One aspect of real estate investing that catches many off guard, and often isn’t even thought of until the effects are encountered, is the challenges of neighborhoods with an ‘identity crisis.’
These neighborhoods can be found all over America and are going to be encountered more frequently as the new housing boom takes off. So what are some of the examples of this in play, and how can they impact those investing in them?
What is Identity Crisis?
This describes neighborhoods in which there are multiple and diverse types of properties. This can affect comps, ability to finance, and future values. If real estate investors aren’t watching out for this, slick and swift sales pitches can bury them neck deep in bad deals. Conversely, some smart buys can also make a world of difference in realizing huge windfalls in real estate investment profits.
Some examples include:
Where Commercial & Residential Zones Clash
This is an extremely common scenario; one in which a residential property lands on the same street as commercial buildings. Most new real estate investors wouldn’t give this a second thought. However, it can make a massive difference when it comes time to close or resell a property.
Investors may not even realize the issue exists when they see listing photos. However, when it comes time for an appraisal, it can be a big red flag for mortgage lenders and those interested in investing. This can derail deals, cost deposits and more.
This doesn’t mean these homes are bad deals, but the consequences need to be known. In some cases, where local commercial activity is booming, these can be hugely profitable investments that rise in value fast.
Luxury vs. Low Income
Another common scenario is when luxury and low income properties are found next to each other.
As spec building takes off, this will be seen more frequently. Often times, sellers and their agents will spin stories of how the lower end properties within view will soon be demolished. Of course, experienced investors know that, in the case of low end multifamily rentals, this often isn’t true. The owners that are cashing in huge on rents, with low taxes, have little motivation to tear down and rebuild.
This can cause an issue when it comes time to resell the luxury home, yet offers great potential for those investing in nearby antiquated multi-family homes.
New Homes
As builders ramp up, acquiring fill lots and putting up new subdivisions can see even more diversity. In many cases, this will automatically lift the value of neighboring existing homes, as new homes are more costly to put up. This can be great for savvy value investors, but also bad for the buyers of new homes. With so many projects being planned, it is also smart to accurately assess how this will impact demand. Which properties will be most sought after? While will go up in value fastest?
Themed Communities
Communities that are experiencing big shifts in demographics may also become a victim of an identity crisis. Many experienced investors recognized the benefit of diversity when it comes to the age of residents for the longevity of a community. An influx of younger residents may greatly change the atmosphere of a retired community.
