Real estate investors can benefit by investing in gentrifying neighborhoods. Gentrification occurs when middle and upper income people move into a traditionally lower-income neighborhood. Typically, the new residents will move into completely renovated housing stock, if they do not renovate the property themselves. Often developers will tear down the older homes and re-build new homes. In Houston, these older lots are often subdivided and 2 or 3-story townhomes built onto the previous lot.
On the positive side, gentrification brings in much needed economic investments. These investments improve the neighborhood and increase property values. On the negative side, these same economic forces make living in the neighborhood increasingly unaffordable for the existing residents. After a while, the original residents often will need to sell their properties and move out, because they can no longer afford to pay the higher market rents or property taxes that come from increased land values.
“A Rising Tide Lifts All Boats”
For a real estate investor, investing in gentrifying neighborhoods provides a unique opportunity to invest for appreciation. The rising property values in the neighborhood provide increased returns to the investor. These returns are above and beyond any returns from rehabbing or remodeling the investment property. An investor takes a risk when they flip a property. For example, after remodeling a property, there is a chance the property does not rent out for as much money as the investor hoped. A neighborhood that is gentrifying protects against downside risk in real estate investing, because the increasing property values will help to make up for any mistakes the investor makes.
Where are the Gentrifying Neighborhoods?
Houston is a massive metropolitan area. Figuring out what neighborhoods in Houston are gentrifying or are likely to gentrify is a daunting task for anyone. Fortunately for us, the good folks at Rice University’s Kinder Institute have done a lot of research to identify Houston’s gentrifying neighborhoods.
First, they identify neighborhoods that have been gentrifying in the past:
In this map, the bluer the census tract, the more gentrification the neighborhood has experienced within the last 20 years.
- Light Blue Tracts = tracts that experienced gentrification in the 2000’s.
- Medium Blue Tracts = tracts that experienced gentrification in the 2010’s.
- Dark Blue Tracts = tracts that experienced gentrification in both the 2000’s and the 2010’s.
Just because a neighborhood has been gentrifying in the past, does not mean the neighborhood will continue to gentrify. Also, new tracts that have not gentrifying in the past could begin gentrifying in the future. So the researches then used a lot of statistics to come up with a list of census tracts most likely to gentrify in the future:
According to the researchers, the darker the census tract, the more likely that neighborhood is to gentrify in the future. By comparing the two maps, a real estate investor who wishes to invest in a gentrifying neighborhood can find areas that 1) have been gentrifying in the past and 2) are likely to continue to gentrify. For example, areas around the interchange of 288 and 610 on the south side or I-10 and 610 on the east side of Houston both meat this criteria. Neighborhoods around I-10 heading east out of Houston or I-45 heading south out of Houston also meet this criteria.
What are the Risks of Investing in Gentrifying Neighborhoods?
Investing in gentrifying neighborhoods also has some of its own risks. Here are the top risks:
- Market risk – the neighborhood could stop gentrifying as middle and upper income people just find other neighborhoods to invest in.
- Time – sometimes neighborhoods can gentrify slowly. For example, a neighborhood might spend a decade or more increasing in property values. For an investor with a shorter time horizon, this slow pace may not work.
- Bought the Wrong Investment Product – gentrification results in wholesale renovations or complete replacement of the older housing stock. An investor in the older housing stock will eventually need something that can be renovated into a more desirable housing product. If they cannot renovate, they will eventually find their rent increases cannot keep up with the rising property taxes and they do not have the right housing product to attract higher paying renters. In some Houston neighborhoods, gentrification has resulted in the older homes being torn down, the lots subdivided, and newer multi-story townhomes going up in their place. If a landlord has an older investment home in one of these neighborhoods, they will eventually find the rents no longer cover their operating expenses, and the home is only worth its lot value if they sell it.
Obviously, there is a lot to consider in investing in gentrifying neighborhoods. A prudent investor should seek out professional help to identify some of the risks and potential benefits of investment property in the Houston area. While most realtors are not familiar enough or qualified to advise on real estate investments, at RDM Realty, real estate investments are our specialty. Reach out to us – we can help.