Why 18-Hour Cities Are A Win

As international investors continue to flood to the U.S.'s largest cities, the outlook for real estate investment in these areas is changing. Named for their status as international travel hubs, so-called gateway cities have become hotbeds of competition, with high barriers to entry for the average investor. Overhead is another problem in these cities, some of which have seen minimum wage hikes in recent years, as well.

The good news is that there's no earthly reason why you should be fighting to put all your eggs in one (very popular) basket. Why drive up prices and reduce your ROI? Instead, it's time to explore some thriving smaller cities that are turning into hot investment opportunities— at up to 43% less per square foot than 24-hour cities.

Smaller Cities Offer the Best of Both Worlds

Urban markets such as Austin, TX, Charlotte, NC, Cincinnati, OH and Indianapolis, IN are often described as "18-hour cities" in contrast to the 24-hour gateway cities. These venues offer the best of both small-town and big-city living. They have live music scenes, universities, pro sports teams, foodie and bar culture, and they're walkable— things 62% of millennials say they want.

At the same time, commuting isn't a two-hour headache. And the suburbs that ring these cities are changing to reflect millennial influences, as well. As twenty- and thirty-somethings start families, they continue to gravitate toward good schools and safe communities— but now they also want the amenities of a more urban environment. This desire to be close to everything extends to jobs, and since 84% of businesses are now located slightly outside of major metropolitan downtowns, it's increasingly feasible. A family can live in the suburbs and walk or bike to school, work, dining, and shopping.

This is part of what makes cities like Carmel, Indiana so very attractive. This suburb of Indianapolis was ranked Money Magazine's #1 place to live in 2012. It hits everything on the new suburban wishlist and even offers bikeable connections to Indianapolis via the Greenbelt trail system.

They're Innovation Hubs

Many of these smaller metropolises rank among the 25 best cities for small businesses, competing with larger cities by offering lower overhead. From rent to employee salaries, the lower cost of living improves companies' bottom lines. And remember that statistic we threw out there earlier, about how businesses are slightly more decentralized around urban centers nowadays? That's giving rise to organic innovation hubs. It's no wonder these locations are showing up on hot lists for tech startups.

Businesses with fewer than 50 employees are accounting for 46% of job growth right now, so a market that favors them is a serious plus. And there are plenty of publicly-traded and Fortune 500 companies in these markets, too. Indianapolis is home to Eli Lilly, Anthem Healthcare, and Angie's List, and the Cincinnati area boasts 14 Fortune 500 firms.

Hopefully, at this point we've got you wanting to relocate to one of these energetic locales. But what do 18-hour cities offer investors? The opportunity to invest in a market with serious growth potential, for one thing. If that's not enough to win you over, low compression on cap rates is evidence that there's less competition for real estate in these markets. Naturally, the threshold for buy-in is lower, and the ROI is higher.

There are some points to keep in mind as you choose your investment, however. Let's take a closer look.

Commercial Spaces Are Transitioning

First of all, make sure you're investing in properties that conform to the wishes of the near-future market, not just the now market. In these cities, commercial real estate is raking in $250 million to $2.5 billion a year. But if you're going to successfully invest in office space, you'll want to keep in mind that the days of endless office parks are in the past. Think decentralized, flexible-use spaces, and you'll be anticipating the needs of today's more mobile employees and outside-the-box startups. Another option to consider is investing in coworking spaces, which rent out desks, offices and meeting rooms on a flexible basis, for mobile employees and self-employed workers from a variety of industries.

If, on the other hand, you're dreaming of storefronts and restaurant space, remember that urbanites gravitate toward mixed-use, "strollable" neighborhoods, and choose your investment accordingly.

Residential Is Paying Off

If you go residential, make sure you know what kind of resident you're targeting. Take a good, hard look at rental properties right now. Tightening mortgage restrictions have created complications for potential homebuyers. Even if they've got a strong positive cash flow, if they've defaulted on a mortgage in the past, or have a poor credit history, they may not be able to buy. Renting also provides an attractive level of mobility for workers who may transition to another corporate office or change companies in a few years.

The rental market is booming in many 18-hour cities, even though rent is in many cases more expensive than a mortgage would be. This is creating a great deal of interest in multi-family units. Sales were up 10% last year, at a total of $34.1 billion— and believe it or not, Austin accounted for as much of that as Chicago.

Single-family housing is also a strong investment. The best cities for house flipping nationwide are by and large not 24-hour metropolises. The average home flip in Cincinnati is purchased for $60,465, and sells for $114,700. That's $54,235 in your pocket. But with interest in rentals increasing, and monthly rent outpacing mortgages on similar-sized properties, you might just want to hold on to those properties and avail yourself of the monthly income stream.

Small Cities Have Great Energy

There's great energy in 18-hour cities, and with all this interest comes increased spending on revitalizing urban downtowns and infrastructure to meet the needs of an influx of residents. These new centers deliberately offer reduced lanes for motorized vehicles, increased paths for walking and biking, and more mixed-use spaces. There are plenty of opportunities for the savvy in any downtown that’s moving in this direction.

Plenty of real estate investors are missing the forest for the gateway city "trees", but you don't have to be one of them. Investigate America's mid-sized cities, and you'll find there are plenty of diamonds in the rough out there waiting for someone to notice. The money's there, and you can be part of an exciting culture shift, as well.