A large factor in successful real estate investing is choosing the right market to invest in. Many investors focus on top-tier markets, where demand and rents are highest. But top-tier markets present their own challenges, including the risk of oversupply, high cost of entry, lower yields, and more competition.
Alternatively, investors can look just outside the top markets to invest in a gateway city. Gateway cities have been the backbone of local and global economic activity for decades but as of late have been somewhat neglected, presenting investors with the potential for redevelopment and opportunity for growth. Learn what a gateway city is, things to consider when investing, and if you should invest in one or not.
What is a gateway city?
Gateway cities are urban metro areas that act as the foundation and hub for the economic industry for the state, region, or country. They're typically located in or just outside metro centers in less desirable areas that are typically home to the economy's transportation, manufacturing, and industrial infrastructure. There are gateway cities across the globe, but here in the United States, common gateway cities are in southern California, including areas of Los Angeles; San Francisco; St. Louis; Brockton; and other areas in Boston, New York, Chicago, and Washington, D.C. Some states, like Massachusetts, can have several gateway cities, like Holyoke, Haverhill, Worcester, New Bedford, or Springfield that provide infrastructure support for the gateway cities region, the Northeast.
Originally these cities were seen as a "gateway" into the American dream, especially for immigrant families, because of access to reliable work and housing for residents. But over the past several decades, many of these cities have declined as large manufacturers closed or moved to a new location, causing the areas to become depressed, real estate to be abandoned, and rent and property values to decline.
Why invest in a gateway city?
Gateway cities are often neglected areas that have a unique set of social and economic challenges, such as low income, lack of affordable housing, lack of access to transportation, lack of jobs, or distressed real estate values. But because they're positioned in or near highly desirable metro markets, investors have the opportunity to purchase real estate at lower values, improving or redeveloping existing real estate while creating new jobs, housing, and other necessary infrastructure to revitalize the area.
In addition to the discounted real estate prices and opportunities for increased revenue through revitalization, there may be tax advantages for investing in specific gateway cities. Some gateway cities have specific tax credits for creating projects, like affordable housing, in specific zip codes or neighborhoods. Others may be considered an opportunity zone, which is a designated census tract of some of the country's lowest income or rural areas. This designation came from the Tax Cut and Jobs Act, which provides tax incentives to investors who participate in the revitalization or development in opportunity zones through an opportunity zone fund (OZF). There are specific rules as to how the tax incentives work and how to invest in these areas, so the tax advantages may not be available to all, but it's an added bonus and could mean additional money flowing into the area, increasing values and economic activity for the area.