Why West Coast Investors Are Turning to Midwestern Real Estate Notes

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This article is presented by Connect Invest.

Prices on the West Coast are sky-high. San Francisco median home prices are over $1.4 million, while LA rents go for an average of $2,760, if not higher. Meanwhile, new coastal rent-control laws are squeezing cap rates and drying up inventory for West Coast landlords, leading to slower rental growth.

At the same time, capitalization rates in California for apartments and multifamily homes average between 5% and 7%—well below levels that might justify the risk of buying.

Investors are getting squeezed by fewer deals, tighter returns, and tougher exit options.

So if West Coast real estate isn’t a viable investment option, where is? Instead of chasing marginal rates, investors can reallocate a portion of their capital into real estate-backed notes on Midwest and Southeast real estate assets—markets with stronger rent growth.

The Strength of the Midwest and Southeast Market

Thankfully, the West Coast isn’t the only place to invest in real estate. But if you live in the West, buying and renting out a property in the Midwest or Southeast might be complicated. While you can outsource property management, it eats into your margins.

While rental prices are slowing down in some areas, they are picking up in others. Rent prices in the Midwest, for example, increased 6.1% in the first half of the year, double the pace of 2024. The Southeast is also strong, with 2.7% growth, led by Alabama and Georgia. Rental vacancies in the Midwest are also low, at 6.6% compared to the national average of 7%.

The Midwest is also more affordable than other areas, leading to a younger population that’s likely to stay there longer due to the region’s strong economy (even as the area faces headwinds like the rest of the nation). According to the Fed’s Beige book, employment is expected to pick up in the next 12 months.

Median home prices in these regions are also lower, at just $330,500 for the Midwest compared to the average of $531,100 for the West Coast. Homes in the Midwest are also staying on the market far less than they are in other states, at 23.8 days compared to the 80-day national average. This shows just how clearly this region is in demand.

Investing in the Midwest Housing Market

It’s easy for investors to take advantage of the interest and growth in the Midwest without having to live there, thanks to real estate notes.

Real estate notes are a debt owed to the owner of the note. While a borrower might traditionally pay off their mortgage to the bank, with a real estate note, the borrower instead pays the loan and interest to the owner.

In other words, if you own the note, you get the interest.

Many banks and financial institutions will sell real estate notes once they have lent out the money. And as a real estate investor, you can get in by investing through a platform that offers these notes. In many cases, you can buy short-term notes that give you the edge of investing without having to commit your cash to years of nonliquidity.

Curious how Connect Invest helps West Coast portfolios stay productive without another rental headache? Check out how our region?diversified notes can bring yield and optionality to your holdings.