Real Estate Realities: The Limits of “Location, Location, Location”

February 23, 2022

Real Estate

Although real estate is not the most complicated niche of investing, it still has a ton of potential complications and risks which need to be understood and managed. Falling for simplistic thinking gets many real estate investors into deep trouble.

A key mental pitfall relates to the famous motto that real estate is all about “location location location”. The maxim implies that as long as you get the location right, everything else will fall into place.

Only Partially True

But this saying, mostly promoted by brokers looking to cut a deal and collect a hefty commission, is only partially true.

While location is the key factor in real estate value, other things matter too, like price, leverage, and management. But even identifying the ideal investment location is very difficult too. You can make a fortune purchasing property in a depressed area and lose a fortune investing in the hottest areas. Because location dynamics aren’t fixed.

Economies come and go. Cities come and go. Neighborhoods come and go. Buildings come and go.

Navigating real estate investment is a challenging endeavor which requires skill, due diligence, and effort. And even then, because there are always risks involved, diversification is a must. You can’t just rely on securing a popular location, especially when paying top dollar.

The Big Picture

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It is easy to demonstrate that simple assumptions about location are naive and dangerous for real estate investors. This powerful infographic beautifully illustrates the tremendous evolution and variability over time among the US’s major regions and cities.

(2026 rankings are mostly similar to 2020s shown in this image, except that Jacksonville, FL is now number 10, and San Jose fell to 12th place.)

Putting all your real estate eggs into one basket worked out beautifully or terribly, depending on where and when you bought and sold.

Massive Regional Shifts

On a big-picture level, it’s fascinating to note that New York, Boston, and Philadelphia, America’s foundational cities in revolutionary times, combined had fewer people than Lakewood does now ka”h.

A lot happens over 25 years; forget about 250!

Zoom out and the flow of colors broadly highlights the country’s origins in the Northeast (red), the manufacturing Midwest’s powerful rise in the early 1900s (blue), and the more recent booms of the Southern and Western Sunbelt (green). The USA is a place of great change when viewed through the lens of time. Clearly locations are not static.

Big Shifts

Cities can also experience drastic shifts of fortune, with Detroit being an obvious example. Detroit’s population and prominence exploded beginning around 1910, as Henry Ford’s Model T burst onto the scene. After peaking in the 1950s, the Motor City’s population declined and then collapsed as racial riots and competition from Mitsubishi, Toyota, and Honda weighed heavily on the city’s prospects.

These massive demographic shifts obviously had an overpowering effect on real estate values. The real estate maxim about location masks the trickier reality that, within a surprisingly short time period, the best location can become the worst and vice versa.

New York’s Journey

New York City, the city that had the most influence on most readers of this column, has its own unique trajectory told in this chart. It’s easy to imagine that the Orthodox Jewish community’s affinity for real estate is heavily colored by the fact that New York City has been an almost continual boomtown for most of the past half-century. But this wasn’t always the case.

Note below New York’s massive population collapse of the 1970s as the city was torn apart by politics, crime, recessions, and interracial disturbances. New York real estate wasn’t immune to this upheaval. As I often relate, when I attended yeshiva in Boro Park in the ’70s and ’80s, entire blocks of apartment buildings sat burned and abandoned across the street. Other sections of NYC looked much worse than BP.

Those who paid full price for local real estate in the ’60s and ’70s were significantly pummeled as the city’s population and prices plummeted. Plenty went bust.

Conversely, those who bought up those depressed buildings for pennies in the 1980s, made unbelievable fortunes as the city turned the corner and boomed again. The location definitely matters, but knowing in advance exactly where and what to buy is never easy!

NYC History Repeating?

NYC in the 2020s is starting to mimic the 1970s in some ways. Rent control laws have devastated the economics of residential housing in the city. Many landlords are handing back the keys to lenders, not willing to be left holding a bag that reaps endless losses. Similarly, many office buildings became outdated in a post-covid world.

Fortunes have been lost. And new fortunes will be made, navigating NYC real estate through the upcoming years and decades.

Booms and Busts

It may not be apparent during the boom times, but things change. When the going gets rough, as it tends to from time to time, the specific city, neighborhood, building, and manager you’re invested in can matter greatly.

Macro trends such as interest rates and economic conditions heavily influence the investment landscape. Prices definitely matter a lot too. You may do a lot better investing in a metziah in a weak city or neighborhood versus seriously overpaying in a strong location. Navigating these factors takes wisdom, skill, and mazal.

The Three Ds

I’m a huge fan of real estate investing, with its potent combination of growth potential, safe leverage, and tax benefits. And I definitely do not want to put salt on anyone’s wounds. But we need to learn the lessons of the past. Real estate investing isn’t the no-brainer decision that some may assume it is. It always requires the fundamental three Ds: davening, due diligence, and diversification.