Posted over 5 years ago Buying in Advance of Gentrification to Maximize Appreciation Buying in advance of gentrification is one way to maximize appreciation in a market.Certain neighborhoods in certain large cities have go through a 5 Phase life cycle ending in gentrification.1.Phase 1-New Construction-First they are built as new construction and they are sold to middle to upper income demographics. These areas were the place to be-often served abundantly by rapid transit systems including rail lines and several bus routes. Walkability-to shops, restaurants, & other services-was the norm. This was often 70-100 years ago.2.Phase 2-Stable-Then, several decades later, as new suburb homes were built, those same homes were sold to slightly lower income buyers as the higher income buyers left to move to the new suburb homes. The neighborhoods were still relatively safe and functional.3.Phase 3-Deterioration-Then, a few decades after that, the slightly lower income occupants fled, often in response to high crime rates and inner city riots. Many homes were simply abandoned or sold for pennies on the dollar. More of the occupants living in the neighborhood during this third phase of the neighborhood were renting or on public assistance and the income demographics were the lowest of all time. The homes fall into severe disrepair because the occupants don’t have enough money to keep up with the repairs. Many houses crumble into the ground and are cleared by the city. Many shops, restaurants, & other services abandon this neighborhood as the disposable income is no longer there to support the businesses.4.Phase 4-Transitional -If the neighborhood gentrifies again, it enters the fourth, transitional phase of its cycle. During this time, you can find a lot of construction going on. Developers begin buying lots and building new houses. Speculators buy old shells and outdated homes and complete renovations. People with more disposable income move in again and business begin sprouting up to serve the new residents. It is during this transitional phase, as prices begin to rise, that you want to buy & hold properties. The trick is to buy them at prices where you can still cash flow while waiting for the demand for properties and prices increase as the transitional neighborhood moves into phase 5, Gentrified.5.Phase 5-Gentrified-Phase 5 is when a neighborhood has gone through the cycles and matured into a gentrified neighborhood again. Many of the opportunities for developers and investors have long since been bought & built. The prices in a gentrified neighborhood have risen so high that the numbers no longer work as rental units. In other words, you’d have to buy these houses at such high prices that the monthly rent would not even cover a mortgage payment. Even though rents increase in a Phase 5 neighborhood, the prices outpace rent increases and you’d be losing money every month. The businesses are vibrant and the upper income demographics once again predominantly occupy the property.If you’re assembling a rental portfolio, the place to buy & hold properties is in a Phase 4 neighborhood. Your goal is to identify a neighborhood in advance of gentrification where the prices are still low enough that there is opportunity to buy at a decent price where your monthly rental income will cover all expenses and still give you a profit.This is exactly how this week’s REI Diamond Interview guest, Mitch Ripkin, became wealthy, by buying properties throughout South Philadelphia over the past 35 years. I asked him exactly how he figured it out. You can check out the interview at www.REIDiamonds.com/interviewsMitch began buying properties in the high crime, less desirable neighborhood slightly south of South Street and North of Washington Avenue in Philadelphia throughout the 1980’s. He bought many of these properties for less than $10,000. Houses were CHEAP there back then. In case you’re not familiar with Philadelphia, that neighborhood now retails between $300K-$500K or more.A word of warning, gentrifying neighborhoods are not a big secret. Every investor in the city KNOWS these neighborhoods and there is often a lot of competition for the inventory for sale. Know your numbers and maximum offer price. These houses can be more challenging to buy at investor prices, but it can be done.