How do you identify a neighborhood on an upswing?

Question

I'm still searching for my first deal, being picky in the process. I'm ideally looking for a somewhat dumpy multi-family home that can be fixed up and rented. Most of these homes are in somewhat questionable neighborhoods, but I don't really see that as a big deal, as long as the neighborhood appears to be in an upswing.

For example, I saw a duplex on the MLS in Durham that was selling for $30,000. I could put down 25% easy, and cashflow all day long. It looked to be in good shape from the pictures, and I drove out to see it. When I got there, I found a house that looked to be in good shape, but everything else around it was in shambles. The neighboring properties didn't have grass, and there were a few trucks up on blocks in the street. There were a bunch of children playing in the street, which I take as a good sign, but I ended up passing on it because the surrounding area just seemed so run down.

A couple days later, I'm wondering if I made a mistake. I didn't see anybody with conspicuous bandannas on their biceps or hanging out of back pockets, and the trucks on blocks both had ladder racks on them, meaning they were probably employed by somebody.

I probably missed this property, but in the future, what should I look for to indicate that a transitional property is transitioning the right way? Are there any signs that you look for to give you a warm fuzzy about buying in a mediocre neighborhood?

Jean Bolger · Answer

A very successful real estate developer I know talks about identifying "barbell" areas. That would be an area, or a corridor, between two areas that have already gentrified. I experienced the benefit of that with my first property (by luck, not on purpose!) when I bought in a dodgy area of town that was between two fashionable areas. Now it's almost the priciest part of town. (I sold up, took the money and moved on to another dodgy area, haha!)

Jesse Rivera · Answer

Look at the cars in the driveway, that is a great indicator. If there are nothing but hoopties, than the neighborhood is not going anywhere. But young professionals drive nicer cars, and they are the ones that bring the neighborhood to a higher level.

David Midgett · Answer

Gauging market upswing involves a lot of guesswork. Neighborhood improvement is often a J-Curve. Starts real slow, gathers momentum, then starts happening fast. You have to decide how comfortable you are jumping in at a specific point on that curve. Obviously, the earlier you jump into a gentrifying area, the better the bargain. And the higher the risk. I'd start with your ideal tenant. Where do they want to eat, shop, hang out, etc? Are those places opening up? Are those people moving into the area? Also look at vacancies, crime reports, absentee owner ratios, etc. Are those data sets improving, static or getting worse? But in the end you can't beat boots on the ground. A single afternoon going door-to-door knocking and saying "I'm thinking about buying in this area- what can you tell me about the neighborhood?" can be invaluable.

Jesse Rivera · Answer

Great advice!

Jacob A. · Answer

Matt Rothwell I've lived in the Raleigh/Durham area my whole life and have seen this area have off the charts growth in the past 15-20 years. I work alot in Durham and it is definately on the upswing if you ask me. There are a lot of renovations and new stores/restaurants opening in the downtown area. However, like Bryan H. said above, Durham is one of those hit or miss areas. I was told by a lender friend of mine that he has a client that is cleaning up in Durham at the moment so I definately think the potential is out there. Just gotta know when to pull the metaphoric trigger!!! Good luck.

Ben R. · Answer

Matt Rothwell, in a war zone, the drug dealers will start waking up from their slumber and hitting the street corners about 2 or 3pm. The other key is don't be the first rehab on the street. Look for other properties being rescued...

Matt Rothwell · Answer

Honestly, I think that its that difficulty in figuring out the bad from the good that makes Durham a good value for the local buy and hold investor that's willing to do research. I don't put a whole lot of stock in the city-data forums, they all seem terrified of any minorities or anyone that makes less than $100k/year. I'm giving the "boots on the ground" test a shot this weekend. I might also try the "girlfriend test" to assess the sketchyness of the neighborhood if I'm not sure of an area.

Bryan H. · Answer

Durham is tough to figure out. I just moved to the area and still trying to find the 'good' areas of Durham. There are some, but there are a lot of bad areas too, especially in the $30k range. Want to know where to invest? Talk to a realtor Talk to a property management company Talk to people at a local REIA I'm still looking at purchasing in Durham, but I check city-data.com, drive by, and ask people I trust at the TREIA group.

Scott Meredith · Answer

You could also check with the local chamber of commerce and see if there is any new memberships or other local retailer/employers coming in. Also check with the city to see if any new business license applications are being filed.

Seth Williams · Answer

Matt Rothwell - you might consider calling a couple of local property management companies. Explain exactly what you're looking for and ask them what their suggestions would be. In my experience, if anybody would know how to identify the particular areas that fit the profile you're looking for, it would be a property management company. These people are on the front lines every day and they come into contact with a lot more than you'd even be able to see on your own.