to the moon, it also won’t plummet to the Earth’s core. The Midwest is stable. Part of the reason is people in the Midwest genuinely like the area and choose to live here. This provides a strong baseline for demand with less volatility than coastal markets, even if they don’t grow quite as fast.
6. More Space
Space has quickly moved from a luxury to a necessity for many renters across the country. In fact, 73% of renters say larger living spaces are highly important to them, according to a 2021 Multifamily Housing Study. However, affordability and connectivity are also important so they’re seeking places that offer the trifecta. Midwest markets serve as a great blend of space, affordability, and connectivity to meet these demands.
There are good, hard-working people in the Midwest. Many grew up on a set of values that prioritizes family, faith, and community. I’ve traveled throughout the country and lived all over the Midwest and the people I’ve met here have been caring, creative, and charismatic. They like people who care about the community and welcome the chance to convert strangers into friends. You don’t have to live here to invest like a local and take advantage of all the area has to offer.
8. Comfort Cooking and Cocktails
From Faygo to Grippos, Polish Boys to bourbon, the Midwest is home to some of the most comforting eats and drinks. When you visit the Midwest you have to indulge in some of the local delicacies that make the region unique. Whether it’s deep dish pizza, Wisconsin cheese, or just amazing cocktails, a side order of cash flow is always the perfect compliment.
The Midwest may not be the sexiest region but there are a lot of great reasons to love investing here. Consider diversifying your multifamily portfolio with a few Midwest markets and experience firsthand what the rest of us love about the region.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.