Why I Invest Near the City Center

I received a phone call a few weeks ago from a wholesaler who had "the deal of the century." She talked about how it was a can't miss opportunity because the house only needed a few updates to be an easy flip. She had my full attention. As she was beginning to embark on a rapid-fire detailed list of all the attributes of this moneymaker, I tried to interrupt. Finally I was able to get my question in. "Where is it at?" She told me it was in a nondescript suburban area of town about fifteen miles southeast of the urban core of Nashville, TN. For some major cities, that proximity would still be considered close to town. At this point in time in Nashville, it is farther away than the zip codes where I want to put my money. In fact, that is how I answered the wholesaler. "I don't buy houses in that zip code." She didn't seem to understand my reply and countered, "You could make $50,000 on this deal!" Maybe I could, but I have targeted specific areas of Nashville where I will buy properties, and I don't stray from that strategy. I told her good luck, and if the deal was as sweet as she was describing it, I was pretty sure she could find an investor who would take it, but it wasn't going to be me.

According to the 2010 United States Census, 80.7% of the population live in urban areas. That is nearly 250 million people, and the rate of growth in cities is also increasing. In the decade from 2000 to 2010 urban areas grew by 12.1%, compared to the country's overall growth of 9.7%. Nashville, TN is no exception to these statistics, as it has grown at a similar rate.

The economics of supply and demand are often reflected in real estate pricing. Since the population growth data clearly indicates that the demand for housing is higher in urban areas, the prices often correspond accordingly. This is true for both selling and renting property, as metropolitan areas are usually pricier than rural ones.

The Millennial Generation is choosing to live in the city center over the suburbs or rural areas. They want to be closer to the action and feel more connected, which is reflected in their choice of housing. Will the opinions of this generation, comprised of 77 million young adults age 18-36, change over time? Perhaps. But the desire to live in a culturally diverse, creative community can best be satisfied by city life. The Millennials may fuel the urban housing demand for decades to come.

The sum of these factors leads me to believe that investing in housing near the heart of a growing, business-friendly city is the best bet. Nashville was ranked the tenth best place for business in 2014 by Forbes, as job growth over the past five years was fifth among the 200 largest metro areas.

There are five zip codes in Nashville that are my target areas for rental properties and flips. These areas are all near the core of Nashville, in what I would call the inner-ring neighborhoods. I consider purchasing investment properties in about five more zip codes, but it requires the right deal at the right price. For example, I bought a house for $243,000 in the 37215 zip code in 2011 that was a fix-and-flip. Now, the cheapest house listed for sale in that zip code is $374,900. I still check the listings there occasionally to keep a pulse on the market and see if a special deal comes along, but I'm not expecting to find any long-term rentals in that part of town.

In the future I may branch out to other areas if I see new potential arise in other neighborhoods, but the bulk of my business is conducted in the first five core zip codes, and I have been successful that way. I attribute part of my success to really knowing those areas, including most or all of the street names. I know where there are sidewalks and where there aren't. I know what the zoning is, where the schools and parks are, what new developments are planned, and most importantly how much the houses are selling and renting for. Part of the reason I am able to retain this information is because I don't try to become an expert of the whole 14 county Nashville metropolitan area. I just focus on a few target areas, and I've been watching them for years. If one neighborhood's prices rise beyond what I want to pay, I turn to another area to look for new prospects.

After saying, "No thanks," to the "deal of the century," I reminded the wholesaler that I had already given her the zip codes where I buy houses. She chuckled and asked why I only bought in those areas. Here's the thing, I didn't know if her awesome deal was awesome or not, because I am not an expert in that property's neighborhood and I couldn't accurately access the value of her property. It takes more than a Zillow search to know how much a house will sell for. I explained to her that my buying strategy is incredibly simple. I want to own houses where people want to live. And I think people will increasingly want to live close to the city.