Midwest Real Estate Investing: How I Turned California Gold into Midwest Platinum

In 2001, I purchased a small multifamily property in San Francisco’s Marina district—a classic Edwardian building that had been in the same family for over 100 years. Translation: it needed a lot of love.

After major renovations—including adding bedrooms and jacking up the structure to install new steel framing and expand off-street garage parking—I had squeezed nearly all the value I could from the asset.

San Francisco’s Market Froth and My Exit

At the time, San Francisco’s apartment market was overheating. UBS and Credit Suisse were quietly funding a buying spree by Walter Lembi, the city’s largest landlord, through a $100 million credit line that provided almost 100% financing. These two banks repackaged this debt for institutional investors, and they made Lembi the biggest player in town.

In addition, the subprime mortgage market was fueling a bubble in single family housing, and I didn’t think this bubble could last. Eventually, subprime crashed, the Great Financial Crisis (GFC) hit, and capital markets froze. In San Francisco, rental vacancies rose and rents fell. As a result, Lembi could no longer service his debt, and he began returning properties to the banks by the truckload. He passed away one year later, nearly bankrupt.

Selling at the Peak Took Conviction

In 2005, just before all this happened, I sold the Marina property. At the time, I didn’t fully grasp the mechanics behind Lembi’s buying spree, but I knew the market was overheating. Reinvesting in San Francisco didn’t make sense—why sell high only to buy high again? Shunning San Francisco took courage, as many brokers were pushing hard for me to reinvest in the city using my 1031 exchange proceeds. But I decided to look elsewhere.

I toured Oakland, Sacramento, and Reno. Oakland felt stagnant. Sacramento was frothy with institutional capital. Reno was simply depressing. None of these markets made sense.

With my 1031 deadline approaching, I broke the boot (by taking the cash) and paid taxes. That decision gave me something far more valuable: time.

As a rule, I never let the tax tail wag the profit dog.

More important, I did not force myself to invest in the wrong markets at the wrong point in the cycle. This freed me to look for value, not just compliance with arcane tax law to shelter my gains.

That journey led me to Midwest real estate investing—specifically, Ohio.

Midwest Real Estate Investing: Ohio’s Contrarian Appeal

Although not without risk, Ohio presented an interesting opportunity:

  • Unlike San Francisco, there were no rent control laws
  • Demographics were weak, but seemed to have hit bottom
  • Institutional capital was exiting the market, which reduced liquidity
  • This led to high cap rates and low competition

AIMCO (NYSE:AIV), a Denver-based apartment REIT, was selling all of its Midwest assets. At the same time, Fannie Mae and Freddie Mac designated Ohio a “Pre-Review” market, meaning each loan was underwritten manually on a “case-by-case” basis—discouraging lenders and making capital scarce.

This created what I referred to then as a yield vacuum—exceptionally high returns created by minimal investor appetite for this risk.

Most people thought I was making a mistake. A New York hedge fund manager warned me that Ohio had the highest single family foreclosure rate in the country (it would soon flip: during the GFC, Ohio’s worst-hit cities would be eclipsed by California cities like Sacramento and Stockton). A senior executive at Fannie Mae said I shouldn’t buy anything more than a 90-minute drive from home.

But that the advice from the Fannie Mae executive ignored market fundamentals. If I had followed it, I would be right back into the belly of the beast. I knew that the one thing I could not fix after closing was my basis, so I did not want to reinvest in an inflated San Francisco market. At the same time, the market in Ohio was the dislocated and weak, and that worked in my favor by allowing the time to identify an asset whose price reflected the risks of investing in Ohio from a distance.

I didn’t dismiss these risks. I priced them in. We ran models for rent growth and expense growth combined with breakeven ratios to test the resilience of the investment.

Buying Near the Bottom—Just in Time

Ultimately, in 2006, I bought a 58-unit property on the I-75 corridor in Southwest Ohio. While I missed the 2005 Ohio market nadir, 2006 was close enough. I also avoided the worst of the GFC crash in San Francisco and Sacramento while benefiting from the rebound in Midwest rental demand.

In addition, when subprime mortgages finally collapsed, people returned to renting, which was a big part of my Ohio investment thesis. As a result, the cash flow from my Ohio property continued to increase, and I still own it today, nearly 20 years later.

Midwest Real Estate Investing Still Holds Opportunity

What I learned is this: the Midwest offers pockets of growth that rival coastal markets with less competition and regulation.

Coastal investors with “flyover state” mind sets often miss these markets due to outdated narratives, which is perfectly fine with me. But after nearly two decades of operating in the Midwest, I’ve seen time and again that the Midwest real estate investing thesis holds up.

There’s less hype—and better fundamentals.

Want to dive deeper into our investment strategy? Explore our investment thesis here.