Updated on July 4, 2020. The trend towards investing in heartland real estate is stronger than ever due to the rise of remote work. People want to live in a lower cost area of the country that is less dense as well.
Making a small fortune is really fun. You can do so more easily if you can correctly predict a trend. Not only will you earn a much higher return on your investment, you’ll also suffer less anxiety and grief.
The Trends I’ve Ridden
In 1997, I studied abroad in China for six months. There I realized its economy was on the verge of explosive growth. So I minored in Mandarin and joined the Asian Equities department at a major investment bank. It was my way to ride the opening up of the Asian region.
I was probably the dumbest donkey in the industry. However, being Asian, knowing how to speak Mandarin, and having the good sense to hustle for 13 years was good enough for me to retire at the age of 34.
By 2001, after the dotcom bubble burst, it was clear the public’s love affair with the stock market was over. So I shifted the majority of my wealth from stocks to real estate. San Francisco property prices ended up soaring while stocks languished for a decade.
During the financial crisis, I realized it was now or never to start a website to at least try and take advantage of web 2.0. I had no plan. All I knew was my happy days were numbered due to a structural decline in the banking industry. Increased regulation and narrowing spreads made work less fun.
11 years later, Financial Samurai is now an established brand in the personal finance space that’s generating much more than I ever made in investment banking with 80% less work.
What’s The Next Investing Trend?
In my opinion, the next money-making trend is investing in the heartland of America through real estate crowdfunding.
To escape high prices in the coastal cities, people — often younger and with lower- or middle-class incomes — are looking toward the Inland Empire and nearby states for additional square footage and a lower mortgage payment.
Now with a global pandemic forcing us to shelter-in-place for months, surely there will be an acceleration of people moving away from densely populated cities such as New York once restrictions are lifted. I for one would love to have a bigger backyard and more space for my kids to roam around.
Further, companies are also moving towards the heartland because it’s becoming cost prohibitive to pay their employees hundreds of thousands of dollars a year so they can rent two bedroom apartments for $4,500 a month. Working from home has allowed millions of people to realize its full-potential. There’s really no going back now.
With technology enabling geo-arbitrage, the opportunity is ripe for investment.
Investing In Heartland Real Estate
Power is ephemeral, which is why in order to promote government harmony, the Hatch Act of 1939 restricts the political activities of Federal employees. Basically, the Act says: Don’t bring your politics to the office.
While the private sector operates without a similar Hatch Act restriction, common sense says it’s still better not to go crazy if your boss has a different political point of view.
The uncertainty of power is why large corporations donate to both political parties every year. They are hedging their bets. Money curries favor from politicians who need money to win and stay in power.
Even if you donated $1,000,000 to Hillary, you’re not screwed if you also donated $1,000,000 to Ivanka’s charity of choice. Donald should still be willing to take your phone call.
Who Else Wins Or Loses?
To be good historians, let’s take a look at the 2016 election results from a macro level.
The below chart is the final electoral college tally. As you can see from the map, the losers are California, Oregon, Washington, Nevada, Colorado, New Mexico, Minnesota, Illinois, New Hampshire, Vermont, New York, Maine, Massachusetts, Rhode Island, Connecticut, New Jersey, Delaware, Maryland, Washington D.C. and Hawaii.
The winners are obviously those states in red.
Now let’s drill down to the election results by county. Not every county in every losing state voted for Hillary. For example, just eyeball California on the map below and you will see the state is pretty divided. But given we have a winner take all system, Hillary was able to gain all 55 of California’s electoral votes.
The real shock from the county-level results is how much of a landslide it was for Trump. If you were just listening to the mass media, you would have been lead to believe the outcome was much more balanced.
But as we know, the mass media and firms like Facebook and Twitter lean left. Therefore, you’ve got to constantly be aware of potential bias and think for yourself.
Know Your Demographics
You might now be wondering, how can there be such a county-level landslide victory for Trump when Hillary won the popular vote by close to 2.9 million? The answer simply lies in demographics.
About half of the U.S. population lives in the blue areas seen below. The other half of the population lives in the gray areas. Folks in the blue areas underestimated the desire of folks living in the gray areas to want something other than a career politician.
With globalization, a lot of people living in the gray areas have not been able to take advantage of the economic boom. Making money in real estate is all about understanding and properly forecasting demographic trends.
Investing In Heartland Real Estate 2020+
The question now is: what happens to heartland real estate after the November 2020 presidential election? The race is between Joe Biden and Donald Trump. The economy is currently in disarray largely due to the coronavirus pandemic.
Joe Biden is leading the presidential election polls against Donald Trump. If he wins, will heartland real estate lose out. On a relative basis, most likely.
However, there is a tremendous desire for people live and work in lower cost areas because they now can. The global pandemic has enabled tens of millions of Americans to work from home. The ability to work from home means that more people will move out of expensive coastal cities and into the heartland.
As a result, no matter who is the next President Of The United States, economics and demographics will win out in the end.
Further, some people believe that given the economy is already so terrible, any change is good change.
Here are the best cities to buy real estate in the new decade from a valuation and growth perspective.
The Easiest Way To Move Capital To Winning Cities, Counties And States
In a Republican administration, the winners include biotech, banks, energy, infrastructure and defense. The idea is that less regulation and more government spending should be a boon for these five industries.
The other way to invest with a Republican-controlled government is to fly around the country and invest in heartland real estate. The problem with this method is that it is inefficient. This requires a lot of capital and a ton of follow-on maintenance once a property is purchased.
Instead of flying all around the country investing in locations where many of us have zero expertise, the simple solution is to leverage real estate crowdsourcing platforms. The leading platforms are Fundrise and CrowdStreet to search for investments in the New America instead.
Both platforms enable investors looking to diversify into real estate through private eREITs or specific commercial real estate projects. Both are free to sign up and explore.
The great thing about real estate crowdfunding is that you don’t need to take on a mortgage to go all-in on one property. The deals and sponsors are all pre-screened. Further, can easily diversify your real estate investments, and the returns are 100% passive.
Every project is different. Spend time reading the research each sponsor puts together on the platform before making a decision.
Below is my real estate crowdfunding dashboard where I invested $810,000 in heartland real estate since 2016. As of 2H2020, I’ve received $291,054.81 in distributions.
Geo-Arbitrage Is Going To Be A Huge Trend
Due to technology, it’s no longer necessary to live in an expensive coastal city where a two bedroom, two bathroom apartment costs over $4,000 a month. Companies themselves have expanded away from the coasts because the cost of labor is too high.
By the year 2030, freelance workers will overtake traditional W2 wage earners thanks to the internet. If you haven’t looked, freelance opportunities are ubiquitous. Today, everyone needs to have their own website and plant their flag on the internet. Here’s my step-by-step guide on how to start your own website if you don’t know how.
Depending on your skill-set, you can earn much more contracting while being much more free than working a day job. Relying on just a W2 income nowadays is foolish because you never know when your job will go away.
Take a look at this great chart highlighting the cost of living difference in Housing, Utilities, and Groceries compared to base case San Francisco living.
Not only will more young folks decide to live in the Midwest and South, more people who’ve already made their money on the coasts will move to the Heartland as well to live a more comfortable life in retirement. As a result, heartland real estate should increase in value.
Take Advantage Of The Trend
Good investors always think about secular changes, regardless of where they stand on the political spectrum. Heartland real estate should do well in the new decade because:
- There will be a net migration out of Blue states into Red states due to lower prices.
- As our country gets older, more retirees will move out of Blue states to stretch their retirement dollars.
- The remote work trend will continue and accelerate due to technology, forced work from home situations, and fear of commuting in densely populated areas due to the coronavirus.
- Income growth should be higher in Red states due to demographic shifts.
- The elimination of state and property tax deductions (SALT), hits higher priced states such as California, New York and New Jersey the hardest, while benefitting cheaper states with no state income taxes to deduct e.g. Texas.
- Now that investing in real estate is more efficient, Red State 10%+ cap rates compared to <4% cap rates in Blue cities are too hard to ignore. The spread should narrow.
- The expansion of who can invest in real estate crowdsourcing will lead to an increase in demand and prices.
- The rise of more real estate crowdsourcing platforms increases the supply of capital, thereby increasing the demand and prices of previously hard to tap investments.
Investing Where My Mouth Is
After selling my San Francisco rental house in 2017 for 30X annual gross rent, I proceeded to reinvest $550,000 of the proceeds in real estate crowdfunding to take advantage of lower valuations and higher net rental yields in the heartland.
To earn more income passively with less risk exposure was my #1 goal as a new father. I’m pleased to say as of 2020, the annual returns have averaged between 12% a year with no work on my part. However, future returns are uncertain due to the global pandemic.
With the long-term migration trend away from the coasts and into the heartland, I plan on continuing to take full advantage in 2020 and beyond, especially if there are deal sweeteners due to the pandemic.
Companies Are Announcing Their Moves
If companies like Google and Apple are spending billions of dollars expanding into the heartland, it’s probably wise for investors to follow suit.
Even the brilliant Elon Musk, on May 9, 2020, threatened to leave Alameda County in Northern California. Tesla will likely open up more factories in the heartland, given heartland real estate a further boost.
The Best Real Estate Crowdfunding Platforms
The best real estate crowdfunding platforms to take advantage of real estate appreciation in the heartland are:
1) Fundrise – They were founded in 2012 and have consistently been the most innovative real estate crowdfunding platform. The platform was created the eREIT fund category. eREITs are more stable and enable investors to invest as little as $500 to gain real estate diversification in various regions of the country. Fundrise is free to sign up and is open to all non-accredited investors to explore.
2) CrowdStreet – If you’re an accredited investor, take a look at CrowdStreet a real estate marketplace that primarily focuses on secondary metro markets. These “18-hour cities” are lower cost with higher cap rates and higher growth than the expensive coastal cities. These cities include Austin, Memphis, and Charleston. CrowdStreet has a direct-to-Sponsor model. This model improves efficiency and transparency. CrowdStreet is free to sign up and explore.
3) RealtyMogul – They were also founded in 2012 and are highly focused on developing a long-term business. I had lunch with their Founder & CEO and I came away impressed with her desire to build a long-term, sustainable company that focuses on the best deals. RealtyMogul is also free to sign up and explore. Their individual deals are for accredited investors only. But they do have two eREIT products that are open for non-accredited investors.
Updated for 2020 and beyond.