When determining a potential real estate investment, which is more important: 1. Purchasing a value-add property OR 2. Purchasing a property in an area that is about to grow/gentrify exponentially?

I don’t think it’s an either or, but both.

@Max Ball I would like to say both (@Todd Dexheimer) but if I had to pick one, I would purchase a property in an area that is about to grow/gentrify. In non-gentrified markets, rents can only increase up to a marginal amount regardless of the value-add. In heavily gentrifying areas, rent growth can be exponential for many years. This also results in non-renovated units fetching higher rents for years on end. In other words, you get to enjoy rising rents without doing any value-add. That's the holy grail!

For me, the ability to add value is more important because the ultimate result is more reliable. If I buy a property in need of work or improvements my after repair/improvement revenues are fairly predictable because they are based on what that market is generating today for a similar property. So, the revenue results are very much in my control. I just need to execute properly. If I buy betting the neighborhood will improve, the increase in revenue is totally dependent on outside factors over which I have no control. This makes it much more risky in my opinion. A younger person with more of a time horizon and/or a higher risk tolerance might feel quite differently.

It sounds nice in theory and I'm a big fan of tech, but currently RE tech is 2-3 decades behind the curve. Unless you have a model which can 100% predict where the next hot spot is going to be (and you might have, in which case we should become best friends), it will remain, at best, a guess - albeit one "backed" by more math than I would understand.

Economy of the area is the very first thing that is important to me. If that looks good then I start to look at the value add opportunity. In my opinion- its not one or the other... its both!

@Max Ball I will echo the "both" replies here but to answer your question as which one is more important for me, I say value-add. The value-add model allows us control in either increasing revenues or streamlining expenses. I personally would not invest in an emerging market if there were no value add component to the deal. However, I would invest in a mature market if there was enough value to be added.

Everyone has a theory but it's a total cr*pshoot. We do thorough research but don't bank of gentrification to help us succeed. If it happens, great, if not, meh. The acquisition has to work with or without gentrification. The longer you're in a market, the better feel you develop.