One property buying strategy that has been successful for the past thirty years is to buy near the center of big towns. Even though it’s a well established trend, there are plenty of opportunities. But it is still important to be selective when you find what looks like a cheap inner city property.
This trend is sometimes referred to as gentrification. Land values rise because wealthier people move in. Because of the higher prices, the poorer people are forced to move to places where rents are cheaper. Gentrification is often considered a negative thing because the neighborhood loses some of its original character but also the poor may become homeless or lose social connections.
In the 1950’s and 60’s, people with families began to favor suburban areas. This is because:
- cars became more affordable;
- city centres were polluted;
- suburban gardens allowed children to exercise in a safe environment.
But more recently inner city living has become more favored because:
- transport costs have risen due to higher oil prices;
- commuting times have increased;
- older people prefer smaller, low maintenance apartments;
- smaller block sizes and unwillingness to maintain gardens have negated the health benefits;
- infrastructure and services are better closer to city centers;
- camera street surveillance has reduced inner city crime.
We should not try to fight a trend, but all trends must come to an end. Things that might turn this trend include:
- population decline;
- an acceleration in jobs for people working from home; and
- a black swan such as improved transport technology or a major decline in employment.
If a city has a large population of artists, the first sign of gentrification is them renting or buying apartments and studios in that area. Otherwise it might be signaled by an increase in micro businesses such as designers, architects and hairdressers. Cafes and other services aimed at a higher demographic soon follow.
In my own lifetime I have watched the process radiating out along major roads and train lines. The process of gentrification along a road is often delayed when it intersects another major road or geographical boundary. Sometimes the new construction and changing land use causes a short term decline in property values until a sufficient number of properties have been converted to the new uses.
Some inner city areas are resistant to gentrification. In my own city of Perth, the area of Northbridge/East Perth had a mixture of light industrial and low income residential buildings. But instead of being bought by high income earners, many of the properties were bought by institutions serving the low income sector. They included drug rehabilitation centers, soup kitchens and legal aid offices. Most of the residential buildings were rentals so property owners did not complain about the concentration of social welfare services in this small area. However, the social welfare services draw their clients from all across the city. This caused crime rates and prostitution to soar and restrained development for a long time.
An article in San Francisco Magazine describes a similar problem faced by the Tenderloin district. This famous slum is in a prime central location, but it will not gentrify any day soon. The writer says there are four factors which combine to make a Gordian Knot for any developer hoping to turn its crack houses into fine hotels he cites:
- zoning laws;
- city politics;
- entrenched nonprofits; and
- unique housing stock.
Most of the residential buildings date to the depression era and were single-room-occupancy residential hotels. Many of these rooms lack a kitchen or private bathroom. This was acceptable in the 1930’s, but few people would not tolerate it if they were not desperate for a place to live. The zoning laws restrict new buildings in the district to between 8 and 13 floors, putting an end to plans for building luxury high-rise hotels. The nonprofits fight any redevelopment proposal and work towards increasingly tighter building restrictions. For an idea of street life in the Tenderloin, Vice wrote a particularly bleak article about it.
There are still opportunities to make money by buying cheap property and waiting for it to gentrify. But if you aren’t careful, you may have to play the role of slum lord for many years, without hope of a big windfall gain.