Recently, Forbes published an article about a Realtor.com housing model that predicts the best cities in which to buy a home . They used data and information from the National Association of Realtors, Realtor.com, Treasury bond yield information, price changes of housing, employment information, and more to come up with the model. Right now, the model asserts that the best city to buy a home is Tucson, Arizona.
But think to yourself — would you buy real estate in Tucson? I certainly wouldn't. And that’s not because it isn’t a wonderful city, nor because the property fundamentals there might not make good sense. Instead, I have another perfectly valid reason why Tucson is not a good place for me — and for many others — to buy real estate: I don't live there.
There is really only one "best city" in which you should buy a home, and that's the city where you plan to live for at least five years.
This means that even though news articles proclaim that some cities are the “best cities” to buy real estate, they are really saying that these areas, based on market fundamentals, give a buyer the best chances of increasing their wealth by owning property in that city. But in general, the further away you live from property you own, the more likely expenses related to the property will be higher, and for that reason it's less likely to create wealth for you.
The primary reason for this is that real estate is not a stock, bond, or CD-type of asset that needs minimal management and supervision. Real estate assets need significant management and supervision, which costs a lot of money, and the further away they are, the more it costs. This is true whether it is a rental property or a second home.
On the rental property side, you need to hire a manager, deal with major issues, and occasionally visit the property to ensure the manager is doing a good job. Your manager does not have anywhere near the incentive that you do to maximize value for you by minimizing expenses and keeping the unit rented. In addition, when something major goes wrong, you will have to step in. If the property is far away, you'll have to take a few days off work, fly to the property, rent a car, rent a hotel, find a vendor to fix items, etc. Of course, things could go well and there may not be any major problems, but this is real estate, so chances are there will be at least some issues that demand your attention.
For second homes, in general, they hardly make any investment sense at all. With second homes, you have no rental income to cover the expenses of the property. All your cash flows are negative: the mortgage, taxes, insurance, and maintenance expenses. It is unlikely any hoped for appreciation in value will compensate for all those negative cash flows you will pay over the years. And again, the further away the property is located, the more expensive it will be to maintain it.
Lastly, when it comes to personal residences, it is best to live near where you work. This means unless you are planning to move to one of the “best cities to buy a home” because you have good job opportunities or prospects there, you shouldn’t be buying property in that city regardless.
A few other items to consider are that regardless of what the metrics say about the best city to buy a home, if you are not going to own it for at least five years, you probably will not earn wealth on your property ownership. In addition, if the property is not in good condition, skip it! Rarely do fixer-uppers sell at a large enough discount to make them financially worthwhile. Instead, they usually turn into money-eating machines. And skip cities where there are way too many foreclosures, vacant properties, or if the city is in a financially declining state of affairs.
The bottom line is that real estate is always in investment, whether it's a personal residence or investment rental unit, because individuals hope to earn wealth due to their ownership. If you are going to invest your hard earned money, you have a much better chance of earning a fair rate of return if you can keep a closer watch on your investment. That’s why buying something near where you live is the best city in which you can own real estate.