The Best Neighborhoods for Apartment Investing

One of the first questions you ask yourself is, “What neighborhood should I invest in?”  There are hundreds of ways to answer this question.

I think it’s one of the most important questions.  Maximum ROI shouldn’t be the first objective.  Investing in apartment buildings is a long-term strategy for building wealth and steady spendable cash-flow.  It won’t happen quickly.  You need to be able to stick with it for many decades to benefit fully.  Select your neighborhood and property type carefully, and based on your own strengths and weaknesses.

A lower ROI over a longer time horizon will usually beat a higher ROI over a shorter horizon.  It’s the power of compound interest.  With this in mind, it’s more important to ask whether you can sustain the investing model long-term.  

If cash-flow is your objective, can you be comfortable managing property in rough neighborhoods?  If appreciation is your objective, can you endure the next 10 years of negative cash-flow while you actively manage the property to keep operating expenses low?

Remember that you need to have a management strategy that will create and maintain the most value for your tenants.  Don’t be miserable for the next 10 years because you invested to yield the greatest ROI rather than the most sustainable model for you.  It’s not worth it.  If you do, you just might quit or curtail your growth plans because you cared too much about the the next two years rather than the next two decades.

An important question to ask is, how will owning this property affect other areas of my life?  Am I willing to do the things necessary to manage this property type in this location type?  

Fortunately, many of the issues that will come up are predictable in real estate.  So, it might be helpful to imagine how you are dealing with the issues 1-2 years after purchasing a property.

1. How do you feel about catching a flight to visit an out-of-state investment with a string of bad management decisions?
2. What if you find you can only attract unemployed drug addicts to view your vacancy at a busy intersection in the hood?
3. How do you feel if you find yourself driving out to the property on weekends and it’s over an hour away?
4. Will you regret not purchasing a property close to your other buildings?
5. Is the 8-unit building, with all studios, too management intensive to handle?
6. Is it worth the extra cash flow to manage a property in an unsafe neighborhood?
7. Was buying 3 blocks from the beach worth the $2500/mo negative cash flow?

Every building you purchase will have it’s share of problems to solve.  Consider picking the neighborhood and property type where you are uniquely qualified to solve problems.  The ROI won’t matter much if you give up and sell all your buildings in 5 years.