How to Identify the Next Hot Neighborhood

[Joe Assad]

Places like Oakland and Brooklyn have become harbingers for the real estate renaissance happening in once rough and tumble neighborhoods. With a short supply of homes on the market and limited new construction, communities that were once considered unsavory are now becoming desirable investment opportunities. Those willing to bear the risk of these investments are often rewarded handsomely once an area has turned around, as is proof with the aforementioned cities.

But part of being able to capitalize on these opportunities and achieve the maximum return-on-investment is spotting these areas while they are still in their state of becoming and while asking prices are still low. By watching for these key market signals, you can identify areas poised for a turnaround.

Proximity to nice neighborhoods. One way to scout for diamonds in the rough is to identify the rundown neighborhoods that border the highly desired ones. Areas that surround attractive neighborhoods stand to be revitalized before others due to the inevitable spillover that occurs as an area becomes more populous. Often times these areas will be rezoned just before expansion begins so that is a good clue that redevelopment is on the way. Look for areas with more flexible zoning, as they will often see a surge in residential and commercial development, which will aid these areas in evolving much quicker.

Thriving artist community. It is no surprise that artists have the vision to spot hip neighborhoods often before anyone else. These bohemian types have a keen eye for finding eccentric, up and coming areas that are often much more affordable than surrounding areas. Artists are also good settlers and bring a strong sense of personality to the neighborhoods they live in. The creative character that they infuse into their communities can add a lot of value to an area and make it blossom into a highly prized housing market for investors and homebuyers.

Burgeoning retail segment. When restaurants, bars and coffee shops start moving in, it is a good indicator that a neighborhood's identity is changing. Major retailers spend a significant amount of money and time scoping out areas for stores, so if you see a Starbucks pop up in a neighborhood, you can bet the company has sufficient evidence to believe that the area is on the rise. The presence of the coffee chain has become such a telltale sign that housing prices will increase, it has been called the Starbucks Effect. But major chains are not the only sign of revitalization, independent shops can also signal that change is just around the corner.

Easy access to transportation or highways. Whether you are looking at properties in bustling urban areas or homes in the suburbs, accessibility is key. Transportation is essential for connecting people to employment centers, so those areas with infrastructure in place usually will not stay underdeveloped for long. In large cities, identify neighborhoods that are close to public transportation, as they will become prime targets as population explosion in urban centers continues to push people outward. When looking for real estate investments in the suburbs or rural areas, look for neighborhoods that have easy access to freeways and bridges or offer commuter shuttles to nearby bigger job markets.

Decrease in days on market (DOM). Monitoring data around how long comparable homes are taking to sell can tell you a lot about how a particular market is trending. While homes in sluggish neighborhoods might stay on the market for months, an area on the upswing might see a reversal of this trend. If you notice a steady decrease in the number of days homes are on the market, it can be a good indicator that the neighborhood is heating up. Typically, a market will experience declines in DOM before housing prices escalate. By keeping a watchful eye on this data, you can get in on the market while the gettin' is good.

As the housing supply crunch continues, neighborhoods that were once seen as in imperil will be ripe for a turnaround and will start to look more attractive for homebuyers, making them a good investment opportunity. These types of properties often require a different strategy though, so investors should be prepared to act fast to secure the best home price. But on the other side, you may need to hold onto a property longer than you would in a developed area to allow it appreciate and reach its potential. Working with a real estate agent to understand where a market is on the redevelopment cycle will help you determine just how long you should expect to wait to achieve maximum returns.