Geography Lesson for Investors

Question: Where to Invest?

One of the vexing problems for newcomers to real estate investing is just where to put their money. What town, which neighborhood, will prove best when it comes to long term investing. For those living in larger metropolitan areas this often means extremes in location and demographic attributes. The Chicago metropolitan area, for example, is fully 75-80 miles north to south and easily 40-50 miles east to west, comprising 5 counties (not including contiguous NW Indiana counties). The population is in excess of 10 million. In medieval Europe, this would constitute a city-state in its own right, with Chicago as its capital.

The first Rule of Thumb for investors is to be intimately familiar with the community in which they invest. As a practical matter investments should be convenient to the home or workplace of the investor; and I always recommend "clustering" one's properties for efficient management. Particularly when supervising improvements, or rehab., scattered locations can be awkward or at best inefficient to service in terms of travel times.

Choosing the "right" neighborhood or community

There are often great differences in investment prospects across a larger metropolitan area. Some neighborhoods or communities will be more prosperous than others: there will always be the "better" neighborhoods in terms of household income, public amenities and services.

And the landscape is always changing, as transportation is changed or improved. In the 1950s entire metropolitan areas were transformed by the federal government's decision to develop a nationwide system of high-speed expressways. Areas once considered rural became prime prospects for the creation of new suburbs, or even "satellite cities". More recently we have seen businesses expand into the suburbs from their central city locations, creating new employment opportunities; in many metro. areas the "reverse commute" has become commonplace, with city-dwellers traveling out to their new jobs in the suburbs . True "bedroom" communities are becoming harder to find.

Keeping up with ever-changing landscapes

Cities and their surroundings are dynamic, always changing. Who would have predicted in the mid-20th century the effective demise of the city of Detroit? Once the nation's center of automobile manufacturing, competitive forces, changes in transportation options and new technologies combined to strip the city of its business raison d'etre or very reason for existing. Today Detroit's population is reduced by nearly two thirds from its high of 1.8 million in the 1950s, and the city's government deemed bankrupt, unable to pay its bills.

Communities will change over time in their attractiveness to investors. A case in point is Chicago's south suburbs. Supported for generations by a strong manufacturing base, these communities are now in decline due to the closure of factories and those enterprises that serviced them.  A recent article in Crain's Chicago Business described the plight of homeowners across a broad swath of Chicago's south suburbs. The article is illustrated by this useful table:


What is clear from the data is that investors are well advised, at least for now, to stay clear of these hard hit south suburban areas. By comparison, the south side of Chicago, within the city limits, is not so adversely effected and, indeed, there are neighborhoods and communities to the north where home prices have recovered nearly to pre-recession prices. As the Crain's article states: "home values in sought-after neighborhoods like Lincoln Park and River North, as well as wealthier suburbs like Evanston, Naperville and Downers Grove, have returned to where they were in 2004 and 2005, shortly before the crash." Other neighborhoods and communities across the metropolitan area are rapidly improving as well.

In the end, investors must take into account changing employment, transportation and demographic information when deciding where to invest. Not all areas are created equal for investment purposes. And, as this look at the Chicago area's changing economic and housing patterns makes clear, one cannot generalize that suburban is necessarily better than urban/central city, or vice versa for that matter. In the end what we look for is stability, pride of ownership and gently appreciating home values. Always a winning combination.

- Philip Elmes

LINK to Crain's article: (click here)