Factor in Things Like Safety and Returns on Investment
Historically speaking, investing in real estate has seen significant returns. The S&P 500 Index found that the average annual return on commercial properties is about 9.6% a year, only about 0.7% less than residential properties.
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But investing in anything, real estate included, does come with some inherent risks. Market timing, location, demand and how well the property appreciates over time — among other things — can all affect your returns.
Given how important location is, GOBankingRates asked two real estate investors — Christian Gore and Itay Simchi — where they’d never buy property. Here’s what they said.
Chicago, Illinois
The average home value in Chicago is $296,901, a 4.4% increase over the past year. But liquidity is important when it comes to ensuring you’ll see solid returns on your real estate investment, but this city just doesn’t have that.
“The state is fiscally irresponsible and in a bad position,” said Christian Gore, the founder and managing partner of G1 Capital Partners, a private capital firm specializing in multifamily and industrial real estate investments. “There are scenarios in Cook County where property taxes have increased four to six times virtually, making it an illiquid market.”
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Detroit, Michigan
“From my experience, there are several areas in the U.S. that I would never purchase property in,” said Itay Simchi, a real estate investor and the founder of Proven House Buyers. One of those cities is Detroit, Michigan.
“With a staggering 35% vacancy rate, Detroit’s real estate market is still recovering from the automotive industry’s decline,” Simchi said. “I’ve seen firsthand how difficult it is to find reliable tenants and sell properties in this area.”
Housing prices in Detroit hover at $73,843 on average, less than a 2% increase from last year.
San Francisco, California
Housing prices in San Francisco are almost exorbitantly high. The average home value is $1,296,843, but this is a 1.6% drop over the past 12 months.
It’s not all about the cost of real estate that makes the city less attractive to investors, though. According to Gore, he wouldn’t purchase property there because he feels the environment is unsafe and unpleasant for people to live and work. This, combined with the high overall cost of living, makes it a poor investment opportunity.
Baltimore, Maryland
“Baltimore’s high crime rates (55.4 violent crimes per 10,000 residents in 2022, FBI data) and declining population (a 1.2% decrease between 2020 and 2022) make it a risky investment for me,” Simchi said. “I’ve had issues with property damage and low rental income in the past.”
The area may be a slightly better investment for residential properties, but it’s all subjective. Currently, the average home in Baltimore is valued at $187,223, less than half the national average. This is a 5.3% increase from last year, however, a potential sign that real estate is on the up and up.
New Orleans, Louisiana
New Orleans is another potentially risky investment, Simchi said. Crime rates, especially violent crime, is still high in the area. Along with this, the city is lacking when it comes to overall economic growth.
In New Orleans, the average home is valued at $247,524. This might seem initially attractive, but it’s also a 6.4% decrease from the previous year. And then when you add in high property insurance rates, you could be looking at a potentially expensive investment.
“I’ve seen properties damaged by natural disasters and struggled to find quality tenants,” Simchi said.
New York City, New York
Investing in New York City real estate isn’t for the faint of heart, nor is it for the newer investor — unless they know what they’re doing and have a lot of capital on hand. On average, homes cost $748,012 in the city and have remained relatively stable over the past year. No dips could be a good thing, but no increases could also mean negligible returns.
“The tax burden in NY has climbed significantly,” Gore said. This has made “it very tough to make sense of investing here.”
Gore also added that many people in New York have actually migrated to the Southeast. This doesn’t bode well for those looking to make their fortune in real estate investing in New York.
St. Louis, Missouri
St. Louis is another area that’s struggled with high crime rates and a slow economic growth rate, according to Simchi. This has made it difficult for him to find good tenants for rental properties, as well made it harder to quickly sell properties.
Of course, everyone’s experience is going to be different. Right now, the average home value in the city is $177,243, a 5.3% jump since last year.
Memphis, Tennessee
“While Memphis has potential, its high poverty rate (24.6% in 2022, U.S. Census) and low median household income ($44,445 in 2022, U.S. Census) make it a tough sell for me,” Simchi said. “I’ve seen properties sit on the market for months and rental income is often unreliable.”
Properties in Memphis cost about $151.054 on average, so it could be a decent place for newer investors who want to start small to look. At the same time, Zillow found that property prices have dropped by 2.7% since last year — a potential concern for those seeking higher returns.
Washington D.C.
Home prices in Washington, D.C. have remained steady over the past year, with the average home valued at $621,991. But while that might encourage some investors to buy property, Gore has a different take.
“The city has many laws and rules that make investing here difficult and more politically driven rather than fundamentally driven,” he said.
Cleveland, Ohio
The average home value in Cleveland is just $109,453, according to Zillow’s data. While this is far below the national average, property prices have gone up by 8.5% over the past year. This could make the city an attractive place for newer investors — especially if they don’t have quite the same amount of capital to invest.
But this doesn’t necessarily make it a good place to invest. For Simchi, the city’s declining population and high vacancy rates are major red flags that keep him from buying properties there.
*All average home values are according to Zillow.
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This article originally appeared on GOBankingRates.com: I’m a Real Estate Investor: 10 Places I Would Never Buy Property
