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Forget Silicon Valley — Get Great Yield in 'Silicon Alley'

Posted by Mike Kalis on Monday, May 14th, 2018 at 1:49pm.

I must admit that the world of real estate investments boggles my mind from time to time, and today is no exception. Investors continue to focus on coastal properties to the extent that is seems like they are blind to the fact that U.S. manufacturing is growing at its fastest pace since 2014. Coastal elites might call these manufacturing pockets of Middle America “flyover states” or "redneck country," but following such stereotypes and misconceptions will easily make them lose out on potential investment profits. Instead, if investors actually visited Greenville, South Carolina; Birmingham, Alabama; or Grand Rapids, Michigan, they’d find that they’re great cities with plenty of room to grow.

However, investors tend to go where all the other investors go. This kind of mass migration sucks out profits. But maybe the scariest thing is to follow the crowd. The most successful people I have met tend to zig when others zag. Following the crowd often leads to death.

Invest in Opportunities

Sure, Middle America has seen its share of hard times, but unemployment is way down, and entry-level jobs are way up. For example, four years ago, our company had a minimum wage of $8 an hour for entry-level roles, and today, we’ve raised our starting wages to $13 an hour. That’s an increase of almost 70 percent.

Some of this change is political, but it’s also part of the business cycle. Home values are rising because people have jobs, and inflation is beginning to trickle in. Far from inhibiting growth, this inflation serves in the short term to push wages up even higher, with the housing market as an additional derivative of income.

Here's an idea: Investors should forget about Silicon Valley and New York City. After all, you’d have to be crazy to buy a home in California right now. There are cities all across America that live in the shadows of bigger, more glamorous locales — I like to call these areas "Silicon Alley." If you're a smart investor, step up to the plate and recognize the growth opportunities to be had in these unfamiliar places.

4 Reasons Not to Wait to Invest in 'Silicon Alley'

Be wary — investment opportunities don’t last forever. The time for buying in California and New York was around four years ago. Properties in Phoenix, Vegas, and Atlanta were ideal purchases three years ago. Right now, the window of opportunity is open for investment in the Midwest, Rust Belt, and Bible Belt states, and it will be closed sooner than you think.

Waiting too long means that the only opportunities lie in speculative investing, which is where investors find themselves now in California, New York, and Phoenix. By seeing the value in Silicon Alley and acting quickly, you can capitalize on the following:

1. Impressive yields
Would you rather buy a home for $500,000 in California that rents for $1,800 or a $200,000 home in Ohio that rents for $1,800? It’s a no-brainer from a yield standpoint. The California property might produce a 3 or 4 percent yield, while properties in Phoenix are going to be around 5 to 7 percent. Comparatively, Silicon Alley areas in the Midwest are providing investors with 10 to 12 percent cash-on-cash returns. You could make $6,000 a month instead of $2,000. Why on earth wouldn't you agree to that deal?

2. Fewer competitors
Flyover states don’t have the huge institutional investors you’re forced to compete with on either coast. Big-name investors won’t buy in these areas because of how their capital is structured. To put it simply: They can’t deploy money in certain geographic locations. Invitation Homes might want to get the 10 percent yield in Indiana, but it just isn’t in the business model at this point. If you’re unencumbered by institutional constraints, consider yourself lucky and start looking at these promising territories. Main Street can beat Wall Street.

3. Room for appreciation
Without question, untouched markets have great room for appreciation. A new investor might be consumed by the fact that California has a high appreciation rate already, but that’s a non-investor mindset. The past doesn't predict future gains. Any professional will tell you that you can’t bet on continued appreciation. A better move is to get ahead of the appreciation curve and invest your money in areas where you’ll see it increase as market price catches up.

4. Sense of stability

Destinations in Middle America will almost always enjoy more stability than property values in more hotly contested areas. Property values in a place like Vegas can drop 50 percent and then soar back to 100 percent. By avoiding these areas, you might lose out on a big upswing, but smart investing is about mitigating risk and ensuring reasonable returns over time. If you’re looking for “get rich quick” investment schemes, you might as well head to Vegas for a weekend and skip the real estate investments altogether.

Today, investing involves stepping outside of your coastal comfort zone. If you’re a contrarian and willing to take on some vulnerability, dive into “redneck” country and take a walk down Silicon Alley. There’s a natural rotation in capital that’s moving from both coasts and traveling inward and upward through the Midwest, along with states such as South Carolina and Alabama. You can either be on the front end of this rotation, or you can chase it once it’s already occurred like investors are currently doing in California. The choice is yours, but I know where my money is going.

Mike Kalis

CEO Marketplace Homes

 

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