When I started flipping homes several years ago, I wanted to do so in an area that was established but had appreciation or upside potential. I also wanted something a little out of the norm; suburban generica wasn’t going to cut it for me.
Neighborhoods with homes that only needed cosmetic or “lipstick” flips just weren’t as appealing as gutting a home to the studs, fixing every problem, and then putting it back on the market for a huge potential profit!
Another exciting part of urban flips is the real change you can make in a sometimes terrible neighborhood. Watching areas go from the part of town nobody will visit to where “all the cool kids want to live” is very exciting and personally rewarding.
What are some of the unique real estate investing strategies you need to be aware of in order to capitalize on this trend back to urban?
1. The Houses Will Likely Be in Terrible Shape!
If you want to see how bad these homes get, check out this video series featuring one of the worst homes I’ve ever rehabbed.
I think many investors who are used to flipping in more gentrified areas don’t realize the degree of the dilapidation some of these homes have experienced.
I’ve seen literally everything from dead animals under couches to refrigerators chock full of spoiled food to more holes in the floors and roofs than I could count.
Know what you are signing up for; this isn’t for the faint of heart.
2. Appraisal Issues
If you work in a neighborhood that is just turning the cusp to become sexy and trendy, many bank appraisers will have no idea what’s going on!
I’ve always preemptively tried to contact and educate the appraiser about what is going on before they visit the property. Tell them what’s happening with reinvestment and city infrastructure improvement. Point them toward articles that have been written about the area and how fast property values are changing.
Also be prepared to challenge an appraisal that’s super off base. This has happened to me. So be ready with your own comps and explanation for how you arrived at the sales price value.
3. City Politics & Historic Districts
Many people who come from flipping or developing in other areas of a city will be woefully under-prepared for local city politics and historic districts. If you flip in one of these regions, you will likely work near a downtown area. This means your projects will have a lot of eyes on them. From nosey neighbors to code compliance officers to the crackhead down the road, it can get pretty exciting!
Make sure you and your contractors pull all the necessary permits. Don’t try to fly under the radar. Been there, done that. It doesn’t work.
You may also end up working in neighborhoods that have recently been designated historic districts. In this case, familiarize yourself with the approval process you’ll need to go through if you choose to rehabs homes in these areas.
I’ve done well over a dozen projects in historic districts, and they can be very well received and very profitable. However, make sure you factor in extra holding time for approval hearings and meetings if you plan to make any exterior changes or even wide scale exterior repairs.
4. Crazy Neighborhood Leadership
You may also run into crazy HOAs that think they need to be involved in every neighborhood project. They will want to comment on everything from paint colors to driveway and window placement to how much density you can create on a lot.
To be successful, you must develop a process for working peacefully with these people. Therefore, get ready to attend HOA meetings, Saturday morning garage sale parties, and Wednesday night get togethers on how to combat homelessness.
There is a very real political element to working in these areas.
5. Getting Creative With Your Projects
Another part of urban revitalization that I love is the number of different investing and developing options it opens up. When there is a ton of dilapidated supply and growing demand, you can really explore those more off-the-wall ideas.
For example, I started by simply flipping in these areas, and now I’m transitioning to building urban infill neighborhoods. These projects, usually in the five-to-15-house range, allow me to create my own ecosystem in the neighborhoods, capitalize on density, and still get in and out of a project in less than 12 months!
I have participated in mixed-use projects. I own a commercial building I’m turning into a bar with a super-cool rooftop deck. And I’ve gotten to do land redevelopment—all within a two-mile radius!
6. Have You Considered New Construction?
Building on my last point, many urban areas that have suffered long periods of neglect are missing a lot of product. Homes have been condemned, burned down, torn down, or just fallen down! (Yes, I’ve seen all of this.) Which is another reason I’m focusing on brand-new product to market. Old, fixed-up homes are nice, but there’s a segment of the population that wants to live in something shiny and new. They want all the latest energy-efficient features and that 10-year builder warranty.
If new construction is out of your wheelhouse, consider partnering with a builder who can construct what you think the market needs.
This strategy is becoming more and more appealing to me in some of the areas I’m focused in.
7. Profitable Only If You Know What You Are Doing!
I hope this has gotten some of you excited about looking into urban redevelopment projects in your city.
I lucked into living and investing in San Antonio, where downtown is about 15 to 20 years behind other large Texas cities. Now the municipality has tons of city and political interest, dollars, and projects flowing into it. The whole fabric of the city is changing from focusing on tourism to becoming a diversified and culturally rich downtown.
Know the risks moving forward. Take time to plan. Enjoy working on something that’s different from what the majority of investors get to experience.
What are some of the unique strategies you use to capitalize on this urban-redevelopment trend?
Share them below!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.