Following the real estate market crash in 2008 opportunistic real estate investors, from the Mom and Pop types to the large hedge funds, set their sights on those states considered to be “ground zero” for foreclosures. Florida, Arizona, Nevada, and California, often referred to as the sand states because of the desert and beaches, saw an influx of buyers looking to pick up single-family homes for pennies on the dollar.
This run continued through the end of 2012. Then, practically overnight, the steep discounts were gone. As one bank manager told me around this time, “we’ve run out of people to foreclose on.”
I had the opportunity to witness this cycle firsthand. Based in Phoenix, our investment company purchased and sold over 100 properties from 2009-2012 in Maricopa and Pinal County, Arizona. The bargains were abundant and demand for remodeled, turnkey housing (both to buy and to rent) was high. But it didn’t take long for the Arizona desert, once rich with distressed housing stock, to dry up. More and more investors flocked to the market. Soon the margins disappeared and rental yields shrunk. By the end of 2012 the party was over.
The recovery came quickly, for many reasons. The foreclosure process in Arizona is swift and efficient. It didn’t take long to work through the backlog of foreclosures. In addition, values dropped in some areas by more than 60%. Factor in the warm climate (you don’t have to shovel sunshine) and what savvy real estate investor wouldn’t want to buy real estate in Phoenix?
Less Efficiency, Fewer Investors, Higher Margins
This is precisely the time our investment firm began looking for other opportunities out of state. Like the baseball player Willie Keeler used to say, “keep your eyes clear and hit ‘em where they ain’t”. Our strategy is to work in markets where there is less efficiency, fewer investors and higher margins. Of course, other metrics are important, like employment statistics, income trends and age demographics. But above all else our core belief is that you make your money when you buy, not when you sell.
Regardless of the exit strategy, and regardless of whether you’re investing for cash flow or appreciation, the only thing that really matters is purchasing a great asset in a good location for a steep discount.
So with that in mind, why invest in Milwaukee real estate?
According to 2015 data provided by RealtyTrac.com, for Maricopa County (Phoenix) the median sales price of a single-family home is $195,000 and the median foreclosure sales price is $154,000. That’s about a 20% foreclosure discount and hardly enough to pay a Realtor their commission and closing costs, let alone the price of the remodel. Paying such a high acquisition price drastically affects the rental yield as well, especially when there are so many other landlords to compete against.
But for the Milwaukee County market RealtyTrac.com has the median sales price for a single-family home at $119,000 and the median foreclosure price $38,000. That’s a 63% discount!
Investing for Cash Flow and Appreciation
By now maybe I’ve convinced you the discounts are steeper in Milwaukee. But what about the rental yields and demand? Since we began purchasing, remodeling, leasing and managing single-family and multi-family properties in the Milwaukee area in 2013 our average time on rental market is 14 days and our investor clients are getting between 7-10 net CAP rates. Median prices in Milwaukee have steadily increased over 7% annually the past three years according to data provided by Milwaukee Metro MLS. So investing in Milwaukee real estate is a wise cash flow and appreciation investment strategy.
Finally, as noted by a RealtyTrac.com 2015 report, Milwaukee, Wisconsin is one of the top 50 markets in the country for the coveted millennial renter. More than 80% of our current tenants are millennial, primarily because we buy in prime locations with close proximity to employment, retail and recreation hubs.
While there are other real estate markets with an absence of investors and less efficiency, we chose Milwaukee because of several additional factors. Large employers like Aurora Health Care, Johnson Controls, Joy Global, Harley Davidson and Miller-Coors make their home here. In addition, Wisconsin has done an excellent job of luring small business owners and employers from Chicago, which is just 90 miles away. This movement has been well documented by several news outlets, most recently by the popular Crain’s Chicago Business magazine.
Regardless of whether or not you choose to invest with REIMidwest in the Milwaukee real estate market, or in another area of the United States, we encourage you to do similar research. Don’t follow the crowd. Chances are if you’re reading about how profitable a market is (i.e. Phoenix, Las Vegas, Miami) through the mainstream media channels then the best opportunities to invest there may have already passed you by.
In the video below I explain in further detail why we invest in Milwaukee and give you an inside look at some of the properties we’ve remodeled and sold. Happy Investing!