If you plan to invest in real estate, you should consider investing in gateway cities. Gateway cities are urban metro areas that act as the foundation and hub for the economic industry for the state, region, or country.
In the United States, classic gateway cities include San Francisco, Los Angeles, Chicago, Miami, Boston, and New York. These gateway cities have produces the most amount of jobs with the highest average incomes. As a result, real estate prices have outperformed the average United States home price for decades.
As the country matures and spreads out, there are new gateway cities emerging. Savvy real estate investors need to identify such cities and invest accordingly. Investing in long-term trends is one of the best ways to get rich.
What Is A Gateway City?
Gateway cities are urban metro areas that act as the foundation and hub for the economic industry for the state, region, or country. They're typically located in or just outside metro centers in less desirable areas that are typically home to the economy's transportation, manufacturing, and industrial infrastructure.
Gateway cities have been the backbone of local and global economic activity for decades. However, investing in such cities is now quite expensive as real estate prices have done well and cap rates are low.
Originally these cities were seen as a “gateway” into the American dream, especially for immigrant families, because of access to reliable work and housing for residents.
Post-pandemic, working from home is now widely acceptable. Further, thanks to technology, more people are able to work from home. Therefore, there is a “fanning out of America” as workers wisely look to live in lower cost areas of the country while trying to make the same amount of money.
Therefore, in 2021 and beyond, there are new gateway cities to consider.
The New Gateway Cities
- Salt Lake City
- San Diego
- Washington, DC
- San Antonio
These gateway cities provide better relative value and higher rental yields (cap rates). Further, these cities are experiencing strong demographic migration trends. As a result, plenty of institutional real estate investors and savvy individual real estate investors are investing in these areas.
Home Price Appreciation For Top Gateway Cities
Below is the latest Burns Home Value Index for some of the top gateway cities. Overall, the housing market is very strong. However, some cities are performing even stronger than the overall average.
The question is whether this type of price appreciation can continue? Unlikely as it would make housing quickly unaffordable for the majority of residents whose income cannot keep up. We should expect a deceleration in price appreciation. However, I expect gateway city prices to continue doing well in the coming years.
Gateway cities used to be more neglected, presenting investors with the potential for redevelopment and opportunity for growth. However, these cities are fast getting discovered. Everybody is trying to invest in the next San Francisco or New York City from decades ago.
Related: 18-Hour Cities
Why Investing In Gateway Cities Makes Sense
Imagine being able to invest in San Francisco real estate back in 1990 when the median house price was 70% lower? You'd be rich right now because the median home price in San Francisco is now about $1.95 million!
Cities like San Francisco and New York will always be desirable. They've graduated from being key American gateway cities to international cities facing an international demand curve. Foreign buyers are aggressive buyers.
Thanks to technology, there is no monopoly on the San Francisco Bay Area tech hub or the New York City finance hub. You are seeing the finance hub in Charlotte grow massive. Austin and Miami are becoming great tech hubs.
Gateway cities are sometimes neglected areas that have a unique set of social and economic challenges. Challenges include low income, lack of access to transportation, lack of jobs, or distressed real estate values.
However, as an investor, you should also see these challenges as opportunity. After all, when things are down in the dumps, there's generally a lot of upside.
Investor have the opportunity to purchase gateway city real estate at lower values. Investors can then improve or redevelop existing real estate while creating new jobs, housing, and other necessary infrastructure to revitalize the area.
There also might be tax advantages as well. There's a growing amount of Opportunity Zone investments that are pouring capital into second-tier cities with potential upside.
The goal of the government is to designate these opportunity zones in order to attract capital. The idea is that the more capital that comes to a gateway city, the more jobs and the better life will be for its residents.
The Risks Of Investing In Gateway Cities
Gateway cities have great potential upside. However, due poor performance by companies, mismanagement by local government, or unfortunate acts of god, such cities have languished. In addition, some of these cities simple do not have the transportation infrastructure to make for a productive work environment.
Redeveloping a city is great. However, there's also a high cost and long timeline associated with revitalizing or renovating existing infrastructure and real estate. Even here in San Francisco, I've waited seven months just to get my remodeling project approved. And I'm not even expanding the envelop of my house!
Serving lower-income communities can be more difficult than serving higher-income communities. Investors and landlords may face higher vacancy rates, more frequent tenant turnover, more frequent property repairs or improvements, and lower rental rates when compared to other areas.
Further, during the pandemic, some tier 2 gateway cities suffered greatly because its labor force was mostly in the service or manufacturing business. Thankfully, almost every city is coming back strong.
Should You Invest In Gateway Cities?
Personally, I'm investing 70% of all new real estate investment capital into gateway cities. In the past, it was hard to invest in such areas while living in another city. You'd have to fly to the city, kick some sheet rock, speak to the developer, and make a decision. But thanks to real estate crowdfunding, investing in gateway cities has become incredibly easy.
Platforms like CrowdStreet specifically focus on gateway cities for their individual commercial real estate offerings and occasional fund offerings. CrowdStreet was founded in 2014 and is one of the oldest real estate crowdfunding platforms today. I've met their team in San Francisco and was very impressed with what they had to offer.
The good thing about investing in real estate crowdfunding is that you don't need to take on a mortgage to buy property. You can invest, unleveraged, in a piece of real estate instead.
Finally, by investing in real estate syndication deal, you get to earn income 100% passively. The platforms do the due diligence for you so you can make a better investment decision.
I've personally invested $810,000 in real estate crowdfunding to diversify across gateway cities. CrowdStreet has a fantastic platform that is free to sign up and explore.