Posted over 3 years ago

Gentrification and What it Means for Investors

In virtually every major market in the U.S., you can find neighborhoods that have undergone gentrification. They’re pretty easy to spot. You’ll see an influx of affluent people, recently remodeled homes, and new businesses popping up. Sounds good, right? Well, not so fast. For many people, the word gentrification carries with it a negative connotation, and it’s a topic that is extremely controversial among urban developers, residents, business owners, and yes, investors.

What is gentrification?

First, let’s talk about the definition of gentrification. PBS says it refers to “the arrival of wealthier people in an existing urban district, a related increase in rents and property values, and changes in the district’s character and cultures….suggesting the replacement of poor communities by rich outsiders.” So basically, it means that wealthier people (usually white) have taken interest in a run-down neighborhood (typically where minorities live), so they move in and begin fixing up houses and other properties. As a result, property values go up, rental rates increase, and the minorities who have lived there for years can no longer afford to do so and are forced to find cheaper housing elsewhere. See why it’s controversial?

Where does it happen?

As I mentioned, gentrification happens in markets all across the U.S., but there are some common factors. Typically, you see it occurring in urban centers, and especially where those areas have undergone a revitalization process themselves. Take Kansas City, for example. Twenty years ago, downtown was a place no one wanted to go. There was nothing to do there, it was dangerous, and only people who lived or worked there visited that part of town. Today, it’s a major entertainment district, with tons of bars, restaurants, shopping, and cultural opportunities. It’s not surprising, then, to see outlying neighborhoods begin to gentrify, as people want to live closer to the city and all the action.

Should investors target these neighborhoods?

So how do investors factor into all this? And more importantly, should you be targeting gentrifying neighborhoods. From a purely financial standpoint, yet. As an investor, your goal is to maximize your profits, and targeting homes in gentrifying neighborhoods will do this for you. If you get in early, you can buy cheap and then increase rent as the property value and local rental rates climb. When you’re ready to sell, the home will likely have appreciated enough to net you a nice profit. Of course, there’s the morality of focusing on neighborhoods like this. As I said before, there’s a lot of controversy that surrounds gentrification, and you have to decide if you’re okay with that. Most of the investors I know believe that the pros of gentrification outweigh the cons, and they are sensitive to the more controversial aspects. Many also work to give back to the community in some way.

Regardless of your moral stance on the topic of gentrification, the fact is that it’s happening everywhere, and it’s up to you to decide whether you want to focus on these properties or not.

Comments (4)

  1. Man, I feel so guilty for "gentrifying" neighborhoods in New Orleans. I really miss all the shootings, litter, boarded up houses, lack of trees/gardens, & overall degradation. There was really something cool about heroine needles & graffiti. It was so raw, especially for the children that grew up there.

    1. All those problems are just moved somewhere else, they are not gone with development

  2. I don't see gentrification as immoral whatsoever. "Outsiders" see an opportunity, put their savings and capital at risk, and then reap the rewards when they come to fruition. I fail to see why I should feel bad for the local resident who sat still while their neighborhood improved and then cries foul when they can't afford to stay. I'm sure there were opportunities they could have seized along the way between the first green shoots of gentrification and the multi-million dollar development that comes much further down the line and really pushes out the locals.

    Plus, look at all the up-and-coming areas that don't end up making it all the way or the fringe areas inbetween where investors missed the mark by a few blocks or got in too early. Does anyone feel sorry for them or get together to stop gentrification so they don't lose their savings? No, you never hear violin music for them. Those with the wherewithal to save and invest smartly should reap the rewards of their initiative and those who sit idly by should get left behind. At the end of the day you have a nicer, safer, neighborhood with local businesses and new jobs created. How is any part of that a bad thing? It's crazy to me that people see this as immoral.

  3. This is more of a class issue than a racial issue, in my opinion. As an investor, I want to explore how my taking advantage of opportunities in these types of neighborhoods can benefit the people. Giving back to the community is one way. I also know an investor who is taking residential multi-families, buying, rehabbing and renting to section 8 moms. It's important to make money, but it's also important to do our part to be fair, moral and on the right side of the communities we invest in. My two cents.