Buying an investment property is a major business decision many Americans make during their lives. With appropriate location, property search, financing, and management, an investment property generates positive cash flow, the number one indicator of success in real estate investing.
Related: Why Positive Cash Flow Is a Must with Income Properties
The most important factor in the success of rental properties is location, location, and location. We normally talk about the best places to invest in real estate when it comes to locations. Today, however, we’ll be going over the worst places to invest in real estate. Avoid buying an investment property in these areas at all costs!
Worst Places to Invest in Real Estate – Traditional:
We’ll separate the different cities into two categories: worst cities to invest in traditional real estate and worst cities to invest in Airbnb.
There can be many reasons why a location is bad for traditional rental properties. Low appreciation, high crime rate, bad economies, and subpar rental demand and rental supply are typical of the worst places to invest in real estate. Whatever the case, the end result is the same: the area is unprofitable. In 2018, there are 9 cities that fit this category: Polson, MT, Dothan, AL, Altoona, PA, Canton, OH, Moline, IL, Biloxi, MS, Goshen, IN, Los Lunas, NM, and Helena, MT. Whether because they have extremely low rental income or return on investment, these cities are the least profitable in the US. We recommend not buying an investment property for traditional investing in these locations.
Related: Location, Location, Location: What Makes for the Best Place to Invest in Real Estate?
1.) Polson, MT
Median Property Price: $523,111
Rental Income: $725
Cap Rate / Cash on Cash Return: 0.52%
2.) Dothan, AL
Median Property Price: $186,959
Rental Income: $736
Cap Rate / Cash on Cash Return: 0.52%
3.) Altoona, PA
Median Property Price: $170,873
Rental Income: $764
Cap Rate / Cash on Cash Return: 0.95%
4.) Canton, OH
Median Property Price: $155,420
Rental Income: $782
Cap Rate / Cash on Cash Return: 0.25%
5.) Moline, IL
Median Property Price: $124,147
Rental Income: $792
Cap Rate / Cash on Cash Return: 0.09%
6.) Biloxi, MS
Median Property Price: $241,359
Rental Income: $813
Cap Rate / Cash on Cash Return: 0.75%
7.) Goshen, IN
Median Property Price: $158,398
Rental Income: $790
Cap Rate / Cash on Cash Return: 0.85%
8.) Los Lunas, NM
Median Property Price: $241,291
Rental Income: $909
Cap Rate / Cash on Cash Return: 0.82%
9.) Helena, MT
Median Property Price: $317,175
Rental Income: $950
Cap Rate / Cash on Cash Return: 0.3%
Worst Places to Invest in Real Estate – Airbnb:
When it comes to the worst places to invest in Airbnb rental properties, the issue is not as simple. There are two reasons why some areas are not suitable for Airbnb: they are not profitable and they have legal issues.
Rental Income and Return on Investment:
Like traditional investment properties, there are areas where buying an investment property for Airbnb is not profitable. In 2018, these areas include Olympia, WA, Hampton, VA, and San Marcos, TX. However, since Airbnb generates more income than traditional real estate on average, these areas are not as unprofitable as their worst traditional cities counterparts. Regardless, these three cities have low rental income and return on investment. Buying an investment property in these cities would lead to no profit or even losing money.
1.) Olympia, WA
Median Property Price: $457,854
Rental Income: $1,167
Cap Rate / Cash on Cash Return: 0.03%
2.) Hampton, VA
Median Property Price: $209,473
Rental Income: $825
Cap Rate / Cash on Cash Return: 0.35%
3.) San Marcos, TX
Median Property Price: $373,614
Rental Income: $1,588
Cap Rate / Cash on Cash Return: 0.08%
Stringent Airbnb laws are what truly make certain areas the worst places to invest in Airbnb. These Airbnb laws can range from high property tax to flat-out illegality. Buying an investment property for Airbnb in such cities can be utterly pointless and tiresome. The worst cities for buying an investment property for Airbnb are New York, NY, San Francisco, CA, and Oakland, CA.
Related: Which Are the U.S. Cities with the Least Airbnb Legal Issues at the Beginning of 2018?
1.) New York, NY
Airbnb is essentially illegal in New York City. In late 2016, legislation was passed to prohibit the advertisement of a full home for less than 30 days. The properties in question cannot be single-family investment properties. The Airbnb situation in NY is complex, making the platform effectively illegal. It’s safe to say that traditional real estate investing is the default optimal rental strategy in New York City.
2.) San Francisco, CA
Luckily Airbnb is not illegal in San Francisco, but renting investment properties through the platform is extremely restricted. Hosts can only rent their property out for 90 days a year and must pay a 14% transient occupancy tax. Such restrictions make buying an investment property for Airbnb futile; the property can rarely be used, and with the high tax rate, it will likely be losing money more than making money in real estate.
3.) Oakland, CA
Buying an investment property for Airbnb in Oakland faces similar issues as in San Francisco. Hosts must pay a 14% transient occupancy tax on reservations that are 30 days or less. Unlike San Francisco, however, hosts have to pay a higher gross-receipts tax compared to hotels. These conditions make Airbnb in Oakland among the worst in the country.
Buying an investment property in any of the 15 cities mentioned in this blog will lead to losing money and possibly negative cash flow. To avoid these locations, use a property search tool. Mashvisor’s property search tool allows you to find an investment property in a matter of minutes. Using a real estate market analysis and rental property calculator, Mashvisor’s search tool will help you find the best real estate investment property based on your desired factors. Want to take the next step in becoming a successful real estate investor? Click here to start your 14-day free trial with Mashvisor!