5 Affordable, Cash-Flowing Markets I’d Buy In This Year

0:00You're probably sleeping on the best investing region in the country right now. It's affordable, it's got cash flow potential, and they're on-market deals that fit my buy box. Today, I'll share with you which region I'm talking about, why I think it makes sense for so many investors, and I'll even drop my list of five markets anyone looking for a new place to invest would be crazy not to consider.

0:29Hey everyone, welcome to On The Market. I'm Dave Meyer. I started investing in real estate 15 years ago in Denver, and I did that for a while. But I actually wound up moving to Europe with my wife for a couple of years. And when that happened, all of a sudden the whole country opened up for me in terms of possible investment places. And there's plenty to like in the Southeast, and the Sunbelt. There are tons of good expensive markets with huge appreciation. But I started quickly realizing that the Midwest and more specifically the Great Lakes region fit a lot of what I was looking for as an investor.

1:06And I've gone on to invest in that area and I'm looking to invest more. And in today's episode, I'm going to explain why and make my case for this region as something you should potentially consider as well. And as we're getting into this, I want to mention that I am so interested in this region of the country. Henry Washington and I are actually going there in mid-July to drive around. We're going to go look for markets. We're going to look for deals as part of BiggerPockets' first ever cash flow roadshow. We're actually considering buying deals if we find some good ones along the way. And we actually have two free meetups I want you all to know about.

1:42You can join us in Chicago on July 15th or in Indianapolis on July 16th. It's going to be a great networking opportunity, a lot of fun time. So they are free, but you do have to RSVP. So we will put the link in the bio, but also go to biggerpockets.com slash roadshow and you can sign up for free for those events. Hope to see you there. For this episode, what we're going to do is we're going to define quickly housing affordability and examine its key components because that's sort of the basis of my thesis around the Midwest. Then I'm going to present some current data on a variety of affordability metrics for cities in the Great Lakes region like Milwaukee, Madison, Chicago, and so on.

2:24And then I'm going to compare them to more expensive markets that still have great investing potential, but I just want to compare and contrast them. And then I'm going to just talk about how real estate investors can take advantage of what's going on in the Midwest and why I believe the Midwest stands out for value and sustainability and how investors from really across the country should consider Midwest opportunities. In the housing market, affordability has a pretty specific definition. It's how easy the average American can afford the average price home. And within that, there are sort of three things that make up affordability.

3:01Of course, there are home prices. Then, of course, there's mortgage rates. And then third is household income. So when you look at all three of those things together on a national basis, affordability is really bad. It is actually close to 30 or 40 year lows. Like the last time we saw housing affordability this low was in the early 80s when mortgage rates were like above 10%. Prices have just gone crazy over the last couple of years. And in the last two or three years, mortgage rates have gone up as well. And that has created a real challenge with affordability. The typical ownership cost right now, so if you add together mortgage, taxes, insurance, all that for homeownership, it eats up about a third of the average person's income.

3:46That's pretty high. Traditionally, what experts believe is sort of the upper threshold of affordability is 28%. You know, that matters. That's probably hundreds or thousands of dollars per year that people are now spending on homes that they would normally have spent elsewhere in the economy. they would have saved or they would have invested. And I think this is going to matter a lot for the housing market going forward. I believe that there are certain markets that have just gotten so expensive that it is difficult and it's going to continue to be difficult for prices to continue to go up and for rents to keep pace.

4:20My belief is that demand is going to start moving towards places where it is relatively more affordable and that's going to help the housing market stay stable and continue to see consistent appreciation. And businesses tend to follow affordability too. If they can get cheaper real estate, if they can have a less expensive workforce, then they will move to more affordable areas. That creates more jobs, a better economy, and better conditions for real estate investing. The last thing I just want to mention about affordability is these places that are more affordable tend to be more stable. There's less volatility in these kinds of markets when the market swings.

5:03And because there's so much uncertainty in the market right now, I am happy with a slow and steady market. I do need to see appreciation. I need those fundamentals. Absolutely. But if you can find an affordable market that is growing, man, to me, that is the perfect sweet spot to be in in 2025. So that's my rant and thesis about affordability, especially for buy and hold kinds of investments. So let's now just start to look at affordability metrics and how the Midwest compares to other places in the country. So we're going to do this in a couple of different ways. There's different ways to measure affordability.

5:39The first and easiest one is just median home price, right? Like how much are you paying for the average home? Milwaukee, for example, which has been one of the hottest housing prices in the nation, it's still up 6 % year over year, one of the fastest growing markets in the country right now. So even though it's in the Midwest and people say there's no appreciation there, that has had strong appreciation. The median sale price is just$199 ,000 as of April. That is less than half the national average. So definitely an affordable market. Let's look at Indianapolis. I talk about Indianapolis a lot because it has really strong fundamentals.

6:18One of the hottest markets, I think Zillow named it the number two hottest market in the country. The entry point, low$200 ,000,$220 ,000,$230 ,000 is the median home price in Indianapolis. What about Pittsburgh, which by some measures is the most affordable market, not in the country, in the entire world. When you compare the incomes in Pittsburgh to home prices, some measurements say it is the most affordable market at$237 ,000 just in median home price. You get to some bigger cities like Chicago, you move up to$345 ,000. But these are all markets where the median home price is at or less than the national average.

7:02So by that measure, Midwest is doing pretty well. We'll just show just the difference here. If you look at Seattle, where I live, the median home price is$851 ,000, right? So that is four times higher than it is in Milwaukee. You could buy four houses for every one you can in Seattle. It's three, three and a half times higher than it is in Indianapolis. So that's pretty dramatic. In San Diego, the median home price was$1 million in May, right? It's really, really different. So as I talked about, I think affordability is going to help, you know, the housing market continue over time in a lot of these markets in a stable way.

7:36I'm not saying San Diego won't grow. It probably will. I'm not saying Seattle won't grow. I actually think it really will. But as an investor, if you're looking to buy value and be able to scale a portfolio, being able to buy four properties in Milwaukee that is also growing and has cash flow is a very interesting proposition to say the least. Let's move on because we have two other metrics of affordability that are super important for cash flow. Because as I said, San Diego, Seattle, probably going to grow. But the cash flow prospects in those cities aren't that great. So let's look at some metrics on how much cash flow you can buy for your money in the Midwest.

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11:04Welcome back to On the Market. I'm Dave Meyer talking about my thesis and why I'm spending not all of my investing effort, but a lot of my investing effort around the Midwest. Where we left off was just talking about entry points and the median home price in some of these Great Lakes cities compared to the expensive coastal regions. I want to turn our attention now to two other things. The first is going to be home price to income ratios. Remember, I mentioned affordability, that matters a lot. It's basically how expensive is a house relative to the average income in that area. And again, even though in Seattle and in San Diego, people have really high salaries.

11:45But when you look at it as a ratio, the Midwest, again, really stands out. Many Midwest cities have really low ratios. Like Detroit is 1.9%. In Indianapolis, it's 3.3, basically meaning if you put 100 % of your income towards buying a house, it would take you 3.3 years to do that. Milwaukee's 3.8, Pittsburgh's 3.4. So all these are relatively low. That probably doesn't make sense to you without a lot of context. So let me just compare this, for example, to a city like Miami. That's 8.5 years. New York, 10 years. San Diego, 10 years. Los Angeles, 12 years. So again, just measuring affordability.

12:28Normal people can afford to buy homes in the Midwest where they can't as much in these really expensive markets. And to me, this just means that it's going to have a healthy housing market in the future. And again, to me, healthy doesn't mean going up 5%, 10%, 12 % every year. It means where normal people with normal jobs can afford to participate in the housing market, that to me as an investor is a market I wanna be in. I think it's good just for the general society. I think it is good for demand over the long run. and for me, it makes my investment a little bit more predictable, which I really like.

13:05Next, let's turn to rent to price ratios, which we're going to actually use rental yields, which is a little bit different than how we always measure it on the show. Usually on the show, we measure one month of rent divided by the purchase price. We're going to measure it by a year of rent divided by the purchase price, but basically the same thing. The higher the rental yield, the higher the potential for cash flow. So when you look at these markets in the Great Lakes region like Cleveland, the rental yield's 8.4%. Chicago, it's 7.8%. Buffalo, 8%. Detroit, 7%. Pittsburgh, 7%. So all really good, relatively speaking.

13:43When you compare it to Boston or Seattle, it's 4.5%. So a lot lower. Los Angeles, 4.6%. It's not exactly half, but it is definitely pretty low. So this means that in these markets that I just mentioned, like Milwaukee and Indianapolis and Chicago and Cleveland, the potential for cash flow is just better. The ratio of how much you pay for a property to how much rent you can collect for that property is higher, generally speaking, than other areas of the country. And when you look at these affordability metrics altogether, when you look at just the entry point, when you look at the income to price ratio, when you look at rental yields, it paints a picture to me of a stable housing market environment.

14:26This is of course not true for every single market in the Midwest or the Great Lakes region. But just regionally speaking, it does stand out in terms of its ability to generate cash flow and its affordability, which for me as an investor in 2025, that's where I want to spend a lot of my time. Now, I have invested money in higher price cities looking for appreciation. And I do that. I choose to sort of split my investing. I do some for high appreciation and that's a little bit riskier, but it can really generate some huge rewards. Others, you know, for my retirement, I just want stable, good assets that I'm going to want to hold on to for 10 or 20 years.

15:08And to me, the Midwest really offers that second part of my portfolio. And that's why I've been spending a lot of time looking for and executing on deals in that region. Okay, so those are some of the affordability metrics, but let's just recap sort of this Midwest advantage for long-term buy and hold investments. First and foremost is cash flow and holding power. As I've said, I think that the Midwest offers the best cash flow potential regionally speaking in the country because they have those higher rent to price or rental yield ratios. and for me i've talked about this a lot but buying right now in these kind of uncertain times i need cash flow and i'm not crazy about it i don't need some enormous cash flow if it's a great asset but i need it minimum to break even get a two or three percent cash on cash return that's factoring in all of the expenses none of that fake cash flow real cash flow i want that early in my investment because that allows me to hold on.

16:08My whole strategy around Midwest is buying great assets that are likely to appreciate and holding onto them for a long time while my rent income grows and my cash on cash return grows. But in order to be able to hold onto these, I need that positive cashflow. And so that's why I've personally been targeting with some of my longer term investments, these cash flowing areas of the country in the Midwest. So that's the number one Midwest advantage, I think, right now. The second thing is sort of this steady appreciation versus volatility. And I'm the first to admit, the Midwest historically sees slower home price appreciation.

16:47It hasn't seen the same things that we've seen in the Southwest or the Sunbelt. And I'm okay with that, personally, because you can still buy a lot lower. You can buy for a lot of value. And if you buy in the right markets in the Midwest, they are still appreciating. I'm not saying that I would invest in a market where prices aren't going up. I wouldn't because that's a number one inflation hedge. It's a great way to get leverage returns. It's just part of investing in real estate is you want appreciation. But what I like about some of the areas of the Midwest is that they appreciate steady. They just 3%, 4 % year after year.

17:23They haven't seen these wild swings. Yes, Boise, Austin, Phoenix, they grew like crazy during the pandemic. They've been in corrections for the last several years. And if you bought in 2019 or 2020, you're still doing great. Don't get me wrong. But for me, trying to buy now for my retirement in 10 or 20 years, I just want a market that's going to grow steadily and have cash flow. And that's what is offered in the Midwest. The third thing is this low entry cost, because this allows, first of all, people who are new to investing to get into markets where maybe they couldn't afford where they live, right?

17:57If you live on one of the coasts in the Southeast or in the Sunbelt right now, it's pretty hard to get into the market. And that lower cost of entry in a solid market means a lot. It means that you might be able to get your deal a lot faster to start that amortization faster, to start getting those tax benefits faster. That is really compelling for a real estate investor. And it's not just for your first deal. That lower entry point means, one, you can scale your portfolio faster. You can buy more units if that is important to you. For me, I focus on quality of units more than buying more units, but it means I could buy more quality units faster because of that lower price point.

18:36And it also means more diversification. If I have X amount of dollars to spend in the Midwest, I could buy a single family home in one region I like. I could buy a duplex in a different neighborhood that I think might appreciate. I might even buy an apartment building for basically what it would cost me to buy a single family home in Seattle or San Diego. And that diversification, again, gives me a lot of optionality, which I as an investor really like. So those are just three of the examples, the cash flow potential, the lower volatility, the lower entry point. And then last thing I want to say here is about the stability and tenant demand.

19:14Again, not every market, we'll talk about specific markets, but many of them have growing populations with really good renter bases. And to me, that tenant demand is super important. It's going to lower my vacancy, which I care a lot about. I really, as an out-of-state investment, I want low vacancies. I don't want turnover costs. I want people who are going to stay for a long time. And there are great cities for this. If you look at Indianapolis or Columbus or Madison, they all have really low vacancy rates. And to me, that adds that stability to my portfolio that I'm looking for in these long-term holds.

19:50So those are some of the advantages I personally see in the Midwest. and it's not just me, right? Like if you look at the hottest list for home prices in the country, Zillow's top, number one, Buffalo, New York in the Great Lakes region. Number two, Indianapolis in the Great Lakes region. You know, usually on these lists, you see things like Boise or Austin or, you know, Dallas or something like this. These markets are hot because there's relatively low supply, but there is sustained demand. And that is a great thing as a real estate investor. So if I have sold you on considering this. It's not gonna be right for everyone and their strategy.

20:26I'm just sharing with you why I'm excited about it. If I have sold you on this concept and you wanna figure out how you might be able to explore these ideas and potentially invest in the Midwest, I'm gonna share with you how you can capitalize, but we do need to take one more short break. We'll be right back. I just booked a trip to the coast and I cannot stop thinking about it. Waking up early, walking somewhere I've never been, finding a little cafe with no plan except to see what the day brings. A few days to explore, try new restaurants, smell the salt and citrus in the air, and remember why we left to travel in the first place.

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23:46Welcome back to On the Market. We're here talking about how to take advantage of some of the benefits I see in the Great Lakes region of the US. Now, for people who live in the area, that's pretty obvious, right? Like if you happen to live in the Great Lakes region, I think investing in your own market, in your own backyard makes a lot of sense. There are probably several good markets within driving distance if you do live in that region. So I would focus on figuring out which markets have their strongest fundamentals around you and just investing in your own backyard. But I also think investing out of state or long distance into some of these markets can make sense for certain investors.

24:26Many investors who live in high cost cities like Seattle or San Diego or Boston, New York, whatever. I get this question all the time. People are struggling. They're trying to figure out how to make a first investment. And the deals are thin. You know, you're looking at a house hack that may not make you a ton of money or you're banking on appreciation and you're not getting any cash flow. Those things can be right for some people. But I think for a lot of folks, especially who are looking for this long term approach to real estate investing, considering investing out of state in some of these markets can make a lot of sense.

25:03You're going to be able to buy a lot more units because it's much more affordable. You'll be able to get that cash flow that provides stability. And there are all the other benefits that I actually talked about. Now, if you're going to do this, it's super important to hone in on a good market because there are absolutely markets within the Great Lakes region that probably aren't great for real estate investing. Lots of places in the Midwest that are seeing population decline, just as an example, right? And you still can invest in places with population decline, but that's something you want to know.