I think it’s fairly uncontroversial to say that an important part in starting your real estate journey is choosing where you want to buy. Every state, city, metro area, town, village, county, and district is different; each will have its own positives and negatives. It’s important for the investor to understand these characteristics and select a location that fits both their financial and their lifestyle goals.

I live in San Francisco, CA. San Francisco (and California generally) has some of the highest real estate prices in the entire world. And while prices have retreated from their 2022 highs, when I ran the numbers, the value simply didn’t pencil out. Bay Area homes sell in the millions of dollars and the long-term rent does not justify the price. Let’s go through a quick example to show why this is.

Say a typical two-bedroom house in San Francisco sells for $1.5M. Assuming 20% down ($300k and already a shockingly high number) and a 30-year 6.5% mortgage rate, the principal and interest payment is $7,500 a month. A two-bedroom house in San Francisco rents between $3,500 and $4,500 a month. Even assuming $5,000 a month in rent, this property is still $2,500 short of covering primary mortgage payments. And this doesn’t even include taxes, insurance, upkeep, or vacancy! Over the course of a year, this property is likely to have negative cash flows of $-40k to $-50k! I, for one, have absolutely zero interest in purchasing a property with this kind of cash-flow, even if I could afford the huge down payment. It simply requires too much reliance on house prices appreciation for me to see this as a good investment. The value of the house might increase. It might decrease. It might stay the same. Meanwhile, you’re spending 50k a year to experience the privilege of being a landlord.

The other downside to investing in San Francisco (and again, California more generally) is there are very strict tenant protections and rent control in place. Go search Bay Area real estate investing on Reddit. There is horror story after horror story of landlords losing their shirts when trying to deal with unethical tenants. Again, I have zero interest in dealing with this sort of market.

At the end of the day, my local Bay Area market is simply too expensive, too unprofitable, and too hostile to landlords for me to consider purchasing a rental property. For that reason, I chose to invest out of state. Specifically, I chose to invest in Minneapolis.

Now there were several reasons I chose Minneapolis and I will get to those. However, I want to be clear and upfront as to why Minneapolis is a great market for me specifically. And that reason is simple: I have family who live in Minneapolis who are willing to help me. This reason, above all, is what drove me to select this market. I believe this to be a monumental benefit when selecting a market. These are people who I can stay with for free when setting up the property. Who will go to open houses and Facetime me while walking the property. Who have firsthand knowledge of the area and individual neighborhoods. Who I can rely on when there is an issue with a tenant and I need someone local to go check out the property. To be completely sincere, if I did not have family at this location, I wouldn’t have purchased a house here. In fact, I may not have purchased a rental property at all. I am lucky and incredibly grateful to them for this.

I truly don’t think this benefit can be overstated. Can maintaining a rental property where you have no connections be done? Of course it can, and people do it all the time. However, if I were looking at different areas across the country, I would start with locations that have people I can rely on and trust.

With that giant caveat out of the way, here are the other reasons why I chose Minneapolis:

1. Properties are cheap. You can buy single-family homes for under $250k and duplexes for under $400k. My ideal price point was in the $250k to $350k range. In today’s real estate market, that doesn’t go very far, so I had to be much more selective in choosing locations
2. Properties have positive cash flow. Because properties are cheap, rents don’t need to be very high for the property to turn a profit.
3. Minneapolis is a stalwart city of the Midwest with good local and state government and excellent employment and business interests. While other Midwestern cities may have lower price points (looking at the current fad cities like Columbus, Detroit, and Cleveland), I have more faith in the future of Minneapolis. The population is highly educated, there is a large pool of renters, there are Fortune 500 company headquarters, and the city is attractive to midwesterners looking to move.
4. There is no rent-control and the city is friendly to landlords. While I don’t expect to have issues with tenants nor do I want to be a stereotypical “evil” landlord, it’s gratifying being able to raise rents and evict folks if I have to.

Those are the positive attributes. Here are the negatives:

1. The population is stagnant and not expected to increase. Unlike the popular investor cities in the Sunbelt, Minneapolis does not have a growing population. For this reason, I do not expect to see increasing demand for homes which limits the rate at which home values will appreciate. In other words, I’m relying on cash flow, not appreciation.
2. Property taxes and insurance rates are high. Simply put, Minneapolis taxes the hell out of landlords. I’ve seen rates around 1.5 to 1.75% in Hennepin County. That eats into a huge chunk of the profits. Same with insurance. Insurance rates have increased dramatically in Minnesota in the last few years and it is one of the more expensive states in the Midwest.
3. Rents are low. Minneapolis has done a great job in increasing the supply of houses in the city proper. As rents have skyrocketed across the US, Minneapolis has seen a far lower rate of change whereby Minneapolis is a very affordable city for renters. Great for tenants, bad for landlords.

So, there you have it. I try to take off the rose-colored glasses when analyzing a location. I do not expect my property to appreciate significantly; I would be more than happy with 2 to 3% appreciation per year. Meanwhile, I expect to have positive cash flow which covers my mortgage and other expenses while I build equity in the property. Ultimately, while I do believe Minneapolis is a good place to purchase a rental property, the fact is if I didn’t have local family to help me, I likely would have looked elsewhere.

My advice when looking for a location to invest…put together a pros/cons list like the one I listed above. Think about what your priorities are. Are you ok with losing money on a monthly basis while banking on property appreciation?This technique has been extremely lucrative over the last three to five years as home prices have shot up, so it is not without merit. I would also suggest researching local tenant protections and tax rates. It’s easy to research with a quick Google search. Ultimately, you should find a place that works for your lifestyle and budget. Minneapolis was right for me, which location is right for you?