I'd Run for the Hills Before Investing in These 10 Real Estate Markets

I hate being negative about a city, but I'm a realist and understand that some places aren't lucrative for mom-and-pop real estate investors. It's not just a trite cliché that location is the most important factor in real estate -- it's absolutely true.

Where you buy investment property can make the difference between success and failure, but what makes this tricky is the best and worst places to buy change all the time. For decades, my home state of California was the place to buy real estate. People who invested there before me made fortunes. But today, I'd run for the hills before I'd invest in most of California.

Image source. Getty Images.

10 cities I would not invest in today

Landlords should consider these three criteria when ruling out cities: how expensive it is to buy and maintain property, the existence of laws favorable to tenants at the landlord's expense, and outward migration that causes population decline.

Based on those three factors, here are the 10 cities I would not invest in today and why:

Data source: Chart by author.

Let's do a deep dive as to what factors make a bad real estate market. Then you can look for cities that have the opposite traits.

Expensive

It's best to avoid buying investment property in expensive cities for the obvious reason of the high price of entry. But an even bigger reason for landlords is the numbers probably won't work, meaning it's unlikely you'll get any cash flow. There's only so much you can charge for rent before your unit becomes unaffordable to potential tenants, and if that amount isn't enough to cover your expenses, the investment probably isn't a good one. Only buy in expensive cities if your plan is to sell in a few years, counting on a rise in house prices, or if you want to live in the property someday.

Here are the 10 most expensive cities as of December 2021, according to Rocket Mortgage: 

1. San Francisco
2. New York City
3. San Jose, California
4. Bethesda, Maryland
5. Brooklyn, New York
6. Los Angeles
7. Boston
8. Oakland, California
9. Seattle
10. Honolulu

Government and laws/tenant-friendly markets

Remember the eviction moratorium? This mandate made it illegal to evict a tenant until the government said you could by lifting the moratorium, which kept being extended, not lifted. It took a court ruling to end it. If an eviction moratorium were to last, there would probably be no landlords, as eviction is the only recourse landlords have that ensures they receive rent.

Even though the eviction moratorium was eventually ruled unconstitutional, some cities make it tough to evict anyway. Some have rent control laws, which dictate how much you can charge for rent. Seattle has a law called the First-in-Time rule, which tells you how to choose tenants.

Here are the 10 most tenant-friendly cities (cities that make it difficult for landlords) as of September 2020, according to SparkRental:

1. Portland, Oregon
2. New York City
3. Washington, D.C.
4. Baltimore
5. Detroit
6. Chicago
7. Los Angeles
8. San Francisco
9. Dekalb, Illinois
10. Philadelphia

Outward migration

It's usually best to avoid cities people are leaving. Population decline can be problematic for investors. Your market share is decreased, for one. But even more significantly, outward migration trends often signal a city in decline. This usually happens because the city has become too expensive, industry has left (particularly problematic in cities dependent on one industry, like Detroit), crime is up, and house prices are stagnant or decreasing. All this makes it more difficult to find renters who can afford rent every month.

The top 10 states that experienced outward migration, according to the 2021 One-Way U-Haul Growth Index, in order from most to least, are:

1. California
2. Illinois
3. Pennsylvania
4. Massachusetts
5. Alabama
6. New York
7. Oklahoma
8. Louisiana
9. Michigan
10. Arkansas

Knowing what you don't want helps you determine what you do. Pick cities where house prices are below the median, there is little government regulation, and where people are moving to. This article should give you some ideas.