In a Time of Turmoil, Steady Real Estate Markets in the Midwest Quietly Deliver
As 2023 kicks off, fear and volatility loom large: tech layoffs are piling up, recession fears persist, and rent growth has turned negative in some once-sizzling markets like Phoenix and Las Vegas. However, the focus has shifted to steady real estate markets in the Midwest.
Meanwhile, the Midwest is quietly doing what it does best—delivering steady returns and leading the nation in rent growth. While part of this is due to hot markets cooling, there’s something deeper at play: the Midwest’s fundamentals have only grown stronger, driven by macro trends like de-globalization, reshoring, and onshoring.
Steady Real Estate Markets: A Strategy Years in the Making
We’ve been investing in the Midwest since 2006 with a focus on capital preservation, cash flow, and long-term stability. And while we’ve consistently hit those targets, we’ve also learned that the Midwest offers something more: opportunity for significant capital appreciation.
Why? Less competition. Fewer bidding wars. More disciplined pricing.
In real estate, there’s no factor more important than acquisition price. And almost any investment can be successful—if you buy it right.
The Dark Side of Demographic “Strength” in the Sun Belt
There’s no question the Sun Belt boasts powerful demographic trends. But those trends often come with a costly tradeoff: investor overcrowding. This makes it very difficult to acquire assets at an attractive price.
Over the past five years, intense competition in the Sun Belt drove cap rates to unsustainable levels—sometimes below 3%—in markets like Austin, Charlotte, Phoenix, and Las Vegas. Financing had become cheaper and cheaper, and developers feed the boom by flooding these same cities with tens of thousands of new units.
Now the tide is turning. Demand is weakening. Thousands of new units are hitting the market.
RealPage recently flagged Phoenix as “especially vulnerable,” citing a huge supply pipeline colliding with evaporating demand. In Miami, CoStar reported a record 28,383 units under construction—enough to expand the market’s inventory by 15.6%. That’s five times the national average of 3%.
Steady Real Estate Markets: Where “Boring” Is a Competitive Advantage
In contrast, Midwestern markets like Indianapolis and Cincinnati have stayed disciplined. Cap rates remained wide. Supply stayed measured. And rent growth? Quietly leading the country.
Take Indianapolis. According to CoStar, cap rates compressed just 200 basis points from 2013 to 2022—falling from 7.49% to 5.55%. But rent growth reached 7.4% in 2022—outpacing every major Florida market.
And new supply? Minimal. Just 5,147 units under construction in Indianapolis, representing only a 3.2% expansion of inventory. In Cincinnati, the pipeline is only slightly higher at 4.2%—yet rent growth matched Miami at 6.8%.
What That Means in Practice: Two 2023 Refinancings in Ohio
Real estate is long-term by design. It’s illiquid, heavily taxed on exit, and expensive to transact. That’s why we rarely sell. Instead, when our loans mature, we return capital to investors through tax-free cash-out refinancings. This preserves compounding, defers capital gains, and eliminates the pressure of 1031 exchanges.
In 2023, we’ll refinance two properties in Ohio:
- A 58-unit property acquired in 2006 (2nd refinance)
- A 150-unit property acquired in 2013 (1st refinance)
The first property’s second refinancing could bring our net equity multiple close to 6.5x—and we’ll still own the asset. With our successful interior upgrade program still underway, we expect even more upside.
The second property was a turnaround project. We had to allocate significant reserves to non-accretive upgrades—roofing, concrete, sewer lines, and more. We also navigated four fires, one of which destroyed an entire building. Despite those headwinds, our interior upgrades have been a success. This year’s refinancing is expected to:
- Return 100% of investor capital
- Deliver a 1.5x net equity multiple
- Defer taxes—and preserve future upside
In both cases, we’re unlocking tax-free gains while continuing to compound value for the long haul.
Final Takeaway: Steady Real Estate Markets, A Risk-Adjusted Edge
We believe these risk-adjusted returns stack up favorably—if not superiorly—against outcomes in many popular Sun Belt markets. Our Midwest thesis isn’t based on trend-following. It’s based on fundamentals, discipline, and a long view of value.
And in times like these, that strategy has never mattered more.
Curious how we’ve built long-term, tax-efficient wealth through disciplined Midwest investing?
See Some of Our Case Studies Here.