In the economic sweepstakes it’s usually California or Texas or Florida that get all the attention. That’s where people have been moving for decades now, where the sun shines and winters are mild, and where hot industries – hi-tech, energy, tourism – have created millions of new jobs. And in Texas and Florida the housing has always been cheap. It’s no wonder that these places have drained generations of young adults from other parts of the US.
Markets in what I’m loosely calling Mid-America have one distinct advantage over those growth markets in California and elsewhere – they don’t boom and bust on a regular basis. Sure, during the recent recession home prices in these markets fell, but the same was true for all other markets in the country, too. Other than that special situation, and with the exception of booms in smaller markets – like Fargo with fracking – investors can expect steady returns in these places, without having to worry that they bought in at the wrong time.
The 25 markets we’ve listed for the region have several characteristics in common that provide stability – which is what investors in rental property are looking for. Aside from the very big cities, these are medium-sized markets where healthcare, government and colleges provide an outsized percent of local jobs. Healthcare in particular has been a mini-growth industry in recent years as the healthcare system concentrates in urban centers to service a large surrounding area.
The economic stats I’m showing for our markets are from our Investors Metro Monitor reports at Local Market Monitor. These stats can help investors decide how best to invest in each one.
Looking first at population growth over the past three years, we see that few of these markets have done better than the US average of 3 percent. Fargo because of fracking, Fayetteville because of Wal-Mart, Des Moines because of insurance, and Sioux Falls because of credit cards.
And the situation with jobs – which bring future population growth – isn’t much better. Average job growth for the US in the past year was 1.6 percent. Some of our markets were above that mark, some below, but even Fayetteville and Des Moines didn’t have spectacular growth.
In such a low-growth environment, investors in rental property mainly have to worry that they won’t easily find renters. Eventually you’ll always find them, but how many months will your property sit empty – or at less than full-occupancy if it’s an apartment building – in the meantime?
There are two ways to address that problem. If you haven’t already made your investment you need to factor the risk into the price you pay for the investment to begin with. You need to use a risk-adjusted cap rate to calculate the maximum price you’re willing to pay. That way you’ve built a risk premium into the return you expect from your property.
The other way – and these are not mutually exclusive – is to make sure you’re looking for renters where you’ll find lots of them. We call that the Target Rent Range. As a rule this range goes from the average rent for a particular market to about 25 or 30 percent higher. If you need to charge rents well above that range you’ll have more difficulty.
If we look now at home prices, note that the change in home prices in the past year is a measure of demand for ALL kinds of housing, including rentals. By and large that demand has been OK in our markets, although trade wars, in addition to the typical cycles for agricultural products, have had a negative effect in Davenport (John Deere) and Peoria (Caterpillar).
And compared to the “income” price, home prices in many of the markets are still low. The value of real estate is very likely to keep increasing in these markets.
Lastly, note that the home-price-to-rent ratio in most of these markets is 21 or less. This means single-family homes can be bought and rented out with minimal extra expense. In higher-ratio markets like Milwaukee and Madison you’ll be better off cutting single-family homes into several rental units. The very low-ratio markets like Peoria, Rockford, Champaign-Urbana and Wichita offer some speculative bargain opportunities.
So, don’t be shy about investing in these markets. You probably won’t get headlines or windfall gains, but you’ll get solid results.