The Low-Risk / High-Reward Opportunity of Neighborhoods in Transition
When considering low-risk properties with good returns, many would-be real estate investors look to Class-A properties: newer, high-quality buildings with amenities, high rents, high-income tenants and low vacancy rate.
While Class A properties are perceived to be “safe,” they are also expensive and don’t have high cash flow. They can also be volatile. Class A tenants are paying the highest rents among all property classes. During an economic downturn, these tenants will typically seek lower rents, creating vacancies, driving up costs, and decreasing net operating expenses.
What if a property had the perceived safety of Class A but with better returns? With a little outside the box thinking, vision and the expertise to execute, the answer lies in a different kind of asset and strategy.
Neighborhoods in Transition
Neighborhoods in transition are neighborhoods moving from low-income demographics to higher income and becoming more in-demand. Name brand businesses have started opening up and people are beginning to find the neighborhood safe and appealing. Identifying properties in these neighborhoods right when they’re on the cusp of transition can lead to some great diamonds in the rough.
Here’s how: less in demand neighborhoods are usually made up of Class C properties. These are smaller, older buildings that typically suffer from mismanagement and deferred maintenance. Once the neighborhood begins to show signs of improving, properties become undervalued…but not for long.
Purchasing properties at the right time, renovating exteriors and interiors, adding amenities, increasing customer service, and improving property management will all improve the property and tenant demand. These improvements can result in rent increases of 40% to 200%.
Because these properties are essentially purchased at rock bottom valuations, the risk is minimized from the start. Property improvements can move the classification from C to B. The class upgrade and increasing rents throughout the neighborhood result in improving cash flows, and greater returns for the investor.