If you’re looking to purchase an investment property, it goes without saying that performing adequate due diligence can make or break your returns.
Of course, this applies to the property itself, the property managers, and the facilitator of the deal. These are all important, but one thing that gets less attention is the neighborhood surrounding the property.
In fact, the location of the property can be even more important than the property itself.
Finding a property in a popular, bustling community is great, and could result in consistent returns.
However, there isn’t much of an opportunity to add value and force your own appreciation. What might be even better is to find an up-and-coming neighborhood. This a community that’s beginning to grow quickly, but properties are still relatively inexpensive.
There are many situations where a certain neighborhood has been less than desirable for some time. We saw this a lot just occur for some time after the Great Recession of 2008. Some neighborhoods never recovered–businesses closed, homes were foreclosed, and people moved out.
But in the years since, many neighborhoods have come back to life. New businesses have popped up, new jobs are then created, and populations grow.
Finding a neighborhood like this is perfect. It’s kind of like getting in on the ground floor of a good investment. As the neighborhood grows, so does your property value–much faster than it would by simple appreciation.
But how do you locate up-and-coming neighborhoods like these? Well, while no method is guaranteed, I’ve come across some factors that give you a pretty good indication of which neighborhoods to go for–and which ones to avoid.
Look for Foreclosure Rates
One of the best ways to determine the health of a certain neighborhood is by looking at its foreclosure rates.
An area with a high foreclosure rate could indicate several red flags, as it’s usually indicative of a larger problem.
However, if you find a neighborhood with a steadily-reducing foreclosure rate, it can be a very good sign. Jobs may be increasing, more people may be attracted to the area and be likely to stay there, and the median income will likely begin to stabilize.
To find statistics on foreclosure rates, you can use an online tool like RealtyTrac, which lists trends across the country. Use this as a general idea of just how stable a community is, and how likely it is to continue to grow.
How Fast Are Properties Selling?
When scoping out a new investment, pay close attention to the average Days on Market (DOM) for the homes in the surrounding area.
Basically, if other properties in the area are remaining on the market for weeks after their initial listing, it could indicate a less-than-desirable neighborhood.
On the other hand, if the average property is selling within a few days, then people want to live there.
The key here is to focus on trends. It’s not necessarily an issue if the DOM is high, but if it’s been trending downward over the last few months, you may have a winner.
You can determine average DOM simply by visiting Realtor.com, which offers quite a few insights–including DOM trends for states and cities. Check out their Market Trends tool here.
Another great indicator of an improving neighborhood is the crime statistics. Obviously, buying an investment property in a high-crime area is much riskier than a similar property in a lower-crime area.
But when it comes to finding an up-and-coming market, it’s the trend that matters most. One great tool for this is Neighborhood Scout, which gives a ton of different metrics, from crime trends to insights on the housing market. Most of the valuable information is locked behind a paywall, but it can be well worth it.
Alternatively, you can use a free tool like City Data, which provides huge amounts of data, but isn’t quite as intuitive.
Of course, if the neighborhood is nearby, you can simply drive through it to get a feel for things. Obvious things, like bars on windows or a lot of abandoned buildings, may be enough to give you an idea.
If, after all that, you find that the neighborhood has a steadily declining crime rate, this is a good indicator that good things are happening there, and it may be a great time to invest.
As new businesses begin to pop up around a neighborhood, jobs are added, people move in, and generally, home values increase.
This is the case for all businesses, but especially for popular chains. In fact, an article from CNN Money described what they call the “Starbucks Effect”–once a Starbucks opens, homes nearby can see a value increase of up to 171%.
This isn’t necessarily because Starbucks increases home value on its own, but chain stores like these (Trader Joe’s, Whole Foods, etc) are very good at finding those up-and-coming neighborhoods.
If you find that a certain neighborhood is seeing an increased number of business openings, both small and large, this is a great indicator that property values will soon be increasing rapidly.
Talk to the Locals
Last but not least, it can be very beneficial to speak with someone who’s actually familiar with the neighborhood in question. This could be a real estate agent, property managers, or even business owners in the area.
You can ask direct questions, like: what’s it like in the area? Have things been improving? Does crime happen often?
Even a short conversation can yield very valuable information, and it could ultimately help you make a much more informed decision.
And if you work with a real estate agent, specifically, they can also provide access to metrics and insights (as I briefly mentioned earlier) beyond what you can find online. This can sometimes come at a cost, but a good working relationship can be well worth it.
Learning to identify up-and-coming markets is a very valuable skill. Not only will it make you a more savvy investor, but if you buy a property in the right location, you can see much higher returns in significantly less time.
Of course, as with anything investment-related, the timing makes the difference. The tips in this article can help you make an educated decision, but don’t get too caught up trying to predict the future. Ultimately, the best thing you can do is perform the diligence, find a property, and just go for it.