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SHOW NOTES FOR EPISODE 304: UNDERSTANDING GENTRIFICATION AND WHAT IT MEANS FOR REAL ESTATE INVESTORS
In major markets throughout the U.S., neighborhoods are undergoing something referred to as gentrification. Communities are being transformed almost overnight, triggering mini-economic booms and real estate investors are walking away with tremendous profits. But is this a good thing or are low-income residents the unsuspecting victims of over-zealous profiteers? In today’s podcast, Bill will define, examine and discuss gentrification and the controversy surrounding this current phenomenon.
The term gentrification has come to refer to a multi-faceted phenomenon that can be defined in different ways. Gentrification is “a complex process involving physical improvement of the housing stock, housing tenure change from renting to owning, price rises and the displacement or replacement of the working-class population by the new middle class.
Historians say that gentrification took place in ancient Rome and in Roman Britain, where large villas were replacing small shops by the 3rd century, AD. The word gentrification derives from gentry—which comes from the Old French word genterise, “of gentle birth” (14th century) and “people of gentle birth” (16th century). British sociologist Ruth Glass was first to use “gentrification” in its current sense. She used it 1964 to describe the influx of middle-class people displacing lower-class worker residents in urban neighborhoods; her example was London, and its working-class districts such as Islington.
One by one, many of the working class neighborhoods of London have been invaded by the middle-classes—upper and lower. Shabby, modest mews and cottages—two rooms up and two down—have been taken over, when their leases have expired, and have become elegant, expensive residences … Once this process of ‘gentrification’ starts in a district it goes on rapidly, until all or most of the original working-class occupiers are displaced and the whole social character of the district is changed.
It was, however, in the US, where the Centers for Disease Control and Prevention report Health Effects of Gentrification defines the real estate concept of gentrification as “the transformation of neighborhoods from low value to high value. This change has the potential to cause displacement of long-time residents and businesses … when long-time or original neighborhood residents move from a gentrified area because of higher rents, mortgages, and property taxes. Gentrification is a housing, economic, and health issue that affects a community’s history and culture and reduces social capital. It often shifts a neighborhood’s characteristics, e.g., racial-ethnic composition and household income, by adding new stores and resources in previously run-down neighborhoods.”
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. Cities are cleaning up their “downtown” areas and instead of running away when it gets dark, people are running to the new nightlife downtown! Sounds good, right? Well, not so fast. For some 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.
So let’s start with a definition. For those of you who don’t know, what is gentrification?
According to Wikipedia, Gentrification is a process of renovating deteriorated urban neighborhoods by means of the influx of more affluent residents. This is a common and sometimes controversial topic in politics and in urban planning. Gentrification can improve the material quality of a neighborhood, while also potentially forcing relocation of current, established residents and businesses, causing them to move from a gentrified area to find lower cost housing and stores.
The gentrification process is typically the result of increasing attraction to an area by people with higher incomes spilling over from neighboring cities, towns, or neighborhoods. Further steps are increased investments in a community and the related infrastructure by real estate development businesses, local government, or community activists and resulting economic development, increased attraction of business, and lower crime rates. In addition to these potential benefits, gentrification can lead to population migration and displacement. However, some view the fear of displacement, which is dominating the debate about gentrification, as hindering discussion about genuine positive benefits to distribute the benefits of urban redevelopment strategies.
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 Indianapolis, 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.
But the positive aspects of gentrification can be defined as the process of renovating and improving a an area so that it attracts jobs, improves the local economy and reduces crime, whereby the effects of real estate gentrification are beneficial especially to the newcomers of the community.
Many features of gentrification are useful. Who wouldn’t want to see new investments and increased economic activity in their neighborhood? While it may sound like the only ones benefiting are the new residents, the old residents of the neighborhood can also benefit from real estate gentrification as well. Low-income residents that decide to stay in gentrifying neighborhoods can benefit from:
- New job opportunities
- Longtime homeowners benefit from higher property values – increased equity in their homes and businesses
- Credit scores of the poor residents improve in gentrifying neighborhoods
- An increase of new beneficial businesses and new local services
- Old businesses who decide to stay will have an increase in traffic, higher-income customers and a safer environment to do business
- All residents will benefit from Improved transportation that also often follows
- And, of course, once troubled areas see a marked reduction of crime
So it appears that real estate gentrification doesn’t always lead to negative situations for old time residents.
A study conducted by the Federal Reserve Bank of Philadelphia concludes that gentrification does not lead to low-income residents being pushed into another neighborhood. (See also: what have we learned about the cause of recent gentrification.)
Living near the urban core leads to a lower cost of living. It means being able to save yearly costs of transportation since you will able to walk or bike to most places. It also means being able to have easy access to all kinds of services like better doctors, schools and stores. New residents in a gentrifying neighborhood will find it beneficial not only for a cheaper lifestyle, but also for the cultural diversification that will be found in such a neighborhood.
So, you can see how it can be a socially charged phenomenon.
So what does gentrification mean for real estate investors?
Investors, of course, find real estate gentrification an excellent opportunity not only for profitable investment but to actually make a positive difference in a community that was previously plighted.
Investors find in gentrified neighborhoods higher investment potential, such as:
- Rapid increases in property values.
- An investment property can be purchased cheap and rented out for income.
- Rents will go up and investors can produce double-digit returns.
- Attractive businesses and services will draw more renters and investors.
- The local economy will tend to benefit and grow… even boom
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, yes. 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. 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.
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