low income area = high appreciation?

Question

I've seen it mentioned many times in this forum that houses in low-income rougher neighborhoods are good for cash flow but not so good for appreciation.  The implication is that a house in a nicer neighborhood would appreciate more.

A Las Vegas Realtor just send me a map of 2005 appreciation rates by zip code (I don't know why).  What stands out clearly is that the worse the neighborhood, the higher the appreciation.  For instance, 89101 went up 44% while 89131 went up 15%.  89101 is older downtown low income while 89131 is high-income great-schools new suburbia.  Other zip codes follow the same relationship -- the worse the neighborhood the higher the appreciation.

So....is there a general rule?  Maybe appreciation patterns are just another part of the cycle -- different areas appreciate at different times.

Ryan Webber · Answer

I got in a debate a year or two ago with a fellow investor about the whole low end cash flow versus high end appreciation so I went to the MLS and determined the appreciation rates for every area for the five years prior in my city.  The results surprised me.

Out of the top 20 appreciating areas in my city, 11 of the area's average sales prices were less than 70% of the median house price of my city (meaning they were lower end areas).  The median priced home was $125,000 in my city and 11 of the top 20 areas had an average sales price of $80,000 or under.  The number one appreciating area in my city was less than 50% of the median price.  The majority of high appreciating areas in my city were lower end.

The last time I updated the list was about 6 months ago, and it was still holding true.  Not to say its true in every city or really any other city, but in my town, lower end areas generally appreciate better than upper end areas.  Maybe that's true for Vegas, too.  Maybe its true for more towns than anyone realizes.  The only way to make an accurate determination for your town is to do the research.

Agreeing with others here, I would only trust my OWN research.  Realtors are sales people.  Ask to see the data yourself.  Sit down and look at the MLS with them if you have to.  There are a million ways to skew sales data from the MLS.  Trust me, I have first hand experience with realtors "massaging" sales data, so just make sure what you are looking at is accurate.

Eddie Ziv · Answer

Kudos here.
          I invest in low income areas and I encourage people to do so for cash flow (Due diligence apply), but I wouldn't claim that those areas have good appreciation and the reason is simple. People who live in the area and can afford only living in the area, are not the one who can afford more expensive houses. If they do, they move out. That not to say that there is no appreciation, there is but modest. One of the reason for that, aside from inflation is that usually there is no new construction in low income neighborhoods and thus the demand can increase for people who only can afford living there.
          
          BTW, I wouldn't trust anyone who try to convince me of appreciation of any area, low income or otherwise, by showing me data from 2005. Ask them to show you the data from 2006-2009. That would give you the current trend.

Ryan Webber · Answer

Eddie, I think the picture in dealing with assumptions is different then when dealing with hard data.  Have you done any research on appreciation rates or are you just winging it with what you think and what you've heard?

My whole point is stop assuming and DO the research.  The only way to know the truth in your market is to pull the numbers and see how the areas actually appreciate.

Richard Warren · Answer

Not a good example.  Vegas was such a boom area with ridiculous appreciation rates.  Many investors could only afford to buy in low-income areas by 2005 and prices were driven up by a greater percentage.  You are only looking at rates for one year.  You need to look at a longer-term trend before making that conclusion.

Iâ€™m not saying that I agree or disagree, just that you canâ€™t draw any conclusion by looking at one year.

:cool:

Eddie Ziv · Answer

Ryan, I think that in Texas the picture is a little different then in other states. It seems to me that low income residents have a stronger family and community bond than higher income residents. Which mean many of them gravitate toward each other and create demand in those areas. If those neighbourhoods are older and there is no new construction, it creates demand that drives prices up.

Anthony Larson · Answer

I would say the email is meant to get you interested in properties the realtor is having trouble sellling, I think the numbers show the properties investors are buying to rehab, (bought way under value) and than sold and can sell cashflow with amazing management.

If your interested I would ask the realtor where he got his data. I had statistics in college, and I know this you can manipulate numbers in a lot of ways to represent whatever you want.

Maybe he's taking out the low extremes in the data and not the highs, things like that.

IMHO i wouldnt trust the source.

From another point of view, maybe supply and demand is pushing up the prices because of the real estate crash in Las Vegas, Maybe investors are plannin on the real estate to get back to them numbers. And real estate investors in that area are snatching up properties left in right.

Just a few things to consider

low income area = high appreciation?

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