I purchased a property from Bank of America, it’s located in the Northeast Washington DC area and right in the middle of a major gentrification zone of the “The Rhode Island Avenue Corridor”.
The “RIA DC” project is two blocks away, The project is a multi-phase 1,760 unit mixed use for Sale and for Rent product. Townhomes, Apartments, and Senior living, additionally there will be a grocery store and retail. The project begins next month in February 2018.
Did you see a decrease or increase in rental rates?
Did you see your existing property value increase or decrease once the new construction properties became available?
How long did it take before you saw the positive or negative impact to the gentrifying area once the projects were stabilized?
There has also been several other new construction projects that have come on line or scheduled to come on line within the next 12-24 months.
My property was built in 1963 and has been rehabbed several times with the latest rehabb taking place when I purchased it.
Strong rent growth and asset growth in gentryfying areas are typical. Ive owned in Petworth and did very well.
However you also have to look at development in the area as building of new residential units can soften rent prices sometimes. Ive seen this a few times, most recently by Union Station. Rents softened there with the building of all the new apartments and condos. Over the long term you are probably ok, but in the short term it can make a surprising difference.
I have a few properties in gentrifying areas. Overall, I love them. But there are some downsides.
The main downside I've seen is that, even with strong rent demand, rent rates may not keep up with increases in property taxes and insurance. Rent rates in my area are nowhere near what they are in yours, but it's not uncommon for me to have property tax increases of 20-25% in a year. (Some of this is due to homestead laws in Texas, which limit increases in appraised value to 10% per year when owned as a primary residence. Then when an investor buys it, the appraisal district often socks us with 20-30% increases several years in a row. Things may vary in your area.) When I'm giving my tenants $100-150/mo rate increases every time their lease renews, and that's just keeping up with property taxes and not increasing my cashflow any, that can cost me good tenants.
On the other hand, it's very common for me to be able to buy a property in a gentrifying area, do a basic rehab on it to make it rent-ready, and then in 3-4 years it's worth $150-200K more than when I bought it. Do a nicer rehab, sell it and reap the profits.
So I look at them as appreciation plays. Make sure the rent covers expenses and produces a little cash flow, then just determine where in the cycle you want to cash out.
Definitely intimidating the number of new units coming online. Probably depends on how long or short term your plans are. Obviously in 20 years, buying and holding in a gentrifying area is going to make a lot of money. But, there will probably be dips in rent and cash flow with all these new units in the market, and also property value with a correction in the RE market. Not a bad time to sell, but where do you put the money then?! I'm opting to hold forever and ride the waves up and down. Just have to have enough cash flow in the case of a market crash.
Maybe another way to go would be to 1031 into something less affected by market corrections, like mobile home parks or self storage.
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