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Buying in a gentrifying market

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  • Buying in a gentrifying market

    I'm looking at rental property in a gentrifying market with a a fair amount of retail development around the neighborhood where I'm scouting properties. Currently most of the properties are not well poised for immediate income generating. The CoC is pretty much 0-1% and the cap rate is 5%. However, the appreciation potential is big. The cash I'm putting in is extra cash (maxing pretax retirement, investing post tax as well, backdoor roths) so if there isn't immediate return it's fine. Also if the rents increase by 3% a year it will start to cashflow in 1-2 years. Is this a horrible strategy?

  • #2
    Sounds like it.

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    • #3
      When I was young and didn't have much income I bought old, run down row houses in three gentrifying neighborhoods. The rental income wasn't impressive initially but paid the mortgages after a modest rehab. The tenants were all excellent and the two I sold tripled in value over the 10-15 years that I owned them. I still have one purchased for $75,000, no mortgage, rental income $1,800 mo, worth about $200,000 as it stands, if I were to put $50,000 into it could probably get $300,000. So while not earth shattering investments, and yep they do require babysitting, they diversified my portfolio, made a profit and I would do it again if I were in a similar situation. What I usually looked for when speculating on neighborhood improvement is to select those with clear, defined boundaries that separate them from the next section such as a river, large park, on a peninsula, walkable to the retail/restaurant action, near desirable private school etc.

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      • #4




        I’m looking at rental property in a gentrifying market with a a fair amount of retail development around the neighborhood where I’m scouting properties. Currently most of the properties are not well poised for immediate income generating. The CoC is pretty much 0-1% and the cap rate is 5%. However, the appreciation potential is big. The cash I’m putting in is extra cash (maxing pretax retirement, investing post tax as well, backdoor roths) so if there isn’t immediate return it’s fine. Also if the rents increase by 3% a year it will start to cashflow in 1-2 years. Is this a horrible strategy?
        Click to expand...


        Which part of the US are you in?

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        • #5
          Banking on appreciation only doesn't sound ideal for a real estate investor.

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          • #6
            It certainly works IF the massive appreciation happens, but it sure is nice to have some income while you're waiting and if it doesn't happen.
            Helping those who wear the white coat get a fair shake on Wall Street since 2011

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            • #7
              This is speculation, not a true investment. It may work out great for you or you may have a property in a less than ideal neighborhood. I don’t believe in everything Kiyosaki says, however his general thought that assets are things that are cash flow positive is something I strongly agree with. You’re buying in a speculative market with no or negative cash flow (your repairs and expenses will eat most of not all of your 0-1% COC) at a terrible cap rate (for anything outside of a national brand NNN lease property in the best market). You may hit a home run here, but this is quite a risky proposition.

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              • #8
                I would not consider this, at least until you see others leasing successfully and the lease rates make sense mathematically.

                I had signed NNN leases from my prospective tenants for my office building before taking out any loans and the first brick was laid down for construction. I do like real estate and suspect a strong decade ahead.

                Successful real estate investing is methodical with careful accounting, this appears too speculative with a big unknown - tenants. Once/if there is more clarity, it may be a good opportunity, I don't see that at this time from your description. It may materialize, but consider what you will be left with if it doesn't.

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                • #9
                  Gentrification is a valid strategy that I have seen work out. I think you would need to be patient and you could be wrong.

                  There are many strategies that work for different people at different times. Without knowing whether this is a commercial or residential or land investment, it is hard to comment.

                  Generally, I would look for more than 3 long term drivers: rezoning potential, gentrification, future infrastructure investment in the area, future expected income growth of residents, population growth, compressed valuation.

                  I am not a commercial real estate investor. I don’t really care if my yield is low or negative. I would prefer capital gain to rental income as it is more tax efficient. But many people do well in CRE.

                  Investing based on just gentrification might work but I would want the odds tilted much more in my favour.

                  The return is generally reflected in the price, but sometimes long term factors are much larger than what is expected/priced. At other times it is already more than fully in the price.

                  The yield vs capital gain is like the value vs growth dichotomy in stocks. In both instances you are taking on firm/property specific risks. Investing in growth is not necessarily more speculative than value investing. There is a lot of stuff out there about CoC return, % rules etc. I think it is mainly BS. My investments never met those criteria.

                  I made my returns from seeing something other people didn’t and being right on it. Others created value and maybe some people made it investing in value. I think think the metrics touted by RE spruikers are usually rose tinted to value as it is easier to understand and seems less risky. Is value safer ? Is it more profitable.

                  Is the risk worth it, that’s what I come back to. Risk, return, expected probabilities, outcome in the event of being wrong.

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                  • #10
                    I'm looking at Newark NJ. I know the area since I used to work around there. There's a pattern around NYC if you look at Jersey City, Harlem, Brooklyn where people are priced out of Manhattan and live in the surrounding cities/neighborhoods that gentrify (and then people get priced out there and move further out). I have friends who bought in Harlem, Jersey City, and Brooklyn and have done really well. People have bought in the 200s and over time the appreciation has been 10-20% annually or more and over a 10-15 year span properties have appreciated to 1mill.

                    I actually found this article from PIMD looking at this.: https://passiveincomemd.com/is-it-better-to-invest-for-cash-flow-or-appreciation/

                     

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                    • #11
                      Hi Pedsmd,
                      The question you pose is an interesting one.
                      To achieve growth of a property from 200k to 1M in 10 years requires a compounded rate of return of 17% pa.
                      This would be an extraordinary achievement with residential property. You would be perhaps in the top 1% of returns nationwide.

                      It is perhaps too easy to cherry pick good past performers.

                      If what you are aiming for is an extraordinary return, it would perhaps require too much luck to achieve this with an ordinary strategy. How do you know your strategy is not yesterday’s story ?

                      I think you have to question everything.

                      I have few questions for you:
                      1. What were the drivers for the appreciation in the areas you mention from 2009-2019
                      2. Why will this be replicated in 2019-2029 in the area you are interested in ?
                      3. What is the probability of 2 ?
                      4. Why is this not in the price already ?

                      Picking something that will have a 17% CAGR in the future is a challenge. It’s possible. Most people cheat by using leverage. If you can do this without leverage, you have bottled lightning. Wealth could strike you quite suddenly (or not if you happen to be wrong).

                      One thing that NYC has going for it is a large % overseas born population. Migrants are a positive uplift factor. But there are perhaps others.

                      On a more general note, what are the drivers of capital appreciation for residential property ? I think few people really question it. I’m always interested in what others think the answers are.

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                      • #12




                        Gentrification is a valid strategy that I have seen work out. I think you would need to be patient and you could be wrong.
                        Click to expand...


                        This! I think modest outlay and modest expectations yield the least discomfort both financially and emotionally over the long term for someone who wants to dabble in real estate.

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                        • #13
                          Land banking is generally regarded as particularly risky.

                          In addition to the value not panning out, there are maintenance expenses, liabilities you expose yourself to, taxes you have to pay.

                          Force yourself to consider each and every aspect of the investment.

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                          • #14
                            If the cap rate = net operating income/ current market value = 5%, then does it not indicate the current market value is already quite appreciated?

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