From 25k-2.4 million !
Real Estate Agent · Warrior Run, PA · Member since 2016 · 341 posts · 146 votes
Hi Nicholas.
You asked: "My question is, how do we do it ? How do we find the next area that will see significant growth over a 10-20 year period."
@Gurjeet Singh had some good insights. I agree with his 4 points.
There is also a consistent cycle which one sees all the time. It's something like this:
- Artists and Creative Types come into a very inexpensive neighborhood. Usually this is a very young crowd as they really can't afford the typical expensive apts until they group up. They also generally want to have a Loft or work studio for sculpting, painting, etc. where they can also live.
- The neighborhood begins to offer amenities such as specialty foods like great Coffee, Gourmet Coffee, Avocado Toast, French, Japanese, etc. Foods that you expect to be offered only in a up and coming or matured neighborhood.
- Bands and music starts to predominate. Specialty bars and micro-breweries pop up.
- As the cycle progress, younger, wealthier people take notice and generally like what they see. The Young Urban Professionals (Yuppies) begin to move in to the neighborhood. This is where the rents start moving up.
- Eventually, word gets around, people from all over the US and else where wants to visit and AirBnB becomes popular as the Artists/Musicians need to make up for the increase in rents.
- Developers then take notice. Money starts to flood in the area. Shiny new buildings in a creative design starts to pop up.
- The public transportation starts to get crowded.
- If the trend continues...... it becomes a viable, maturing neighborhood, as some of the Artists/Musicians/Yuppies begin to have children. Some Strollers start to pop up.
- As the developers continue building, a need for more amenities such as chartered or specialized schools materialize to support the wealthier of the gentrifying crowd.
- Eventually, the Artists/Musicians/Yuppies in the neighborhood falls into the same situation as the long term residents, those who wish that the rents and prices didn't skyrocket so much. This leads to apt sharing and a migration of those that really can't afford to live there to move elsewhere, hopefully around the same location.
- This trend can continue for a while. By this time, even a downturn in the Economy won't stop the upward trend. It won't reverse gentrify.
- The Realtors start to call the neighborhood something else than what it was known... ie. Clinton Hill in Brooklyn was known as Bed-Stuy up until 15 years ago or so.
- There are a few other economic paths that this cycle can take, some modifications, etc. But this is generally what happens.
The problem with most Real Estate Investors is that they don't really have training in the kind of financial math that makes your think of this cycle.
The kind of financial math you need are future value calculations. Some of the the math calculations include Internal Rate of Return (IRR), Discounted Cash Flows (DCF), Future Value (FV) of the Appreciating property, Net Present Value (NPV),10 year projections, etc.
There's no need for this kind of math if the Investor will not get any kind of appreciation, such as LONG TERM rental increases and value appreciation.
If you have only been taught one kind of math, which is the Cash Flow NOW math (Cash on Cash Return, GRM, etc.), and you never do a 10 year pro-forma business plan which includes things like the above calculations, your mindset is not correlated towards the future possibilities of what might happen 10 year, 20 years or 30 years from now.
This is the type of math I do because no other Math makes sense for an Investor like me, an Investor that has been Investing in Brooklyn for 2 Decades.
If I did the normal financial math, like Cash on Cash Return..... I would not have bought in Clinton Hill, Bed-Stuy, Ditmas Park, Windsor Terrace, all in Brooklyn.
I would never have seen rents and appreciations which moved up 5 times the purchase price, 10 times the purchase price, etc.
I would not be purchasing MORE investments, this time at $2 Million for a multi-family.
If you really want to Invest in these higher appreciation areas, you should really put some thoughts into the Future Financial Maths, the Pro-Forma 10 year Projection Business Plans, the Economic activities in the areas, the cycle that I described above, and for international cities like NYC and SF, global fluctuations in Currency risks as foreign money moves from higher risky international areas (think Venezuela in today's current economic news) to less risky International cities.
Just some food for thought!
Won't tell you how to spend your money, but people saying no appreciation in PA aren't correct. Pittsburgh sees pretty consistent appreciation city wide and we have our more rapidly appreciating areas as well.
@John Hickey , Newburgh,NY looks interesting, 60 miles North of NYC. Historic buildings. I saw some articles worried about gentrification so that is usually a good sign .
Saw a 3000sq ft Victorian for about $200k . Average price per sq foot there (according to Trulia) looks to be $110sq ft...in NYC it's $1536 .
This development looks interesting , same developer has down projects in Brooklyn and San Francisco.
http://www.recordonline.com/news/20170517/developer-unveils-newburgh-waterfront-project
Appreciation is a viable way to go with investments.
Down side is you can't put food on the table with appreciation, it sucks cash flow out of a property and is way risker than cash flow investing. It does not exist till you sell and it can quickly disappear when markets follow their normal swing paths. Very risky to count on 30 years down the road for retirement planning.
Appreciation is the gravy on the meat.
This is at best partially true.
Some properties that appear to have great cash flow may be D class in no growth areas. When a big employer leaves or big recession hits, the C class properties will rent more aggressively and often leave that lower class property empty. This happened in a lot of places during the Great Recession. High cash flow properties that are of very low quality can be quite risky and dangerous too in the long run. It is the same as stocks as the high dividend stock may not be the safest.
As far appreciation, it doesn't exist in a vacuum. Rents almost always go with it. You don't need to wait to sell in 30 years to realize it. Refinancing can produce the cash with no tax owed.
I do agree that you can't just hope for wild appreciation and now is a dangerous time to do so. Better to have a reasonable (PIP) property improvement plan that will get you those higher rents.