Buying real estate in an up and coming area is one of the best ways to make money on your investment. Areas of renewal or gentrification will appreciate faster and higher than other more genteel areas.
C-Class Area + Renewal = B-Class Area
The one part of this equation that everyone fails to grasp is that you need to be in a C-Class or B-Class area. To quote a question I was asked a little while ago:
Do you find in Edmonton you can find properties that flow in nice areas (Duplex or single family)?
I should have said no because I think their definition of a ‘nice area’ and my definition are likely a little divergent, but let’s back up a minute.
There’s two ways of approaching this strategy.
First, undervalued properties. As Thomas Beyer likes to say, buy C-class buildings in B-class neighborhoods. Second, buy in a poor area, doing minimal renovations or improvements, counting instead on the increased value of the comparables. Transportation improvements can count as a part of this strategy. But there’s always a little bit of the first strategy which comes naturally to those interested in real estate.
When I think of C-class (and I’m talking multi-family buildings here), I think of an exterior that needs significant paint, ~20% of fascia, all the evestroughing (but minimal structural damage), some of the windows, and most of the light fixtures. A great sign can be a damaged intercom and/or front entry. If it’s covered with shrubbery and dark looking, even better. 20% of the suites should need near total-refurbishments.
If you’re hearing all that and thinking “let’s get cracking”, we’re on the same page.
What’s the difference between B and C class neighborhoods?
- No prostitutes. Some transients.
- Very few derelict cars.
- Mostly single family homes, intermixed with town-home developments.
- Typically built between 1960-1990
- Transient prostitutes, but not plying their trade in the same area.
- Common transient (bottle-pickers, sometimes panhandlers).
- More dense multi-family area.
- You probably won’t feel safe walking here at night.
What’s a D-class neighborhood?
Is there something worse?
– Actual slums with shack housing
– Large tracks of abandoned residential or commercial properties
I hope I’m getting my point across. If you’re new to the industry, get to know a property manager and ask them to give you a tour of some of their buildings. The lower-class buildings in particular. Get outside your comfort zone.
What do you think defines each of these areas? Am I right in thinking new investors expect too much ‘nice’?