Real Estate Investor’s Warning: 10 Cities You Should Think Twice About Before Buying Property
Investing in real estate has long been a popular strategy for building wealth, with significant returns historically reported. The S&P 500 Index notes that commercial properties yield an average annual return of about 9.6%, just 0.7% less than residential properties. However, like any investment, real estate comes with its own set of risks. Location, market timing, demand, and property appreciation are all crucial factors that can significantly impact your returns. Here’s a look at 10 cities where real estate investors are cautious, and you might want to be too.
1. Chicago, Illinois
Chicago, with an average home value of $296,901—a 4.4% increase over the past year—might seem like a promising place to invest. However, the city’s financial instability is a significant concern. According to Christian Gore, founder and managing partner of G1 Capital Partners, “The state is fiscally irresponsible and in a bad position.” This poor financial management has led to property taxes in Cook County increasing four to six times in some cases, making the market illiquid and challenging for investors seeking reliable returns.
2. Detroit, Michigan
Detroit’s real estate market is a cautionary tale of a city still struggling to recover from its industrial decline. The average home price in Detroit is a mere $73,843, with less than a 2% increase from last year. Itay Simchi, a seasoned real estate investor and founder of Proven House Buyers, warns against investing here due to the city’s staggering 35% vacancy rate. “I’ve seen firsthand how difficult it is to find reliable tenants and sell properties in this area,” Simchi said. Detroit’s economic woes make it a risky bet for any investor.
3. San Francisco, California
San Francisco, known for its exorbitant housing costs, is another city that may not be worth the investment. The average home value sits at a whopping $1,296,843, but this reflects a 1.6% decrease over the past year. Beyond high prices, the city’s deteriorating living conditions and rising crime rates make it less attractive for potential buyers and renters. Christian Gore advises against investing in San Francisco, citing its unsafe environment and high cost of living as major deterrents for property investors.
4. Baltimore, Maryland
Baltimore’s real estate market is fraught with challenges. The city’s high crime rate, with 55.4 violent crimes per 10,000 residents in 2022, coupled with a declining population, makes it a risky place for investors. The average home in Baltimore is valued at $187,223—a 5.3% increase from last year—but the market remains volatile. Simchi has experienced issues with property damage and low rental income in Baltimore, making it a tough sell for cautious investors.
5. New Orleans, Louisiana
New Orleans presents a risky investment opportunity, particularly due to its high crime rates and lack of economic growth. The average home value is $247,524, reflecting a 6.4% decrease from the previous year. High property insurance rates and the threat of natural disasters add to the financial risk. “I’ve seen properties damaged by natural disasters and struggled to find quality tenants,” Simchi shared, highlighting the potential pitfalls of investing in the Crescent City.
6. New York City, New York
Investing in New York City real estate requires deep pockets and a high tolerance for risk. The average home price is $748,012, and while prices have remained stable, the city’s rising tax burden and declining population make it a less attractive option for many investors. Gore points out that many residents are migrating to the Southeast, which could signal trouble for those hoping to capitalize on the Big Apple’s once-booming real estate market.
7. St. Louis, Missouri
St. Louis is another city struggling with high crime rates and slow economic growth. The average home value is $177,243, a 5.3% increase from last year, but Simchi warns that finding reliable tenants and selling properties in the area can be challenging. Investors should approach this market with caution, as the city’s economic struggles continue to pose significant risks.
8. Memphis, Tennessee
Memphis offers affordable real estate, with an average home price of $151,054, but it comes with its own set of challenges. The city’s high poverty rate (24.6% in 2022) and low median household income ($44,445 in 2022) make it difficult for investors to generate reliable rental income. Property prices have dropped by 2.7% since last year, further signaling potential trouble for investors seeking strong returns.
9. Washington, D.C.
Washington, D.C.’s real estate market might appear stable, with an average home value of $621,991, but investing in the nation’s capital comes with its own set of hurdles. Gore cautions against the city’s numerous regulations and politically-driven decisions that can make investing here more difficult and less profitable. Investors looking for a more straightforward market might want to look elsewhere.
10. Cleveland, Ohio
Cleveland, with an average home value of $109,453, has seen property prices rise by 8.5% over the past year. However, Simchi warns against investing in the city due to its declining population and high vacancy rates. While the low prices might be tempting for new investors, the long-term prospects are uncertain, making Cleveland a risky market.
In conclusion, while real estate remains a lucrative investment for many, these 10 cities present significant risks that could outweigh potential returns. Investors should carefully consider the economic and social factors of each location before making a decision. As always, thorough research and a cautious approach are key to successful real estate investing.
