Phoenix, AZ · Member since 2018 · 10 posts · 14 votes
A big dilemma we are dealing with it gentrification and what it means to us. We want to invest in our own neighborhood for many reasons. We want to be close to our houses. We love it here. We love the mix of middle class and lower income people, ethnic families, etc. That brings us to our gentrification dilemma. When we talk about buying a house and flipping it, or even just fixing it up a bit and renting it out for what seems reasonable for our business, we feel like we are pricing out the very people that give this neighborhood flavor and character. If we just buy 150-200k houses and turn them into 350-400k houses like so many others are doing around here then we'll just turn this neighborhood into something more financially valuable but culturally vacant. Are we just sappy do-gooders? Is there no money to be made for people like us who still want to provide decent living spaces for lower income people so they aren't priced out of the neighborhood? Do we just need to start some nonprofit because we are being unrealistic thinking there is a business model that fits our values? Is anyone else dealing with thinking this through or has done so?
This is a question I think about almost every day and discuss with other community leaders. I live in the Germantown neighborhood of Philadelphia, working as a Realtor, and preparing for my own rehab/development projects. This neighborhood has some of the richest history in the US (Buildings from the 1700's around the corner from me). It also has a long history of demographic shifts including white flight out. It is a robust community, but also one with collective trauma from disinvestment, poor schools, lack of commercial options. Much of this is changing rapidly (wholesaler postcards are flying around. Many of the long-time residents have struggled to build wealth due to all of the expected injustices that come with urban poverty, so they are not in a position to take advantage of rising property values. Leaders in the community have come up with some pretty cool initiatives to solve this (See Jumpstart Germantown), but most feel like they are being left behind as young, white hipsters move into the amazing old houses. As a Realtor, I am hesitant to work with out of state investors who simply see the potential, but couldn't possibly know about the community dynamics. It's been eye-opening to see the reality that those with wealth and privilege get to remake communities in their own image, and the poor largely have to move on to another less-desirable place to live, even if they spent their entire lives in the neighborhood. Mortgage redlining played a huge role in this by essentially forcing residents to rent because banks wouldn't underwrite loans for their homes.
I'm working with a few other neighborhood leaders to put together a development company that only employs contractors from the neighborhood, creates job training opportunities, and works to help neighbors stay in their homes. While investment can be positive in general economic terms, it can also be destructive to community identities. I'd love to connect with others who are trying to figure out how to invest and develop with community development as a high priority.
@David Sosna I spend a good portion of the year living in New Orleans, this is a huge issue there. And there is no great one way to go about it. My thought is if you are at least aware of the problem, that puts you ahead of most people. Then going and having conversations with folks in the community helps. If it is something you truly want to combat, you can build into your business model ways to provide affordable housing units. I spent 4 years doing affordable housing in Durham, NC and still made great money. But just being mindful can go a long way.
As an example, the block where I just finished a giant househack/brrrr project - we bought the old dilapidated corner store building and converted it into a triplex and turned the old barn/garage into a carriage house. During this process I made a point to talk with the neighbors, I made sure they knew who I was, and that I had positive intentions. Probably about 60% of my neighbors have been here for 20+ years. The neighbors loved the project! I turned around a property they all said was an eye sore. I made sure to save architectural details that gave the place its charm, and choose paint colors that fit New Orleans. They were always excited about seeing what was going to happen next with the project, and they loved how their property values were improved (Their words). But the challenge is, this ended up being a $700k project, and the big corner property on the other end of the block is now up for sale at $1.1M. When the tax values get reassessed, the neighbors will have a hard time with their tax rates going up. The city does give elderly a tax value freeze once you get to a certain age, so that helps. We also have on our block 3 empty lots owned by the housing authority who will give the lots to builders to create affordable housing units.
It will be an interesting blend, but it won't be perfect. The city can help. But you need outside money to help improve an area, but you want to be careful that the outside money doesn't take completely over. It is a fine line to walk.
Many investors like to puff out their chests and talk about how they are helping their neighborhoods and I don't disagree with them, actually. But there is a ton of nuance that they gloss over because it is convenient. It stands to reason that if you improve an area, even just by NOT being a slumlord in some cases, market prices will and should go up. So, like you said, it is really tricky.
However, one possible idea is to focus on creating NEW inventory (in your case, buying lots and building new houses in your neighborhood). Creating more supply should, in theory, temper rising costs in an area. Population density can be a good thing in this regard (a lot of YIMBY groups are big proponents of increasing density). And depending on your cost structure and market, I imagine there is still money to be made.
Of course, with population density, you get a ton of push back from current homeowners who don't want new inventory because they want to see their own property values stay high and generally, people dislike change. If you are just buying lots and building SFHs, I don't think anyone will raise a stink. But, if you want to help your community, you could voice your opinion on these issues through your city government as one way to be an active participant.
I sort of threw out a bunch of disjointed ideas, but hopefully some tidbits to think about as you move forward!
@David Sosna You could always do a combination of the two. Complete a bigger flip in the $400k ARV range. Then do a smaller flip for lower income people, or do a small renovation for a family for free or low cost.
Creative destruction...cant get away from it. More people, more homes, less open space. Some people are forced to move because they cannot afford the higher taxes even though pleased with the increased value of their house. My mom has to leave the home she and my father built because she is losing her eyesight and cannot drive. Life changes, everyone is thrown a few curve balls.
This is a question I think about almost every day and discuss with other community leaders. I live in the Germantown neighborhood of Philadelphia, working as a Realtor, and preparing for my own rehab/development projects. This neighborhood has some of the richest history in the US (Buildings from the 1700's around the corner from me). It also has a long history of demographic shifts including white flight out. It is a robust community, but also one with collective trauma from disinvestment, poor schools, lack of commercial options. Much of this is changing rapidly (wholesaler postcards are flying around. Many of the long-time residents have struggled to build wealth due to all of the expected injustices that come with urban poverty, so they are not in a position to take advantage of rising property values. Leaders in the community have come up with some pretty cool initiatives to solve this (See Jumpstart Germantown), but most feel like they are being left behind as young, white hipsters move into the amazing old houses. As a Realtor, I am hesitant to work with out of state investors who simply see the potential, but couldn't possibly know about the community dynamics. It's been eye-opening to see the reality that those with wealth and privilege get to remake communities in their own image, and the poor largely have to move on to another less-desirable place to live, even if they spent their entire lives in the neighborhood. Mortgage redlining played a huge role in this by essentially forcing residents to rent because banks wouldn't underwrite loans for their homes.
I'm working with a few other neighborhood leaders to put together a development company that only employs contractors from the neighborhood, creates job training opportunities, and works to help neighbors stay in their homes. While investment can be positive in general economic terms, it can also be destructive to community identities. I'd love to connect with others who are trying to figure out how to invest and develop with community development as a high priority.
@Peter Dunne, YAY For You! I am a Philadelphian born and raised. I grew up in North Philadelphia and spent a great deal of time in neighborhoods like Francisville, Brewerytown, and Strawberry Mansion. I don't need to tell you what has happened and is happening to these areas. It deeply saddens me that the long-term residents here are not provided with the resources to be able to stay in their homes. A couple of years ago family members living in the Brewerytown lost their home to Eminent Domain. They had lived in the home for over 40 years!
To try and even the playing field, I have recently started developing affordable housing in neighborhoods that are not getting much interest from investors. I would like to get a foot in the gentrifying area but sourcing properties is a challenge I have not been able to overcome.
Peter, I would love to connect with you and hear more about your plans for neighborhood investments, revitalization, and stability.
When a community undergoes gentrification there is no way to stop it. Investors do so to make money, business is business. You could opt out of the profits but others will simply step in where you choose not to go.
You can participate in sharing the profits or not, either way you do not stop progress. The culture of the community will simply relocate and life continues as usual.
Investors take advantage of financial opportunities, sappy do-gooders work for non-profit NGOs.
I recently heard from @Ken Breeze the benefits to the tenants when the investor can be a good landlord. I had never thought of it from that perspective, as I had previously only thought of it as making sense for a healthy business standpoint. I am inspired to see investors putting their neighborhoods before making a big buck.
@Greg Fitch the corner store project was in New Orleans. Old corner store built in the 1920s. One of the funnest projects I have worked on as far as transformation. I am writing a case study on it, when it’s done I’ll share it here.
@Fradel Schaechter don’t get me wrong, the affordable housing work I did in Durham was for profit, and we made great returns. But I am a firm believer in the ability that you can blend business and social impact.
@Thomas S. there are lots of ways to do nonprofit style work and still make great money. I did it on a relatively small scale. But check out Impact Housing REIT, they do it on a large scale. $260M in private capital, something like $3B in real estate done, and have their own nonprofit arm. And their average return over their different funds isn't too shabby.
Homeowners experiencing appreciation and additional financial security is a good thing. I can't relate to wanting the opposite for the residents of these neighborhoods.
@David Sosna There's always a need with government housing. Though, it has its issues with red tape. The market will dictate what can sell in the neighborhood. But yes, it can change with gentrification. Though, some families do manage to stay for generations. Good luck with your project!
With all respect due, maybe you should try harder.
It's not so hard to understand that, at the very least, problems might arise if property taxes increase 500% for an elderly couple on a poverty-level fixed income living in the home they've owned for 50 years. It's not so hard to sympathize with a family having to move away from a neighborhood where they've lived for 20 years because the landlord is selling to a flipper who wants to buy for $70K and sell for $250K. How about living on a street where nearly every evening for the past two decades, neighbors, adults and children, set up tables and chairs in the middle of a street off the heart of downtown to gather and hang out, but after the neighborhood starts gentrifying, the newly moved in neighbors complain to the city officials to stop the gatherings? Those things are happening now in Durham,
I'm not saying investors should not pursue properties and profits. Of course we should. I'm fortunate enough to have caught a small slice of the profits of the past few years. I'm just saying it's not so hard to understand the real pain it causes some of the original residents of a neighborhood.
It is great to be thoughtful about your overall impacts...
I do think if you take the ugly duckling on the block and make it a swan, you probably won't get many complaints.
My own big picture view is related to the housing stock. And whether you are producing a net benefit may depend on how you go about your flip.
I see so many houses that need loads of capital improvements--deferred maintenance, all components at or near the end of their useful life--never a thought to cap-ex from owners or landlords that squeezed all the juice out of the lemon.
These neglected places en masse tend to lead to blight and bring a downward spiral (all sorts of social problems, the opposite of bringing in the gentry!)
So if you can come in to a neighborhood and rehab housing to make it more habitable, efficient, and modern, and do it well, that seems a win/win. You are like a one person housing development agency, renewing homes and providing quality housing (not any easy task).
If someone is just doing a surface flip (just cosmetic shine and not so much substance), I am not sure you help any one (save stimulating the economy some for cost of the floors, counters, and paint). You have an ugly duckling with some polish.
So maybe look past the market value aspects to the quality of the housing stock. Few folks have the capital or management skills to pull off high quality rehabs.. And governments and agencies tend to tackle large, multifamily projects. So there is a need. If you can do it, you will help others have quality housing.
And it is up to you what you do. You can rent it out at market rates or choose to take Sec 8.
Or you can do both--have some market rate rentals and also work on Habitat for Humanity projects, your own lower income housing project, or lobby policy makers for mixed income development.
With all respect due, maybe you should try harder.
It's not so hard to understand that, at the very least, problems might arise if property taxes increase 500% for an elderly couple on a poverty-level fixed income living in the home they've owned for 50 years. It's not so hard to sympathize with a family having to move away from a neighborhood where they've lived for 20 years because the landlord is selling to a flipper who wants to buy for $70K and sell for $250K. How about living on a street where nearly every evening for the past two decades, neighbors, adults and children, set up tables and chairs in the middle of a street off the heart of downtown to gather and hang out, but after the neighborhood starts gentrifying, the newly moved in neighbors complain to the city officials to stop the gatherings? Those things are happening now in Durham,
I'm not saying investors should not pursue properties and profits. Of course we should. I'm fortunate enough to have caught a small slice of the profits of the past few years. I'm just saying it's not so hard to understand the real pain it causes some of the original residents of a neighborhood.
Cheers,
Randy
My comment has nothing to do with investors and flippers...it's about the homeowners. All economic classes of homeowners (not just the rich) deserve to achieve appreciation. I sympathize with the renters but not to the detriment of the resident homeowners. Unfortunately, there is not some fictitious nirvana where we can have both appreciation for the resident homeowners and stagnant rent for the renters.
I can't vote for block parties and property value stagnation for families over market appreciation for them.
Feel free to disagree or disregard a sappy do-gooder like me, but the more I understand real estate, the more complex it becomes. It also has a direct impact on communities and individual lives unlike most other forms of investment. Being a resident of a gentrifying neighborhood, who has grown to know and care about many of my neighbors, I am seeing more clearly that the impact of our investment choices goes beyond just our financial goals. I don't expect everyone to get this, but now being a part of the block parties, having the neighbor kids all up in my house, and having the privilege of teaming up with other able-bodied neighbors to dig the shovel show for the elderly and disabled, I can't help but care about these people, renter, home-owner, whoever.
It's easy to get all excited about the analytics, market identification, demographic trends, and spotting value, but in the end our investment choices impact real people. I firmly believe that can be for good. Development and investment is an inherently good thing when thoughtfully applied.
It's just way more complex than it seems most folks are willing to consider. I find it exciting because it forces more creativity in finding win-win solutions.
@Mike Dymski I tend to agree that appreciating values is clearly a win for most home-owners. However, I have found that many are not in a good position to recognize or execute the opportunity. For instance, say you are elderly and your home has fallen into disrepair. It has gone up in value, so you could theoretically take out a home-equity line to fix it up, but on a fixed income, you may not have the ability to pay it back. The primary way for these folks to benefit is to sell the house that they raised their families in. Same thing with tax increases and people on fixed incomes. Many people really to get forced out of their homes through appreciation. For some people, they really would choose stagnant property values if it meant living out their lives with dignity in their own communities.
What is the alternative to gentrification? Suburban flight? Disinvestment? Neighborhoods completely segregated by income?
A city will naturally evolve over time. It will not stay the same. The fact that urban areas are being restored to their former glory should be a good thing. The alternative is middle class people moving away and never coming back.
It's all a matter of supply and demand.. if you want to blame someone for rising the prices, blame the buyers who are willing to pay it!
Personally, I think it's wonderful to see money be put in lower income areas! In a low income area, there's a really good chance majority are renters paying less than market value, so 0 chance IMO of the landlord dumping money to improve it, so the new investors are the ones to come help!
Thomas S.
I have to agree with you there. This is one of those topics that I have strong opinions about.
I lived in an area with beautiful historic architecture and saw it rot away for years, neglected by the very same people who scream gentrification at the top of their lungs.
They want to live in beautiful areas with lots of amenities and pay rock bottom rents without any hipsters or yuppies moving in.
That is a fantasy.
@David Sosna when you say wealthier buyers are culturally vacant, that is the same as saying minorities or immigrants are not wealthy. I challenge your stereotypes. I know many culturally diverse people with money and good jobs. They have different skin colors, different family traditions, etc. I have even seen block parties in wealthy neighborhoods. I am also skeptical that wealthy is the right classification in this case - maybe upper middle class. Many of these neighborhoods are being occupied by young families, just a few years out of college. It includes, teachers, doctors, nurses, police, etc.
As cities grow older, a neighborhood has two options. Either it degrades continuously or new owners reinvigorate the neighborhood.
When a neighborhood degrades, the properties fall into disrepair. Exteriors degrade, decks rot, landscape is overgrown, nobody remodels, etc. As the neighborhood value decreases, it keeps attracting lower income and more renters. It becomes a cycle where values keep decreasing and the neighborhood quality gets worse and worse. Crime starts to seep into the neighborhood. Houses go vacant and become drug houses. It is a form of urban rot that can destroy a city from the inside out. In many cities, when a neighborhood gets bad enough, they will even demolish an entire city block.
When a neighborhood goes through a transformation, it helps the entire city. As a few people start improving their properties, more people start making improvements. The value of the homes in the neighborhood starts increasing. It then reaches a point where the "holdouts" usually end up selling their properties to take advantage of the higher values. In other cases, landlords chose to renovate as a way to attract a better class of tenant and make more profit.
As far as old people who have owned their houses for 50 years, many of them have become physically and financially incapable of caring for the house. Many of these old people stay in their home 15 years longer than they should have. I speak from experience having many relatives in their 80's. They are unable to care for the home. It is just too large and too much for them. The houses fall into horrible disrepair and the yard is an eye sore. They are not being good neighbors. Usually they fight their children, who encourage them to move out. I have seen many older people downsize to apartments or assisted living and they become immediately happier. Being in a community with people your age is much better than being stuck in a home you can't care for. After moving, they proclaim that they should have done it years ago. It is the cycle of life.
Some cities freeze tax values for older people, so you can have a 50 year resident paying a quarter of what the neighboring house is paying. Some people argue that isn't fair.
The best solution is programs that support affordable housing. You should look into investing in these types of areas since it aligns better with your values.
I'm really interested in the idea of building ADUs to offset this. A small ADU in a nice neighborhood is a good way to create a housing mix that will attract all sorts of people and create a strong community.