When you look at investing in the major metropolitan areas, you may find your investment options are limited because of less space, expensive prices, or increased competition. But what about the suburbs? There appears to be just as many affluent individuals, especially younger ones, electing to live in these wealthy suburban areas. These could prove to be a profitable investment for the right investor.
A recent study by moveBuddha looked at cities that had the highest density of young residents between the ages of 30 to 49 in addition to a median household income in the top 10% of the nation. And apparently the suburbs are where it's at.
While this often looked-over submarket could be a lucrative new opportunity, it’s not without certain risks. Here’s what investors need to know.
Where are the wealthy suburbs?
As you might expect, the majority of the cities that met the study's age and income brackets were the suburbs of major metropolitan areas. In many cases, that's where the jobs are to support the high income levels this wealthy segment of the population depend on.
The suburbs also tend to be better places to raise a family in many respects; hence drawing in the younger crowd. New York City suburbs made up 11 of the top 25 cities, in this study, with Houston, Washington, D.C., and several metros in California making up the remainder.
What investment opportunities are there?
If you're looking to potentially invest in this young and wealthy suburb niche but still want an area that has a robust population with other demands, you might be interested in focusing your investments in McLean, Virginia, or Potomac, Maryland, outside of Washington, D.C.; Sammamish, Washington, outside of Seattle, or Cupertino, California, outside of San Jose.
These four cities have populations of more than 45,000 in addition to the age and income brackets the rest of the study looked at. You get the upside of being near a major metropolitan area for demand, the high-income salaries to support large purchases, and the appeal of suburban living. These cities will allow you to have a larger market to work in so that your real estate investment is not quite as niche and therefore a little bit safer.
But it’s not only these markets that present opportunities. People are flocking back to the suburbs in many of the most expensive markets across the nation because of more space and affordable housing. It’s simply a matter of finding where people are moving to in your local or target market.
Things to be aware of when investing in wealthy suburbs
In high-cost markets, even the suburbs will have a higher price tag associated with them. This means the large upfront acquisition costs can be prohibitive, depending on your financing strategy.
You will also likely end up with higher property taxes, which can be a hindrance for buy-and-hold investment strategies. Make sure to account for this when you are making offers.
In addition, investors who prefer rentals may find a smaller market because the high earners are more easily able to purchase a home rather than rent. All of the states that the top 25 suburbs are in, aside from Texas, also happen to be in the top 10 highest capital gains tax rates. So if you're looking at doing flips or short-term investments, make sure to consult your tax accountant to mitigate this as best as possible.
The Millionacres bottom line
Ultimately, these young, wealthy suburbs can present a good investment opportunity to those who are looking to do fewer deals for the same returns due to the higher price tags, especially fix-and-flippers, as many of these buyers are looking for move-in-ready homes. Just make sure to consider the higher-than-average holding costs. You will also want to solidify your exit strategy so that you aren't stuck with an enormous tax bill after the deal is done.
All markets have their pros and cons. Whether this young, wealthy suburb niche market is right for you will depend on your goals and financial position. Focusing in on the higher-population markets may just give you enough wiggle room to make it happen.