When it comes to real estate investing, it’s easy to see the appeal of a big city — fancy properties, plenty to do and the quality of life is often high. However, some expert investors are staying away from the biggest cities for many reasons, both surprising and unsurprising.
GOBankingRates spoke with two real estate investors to uncover the biggest reasons they’re steering clear of the largest U.S. cities for their investments.
Prohibitively High Costs and Fierce Competition
“Major cities often have some of the most expensive housing stock in their state. This provides a huge barrier to entry for aspiring investors who don’t have the capital to purchase in the more expensive markets,” said DJ Olojo of The Foreclosure Fix Podcast. He also pointed out that “because the major cities are desirable, there is often lots of competition from other investors and potential homeowners who want to buy quality properties.”
Sebastian Jania of Ontario Property Buyers echoed this sentiment: “There is the most amount of competition amongst real estate investors” in the largest cities. “What this means is that it is more difficult to buy a property at a deep enough discount to justify flipping it, because there are both hedge funds and lots of retail buyers that want to buy the same properties.”
Outdated Infrastructure and Aging Housing Stock
According to Olojo, “Many large cities have homes that are older than their suburban counterparts. Large cities have been built over hundreds of years, and their infrastructure was often not built to sustain the demands of today’s home users. Narrow streets, smaller lots, older building materials and deteriorating city infrastructure usually make investing in major cities financially and emotionally challenging.”
Bureaucratic Red Tape and High Taxes
“Dealing with large cities can be a major pain due to the volume of customers city personnel have to service,” Olojo said. “Frequently, the building permitting process is long and complex and requires numerous property upgrades that can be expensive. The court timelines for evictions and foreclosures are also typically very long due to a backlog in the court system.”
On top of that headache, he noted, “Property taxes and insurance in large cities tend to trend on the higher end of the spectrum. When you combine higher operating costs with larger financing/acquisition costs, it makes it challenging to invest in these cities.”
Stagnant Growth and Lack of Transitional Areas
While large cities have already reached their prime, Jania is more interested in up-and-coming areas, explaining, “The largest cities typically don’t have a fundamental reason to grow more; rather, they are typically capped on their growth compared to cities in the outskirts of those large cities, which can experience much faster growth due to things like migration.”
He also looks for “transitional neighborhoods that right now, may not be so great, but have a strong reason for becoming a desirable neighborhood in the future,” which are harder to find in major cities that have already fully developed.
The Experts’ Advice for Aspiring Investors
So what should hopeful real estate investors do, if the largest cities are out of reach? Olojo suggests looking “30-100 miles outside of big cities. As the cities continue to grow, their growth will spill out to the suburbs and outlying cities.”
Olojo also recommends considering passive real estate investments, like syndications, or simply taking the time to “study, research and read” from reliable sources before diving in.
Most importantly, he emphasized having patience: “Don’t rush the process, and jump in when you are financially and emotionally ready. It is very hard to lose money in real estate if you have the financial capacity to hold onto a property through multiple economic cycles.”
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