Complications of investing in big cities?

[James Z.]

Hi all - I am new to the world of real estate investing. I have read a few books, and so have a decent "theoretical" knowledge base, but there is one key factor that has been largely overlooked in my studies: BIG CITIES!

I read the forums and look at examples in books, and lots of the buy and hold investors are giving examples and stories of the 2000 sqft single family homes they bought for 50, or 100, or 150k a piece. I live in Washington DC, and from what little experience I received from my mentor before he died, it seems impossible to find 1 bedroom units that aren't falling apart or in an extremely high-crime neighborhood for less than 200k. To give a general sense of what I have seen here, in middle-of-the-road neighborhoods a decent 650sqft 1 br/bath condo is running around 300k.

I do understand that in general, anywhere, higher prices come with the potential for even greater reward. But I try to apply something like "the 2%" rule (monthly rent = 2% of purchase price) to the situations I have seen and my knowledge just falls apart. For example, in this case where he bought the unit appraised at about 300k (actually bought for about 280k, because of some tricky building complications that ended up not being a big deal) 1 br mentioned above, the rent would theoretically be ~$6,000/month. But he felt lucky to get $1,900/month.

So I am beginning to get the sense that there is a disconnect between the theoretical knowledge I have gained from books and real-world deals in cities. Are there complications that frequently come about in a big city that aren't usually a problem in somewhere more suburban or rural? Are there different sets of numbers that I should be running? Is it treacherous for a first time investor to start in a big city? I suppose any information about investing in expensive markets and cities would be appreciated.

Apologies for the rambling and disjointed questions....it's just dawning on me that investing in the city might have major differences from elsewhere that I do not understand yet.

Many thanks!