Where to Invest (Part 4) - The Midest

Welcome to another edition of the Coast-to-Coast Real Estate Investor!

Last week I discussed the Pacific Northwest. This week I’m going to take you on an unusual investor’s look at the Midwest region.

Before I begin, let me set the stage for understanding the Midwest as an investing arena. Unlike a lot of markets which over the last few years have seen meteoric appreciation - particularly in the Sunbelt - the Midwest tends to be, on whole, a very conservative and stable market. Appreciation rates don’t tend to spike astoundingly, or come crashing down with a vengeance. Instead, in states like Ohio and Michigan appreciation plugs along at constant rates around 4% per year (in good years or bad). While that may not seem like much when compared to a burst of 15% or 18% rate like so many places experienced, the effects of compounding, over time, make consistency equate to a great effect. It’s very much like holding a blue-chip stock over time as opposed to short-term trading of a volatile high-tech stock.

I’ll also note that, because Midwest prices are pretty reasonable compared to national averages, and because the area is still slanted towards industry and blue-collar employment, you tend to have good rental prospects, both in terms of access to renters and rents that do a good job of covering carrying costs.

Another item to understand is that while many areas of the country have been experiencing migration to them, many Midwest areas have seen population leave. That may sound like exactly the wrong social phenomena that one wants to see as an investor; but it leads to an interesting development if you look at the situation of different angles. That is, you find truly motivated sellers – people who want/need to leave the area and are willing to bargain with you on price and or terms for their property. And, as I noted above, you tend to have a willing body of renters at your disposal.

Much of the population shift is due to employment. The Midwest has for too long been dependent on industry – particularly heavy industry like the automotive field - and that base of employment is on the wane. It’s waning either because production is being downsized or because it’s being outsourced overseas. When a major factory or employer closes down, time and again, an entire town ends up going into decline as a result. It’s a clear, yet brutal example of microeconomics at work. The crux of the challenge is, that often the culture in these towns is such that they just can’t seem to think beyond the factory providing them with jobs. To them, when the factory closed, the world just came to an end!

I’m not trying to make any kind of journalistic or economic commentary here. I’m just trying to point out that this kind of ebb in industrial employment changes the landscape, and when it does, it usually leads to temporary (although the area’s culture may not perceive it as such) economic devastation. Fortunately, the powers that be in most Midwestern states have finally awaked to the need to break their dependence on heavy industry, and move towards service-based commerce - particularly high tech - to encourage local economies and job growth. That transition is changing the landscape all over the Midwest.

That kind of transition is coming…albeit slowly…but it is coming to a lot of areas. In the meantime, I believe there is a ‘perfect storm brewing’ as fellow investor Steve Zahala, from here in Columbus notes, that in the short run looks dire, but is really creating a great opportunity for investors who position themselves to take advantage of it. While everyone is lamenting job loss, economic hardship, and a historical rise in foreclosure (Columbus and Indianapolis currently tie for having the highest foreclosure rates in the country), a unique set of circumstances for the investor are being created.

Case in point – in Northern Ohio there’s a modest-sized town called Lorain, which is the site of a struggling Ford plant that finally closed about two years ago. The loss of Ford shattered the town economically. At first glance, it’s appears to be practically a welfare town. On the other hand, the town is right on the shore of Lake Eerie…a beautiful town, really…and it’s just a matter of time before the town figures out there’s more to itself than Ford, and rises like a Phoenix from the ashes. But right now, property values are depressed and exceedingly low. Imagine, though, five or ten years from now if Lorain is reborn. Consider the picture of Lorain as city with a diversified economy, based on services and information instead of heavy industry, and if it leveraged the proximity to Lake Eerie and encouraged tourism. Can you imagine what would happen to the prices of homes that, today, nobody seems to want?

While that transition is taking place, you can buy a bargain property, acquire it with near historically-low interest rates, in some cases get government assistance with buying and/or renting the property. Then you merely need to bide your time until the tide turns for Lorain.

With that in mind, let’s begin our Midwest examination in my current home state of Ohio.

Ohio
When you think of Ohio, don’t mentally picture the feet of snow typically associated with places like Cleveland. No doubt, Cleveland and northern Ohio is tough climate in which to live, but not all of Ohio is like that. Moreover, even along the Lakes, it’s not like that year-round, and that’s where the secret of the Midwest lays.

I’ll start in my city of Columbus. I’m from the DC/Baltimore area, so I know what a large metropolitan area is like. What’s interesting about Columbus is that it has all of the amenities of a large urban area (major university, ethnic dining, fabulous nightlife and shopping) but still maintains the feel of a small town. It’s also the capital of Ohio, which means a strong local economy. Add to that it being home to Ohio State University, which is one of the largest schools in the country, and you have a grab bag of solid conditions.

While Columbus a fair-sized city, it’s not overwhelming to live here. It’s possible to live in the country around here, but be downtown enjoying world-class amenities in 30 minutes or less. And, as a near-slogan goes here, Columbus is a great place to raise a family.

Prices are very reasonable, with condos in white-collar areas beginning in the 60’s and single-family homes that can be had for under $100,000. Fixers, even in decent professional neighborhoods can dip into the 70’s, so there’s ample opportunity for the fix and flip types.

A bit further north, the cities and towns along Lake Eerie are a definite consideration. If you’ve never experienced the Great Lakes during the summer months, you are in for a real treat. The scenery and water-related activity rival that anywhere in the country. If you can get past the obvious issues of wintertime weather around the lakes, you have 3 other seasons that are just amazing.

It’s at this point I will give Cleveland it’s due – it’s one of those turnaround cities that today is very dynamic and hip…not to mention having miles of beautiful Lake Eerie shorefront. Urban living is getting increasingly popular, with lofts and condos being developed all the time (urban lofts and condos are generally a good investment, when they are priced sensibly), and solid suburban housing is available throughout the metro area at modest prices.

Also look to the towns that dot the Lake both east and west of Cleveland. From my experiences, I’ll note Vermillion, Huron, and Lorain. I’ll also point out the areas known for their water recreation – Port Clinton, Marblehead, Lakeside, and the Lake Islands in the same area. The Lake Islands are noted for having more marina space than in all of San Diego California!

Southern Ohio around Dayton and Cincinnati is another option. Dayton is one of those cities that is ripe for a turnaround. Nearby Springfield is even more so. Imagine being able to buy a good-boned fixer-upper property for under $20,000? How long would you expect prices like that to last once the city jettisons its dependence on heavy industry and all the associated downfall that came with stemming from the last two decades? It’s starting as we speak!

Cincinnati, like Cleveland has already begun its turnaround, has had an amazing urban revival downtown and along its riverfront. It’s getting increasingly popular as a destination city, and that’s having a spillover effect on people wanting to live there permanently. Like Columbus, Cincy is an amalgam of smaller communities and towns, many with very reasonable prices, and a high quality of life. Country folks can be in-town in fifteen minutes, and urban dwellers have all they need to choose from in terms of city life.

Michigan
As I noted earlier, if you’ve never been to the Great Lakes in the summer, you are in for a real eye opener. Being from the East Coast, I refused to believe the Lakes would hold any allure for me until I saw Lake Michigan in the summer. Honestly, one would think they were in the Caribbean – turquoise blue, crystal clear water…sunsets to die for…sugar sand beaches. The only thing missing are the palm trees. Honestly, it’s amazing! In my opinion, it’s only a matter of time before the Lakes get discovered – particularly by those who can’t afford the seaside, or who are apprehensive about hurricanes. Just consider what’s happened in the Chesapeake Bay region on the east coast and I think you’ll see a harbinger of things to come along the Great Lakes.

Michigan has shoreline along nearly a full three of its four major borders. First, look to the western side along Lake Michigan. The Traverse City area is a good start, but consider the small towns north and south of there along the entire waterfront area. On the east side of the state, commonly referred to as “the thumb”, you’ll find the towns that dot Lake Huron. Finally, you have the Upper Peninsula that has Lake Superior on the north side and Lake Michigan on the south.

As you might expect, direct waterfront, anywhere in Michigan is pricey, but not to the level that you’d find it in other locations. What’s interesting…move even slightly off the water and prices drop considerably.

Indiana
Indiana has a little bit of Lake Michigan shoreline and along with that has a handful of small towns that have good prospects. Valparaiso, Portage, Chesterton are a tad inland from the shore, but worth mentioning because, while on the outskirts of the Lake, get clear benefit from Chicago’s growth. More and more they are becoming commuter towns into eastern Chicago.

Wisconsin
Starting south of Milwaukee you have some great lakefront towns like Racine and Kenosha. Then, look to the small towns north of Milwaukee and south of Green Bay along Lake Michigan such as Sheboygan. Additionally, look north of Green Bay all the way up through to the Upper Peninsula of Michigan. These towns are finally starting to take full advantage of their proximity to the Lake, and you see a push towards their draws related to recreation and retirement. As with all Great Lakes towns, winter is an issue, and if you don’t like snow or ice fishing, the Lakes won’t hold much appeal. But for seasonal homes, and ones that hold promise for appreciation due to proximity to water recreation, there is tremendous value in these areas.

Missouri
St. Louis is experiencing a strong urban renaissance. So, condos and lofts, as well as rehabs in up-and-coming neighborhoods, are what to pay attention to. That’s not to say that the entire metro area doesn’t represent a lot of value – prices are very modest in St. Louis and new construction is everywhere, but the hot market is in-town.

Branson – Branson has been a tourist Mecca for a couple of decades now. In some ways, it’s like a ‘clean’ version of Las Vegas, known for its family-safe live entertainment, dinner buffets and amusement parks. Even two or three years ago, Branson was exciting and dynamic as it existed, but the recent completion of Branson Landing – a mixed retail, entertainment, condo complex along Lake Taneycomo has virtually changed the character of the city, bringing a sense of chic to the town.

Instinctively the growth of Branson makes me put anything in the nearby Lake of the Ozarks area on my radar as well as turning my attention to Springfield, MO about 30 minutes north (I’ll also mention Springfield and Joplin in the context of Route 66 which is garnering a lot of tourist fanfare). And, because Branson borders Arkansas, I’ll also go back and re-emphasize close-by Arkansas towns I mentioned in a prior edition – Eureka Springs, Bentonville, and Mountain Home.

So, that will give you a sense of the kind of unique finds that may be available to you in the Midwest. In a lot of ways, it’s a different kind of investing than the Sunbelt I’ve discussed to this point – but that doesn’t negate potential value in Midwest states. It just takes a different investor mentality to work the area effectively.

Next time, in Part 6 of my final installment of these regional examinations, I’ll be tackling the Mid-Atlantic and Northeast states.

Have a great day, and live your real estate dreams!