Gentrification: How do you assess it?

[Dave Ringstaff]

Hello BP,

I am new to your forums and am eager to join the discussions. One topic i've been wanting to talk about with other investors is buying in a rapidly gentrifying area and renting said property.

I've gone over the markets and the area of interest is going through the exact same phase as the area before it. Gentrification circles out and the area of interest is the next area to feel the effect. I am talking about Port Richmond Philadelphia if anyone is familiar with the area.

Again...strictly hypothetical..

How do the more weathered investors deal with areas of gentrification. Do you still use the 50% rule? I can't imagine it being viable in a situation where the value of your property will nearly double in the following years. I ask, because in this hypothetical situation, there is no way to put aside 50% of gross rent to cover expenses without being negative in cash flow. However, if you account for the 50% rule, over the course of the next 3 years you may pay 3600 dollars out of pocket expenses with this hypothetical property. But if anything remotely similar between this property and the property before it occurs, said property's value is undoubtedly going to go up way beyond your 3600 dollar loss.

I guess my hypothetical situation asks, how do investors weigh the risk vs. reward with a gentrified area of interest?