Q: What should I know about urban neighborhoods before investing in a rehab? Put another way, what neighborhoods do you do business in and why?
Ans: Determining what neighborhoods offer real estate investment opportunity involves a fairly comprehensive examination of the social and economic profile of the community. (Ask me a global question and you invite a technical answer!)
Numbers crunchers will rate neighborhoods according to: prevailing property values, access to public transportation, quality of schools and municipal services, demographics; and evidence of more subjective qualities like Pride of Ownership, Wholesomeness, and Stability. And, to some extent, savvy investors take a look at all these factors, at least intuitively. Others will merely follow the lead of those already investing in a given neighborhood, the next “hot market,” more or less “following the crowd.” That’s how land rushes and real estate “bubbles” get underway.
Happily, in my business, with few exceptions the entire Chicago area is enjoying an urban real estate renaissance of sorts. After decades of decline – and, in some districts, depopulation – rehab and investment are occurring at a furious pace across the entire metropolitan area. Demand is high and property values are rising, propelled at least in part by historically low interest rates.
Old Timers will tell you, “It never hurts to buy in a rising market.” From that perspective, one might suggest: just close your eyes, throw a dart at a map of the city and grab your checkbook. (Although there are a few environmental waste dumps one might do well to avoid.)
Real estate (and rehab) opportunities are to be found in virtually every community and most neighborhoods – it’s merely a matter of “price point.” (Yes, it costs more to buy a property to rehab in upscale Lincoln Park than in, say, working class Garfield Park.)
In every case, the savvy investor looks for what author Kevin Myers calls the “Ugly Fixer-Upper,” the least desirable house on an otherwise well kept street. The investor cultivates the ability to spot the inherent potential of the property and restores that latent value profitably. It’s partly art and partly at least basic understanding of real estate economics and building construction technology. One need not be a real estate professional, nor a contractor, to be successful. But one must be entrepreneurial.
In my own business (since you’ve asked), I have always gravitated to the “low end” of the market. There are, quite simply, many more potential buyers out there who can afford $1 thousand per month for housing than those who easily can pay the $3 thousand or more required to live on the Gold Coast. The problem is: the higher the price point, the more capital and credit (and risk) required to participate. In times of economic down turn or recession, this market is the first to slow. More moderately priced housing is less vulnerable to these economic vagaries. So, pick your price point and have at it.
With home market values rising across many urban areas there is increasing concern over the increasing loss of Affordable Housing. Housing analysts argue that “affordability” is defined today as a home priced at or near $125 thousand and, for apartment renters, rents of about $700 per month. Insofar as such “moderately priced” housing costs are fast disappearing, opportunities for those able to meet these measures of affordability are growing.
There is an increasingly unmet need or “demand” for Affordable Housing prompted by diminishing supply. This is an entrepreneurial opportunity of the first order. For both investors and rehabbers, first costs are relatively low, the rehab required less costly, and the risk decidedly limited. In my judgment working class neighborhoods in most cities offer just such opportunities. Those who can and will meet this rising demand for Affordable Housing will prosper in the years to come. Given the choice, these are the neighborhoods where I do business.
– Philip Elmes