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In this newsletter, you can expect:

• How to Identify Gentrifying Neighborhoods Before They Boom

• Pros and Cons of House Hacking as a First Investment

• Tips for Juggling Real Estate Investing and a Full-Time Job

How to Identify Gentrifying Neighborhoods Before They Boom

Gentrification often gets vilified, by NIMBYism (Not in my backyard). NIMBY’s are generally folks who live in well-to-do areas who want to refrain from new developments happening in their neighborhood to “maintain property values.

Here’s an example of a Tweet thread outlining NIMBY-ism thinking in the Bay Area (my dear home).

Nonetheless, if you’re an investor and can spot an upward trend in a neighborhood that’s prime for gentrification/redevelopment, you can make money.

Here are a few tips to neighborhoods with prime gentrification potential:

Old Homes & Charming Characteristics:

Look for neighborhoods with charming old homes that have fallen into disrepair. Research original architecture and layouts. Areas with unique historic housing stock like ornate Victorians or brownstones often gentrify when restored.

Generally, the more detailed homes with historical architecture will fetch a lot more value and it pays to keep them in good condition.

Check city databases for recently awarded grants supporting private restoration projects. These signal areas the city wants to incentivize revitalization in.

See if you can use historic tax credits or private grants as well to maintain the facade/exterior while gutting the interior.

Retail tells the tale:

Retail companies have dedicated teams and spend millions on technology, people, and have deep relationships with cities as well. Utilize their real estate departments and ride the tailwinds.

Pockets of trendy coffee shops, boutiques, or art galleries moving into previously rundown commercial streets indicate areas on the cusp. The city’s zoning department could have offered a sweetheart deal including tax breaks.

For example - if there are high end fitness studios (think Equinox, Barry’s Bootcamp) and specialized grocery stores (Whole Foods, Erewhon if you live in LA), then it’s a good indication there will be new multifamily development that is coming into the area.

Factor in proximity to established hubs like vibrant downtowns. Areas just outside centers of jobs, transit, culture, and nightlife tend to gentrify next as popularity spreads outward.

Demographic Changes

It’s been mentioned before to find good submarkets with rising demographic trends.

Rising median incomes, diversity in high income industries, increasing percentages of college degrees, and decreasing average age all predict rising demand.

Also consider the types of jobs that are being added to an area as well. In major metro areas, technology jobs were an indicator that high-income professionals would be entering the area. In tertiary areas (like Cleveland, OH where I invest), manufacturing or logistics jobs like warehouses or factories being built is a good sign for a burgeoning middle class.

Investments in transit

Note any new investments in parks, transit, bike lanes, placemaking, and other community improvements. These often pave the way for gentrification.

For example – in New York City, there is a proposed extension of the 2nd Avenue Subway (Q line) from 96th St to 106th and 116th. Proximity to public transit often provides government incentives to provide new construction housing with allocations towards affordable housing as well.

Research the impacts of new high-end construction in the neighborhood. Large luxury developments can speed gentrification, but may also decrease values of existing smaller homes.

Pros and Cons of House Hacking as a First Investment

House hacking involves buying a small multifamily property (1-4 units), living in one unit, and renting the others to generate income.

We’ve talked about househacking a lot. It’s one of the most popular ways for regular folks to get involved in the real real estate industry. It’s not always sunshine and rainbows though, there are definitely cons associated with it too.

Pros:

Lower Barriers to Entry

The ability to put down just 3.5% as a primary residence makes house hacking more affordable than investing in a 25% down investment property.

Lucrative Rental Income

Rent from the units you're not occupying helps offset the costs of your living unit, allowing you to live for free or even making money!

For example, let’s take an owner occupied fourplex for $750k in Phoenix with a mortgage rate of 6.5%.

It’s consisting for four 2 bed, 1 bath units that fetch $2k/month in rent. If you rented all 4 units out, you would receive approximately $8k/month in rent, enough to cover your PITI (payment, insurance, taxes, and interest). If something breaks, you would be out of pocket.

If you lived in one of the units and charged a roommate $1000/month in rent and rented the other 3 units, you would make $7k/month. ($2k/unit  3 units) + ($1000/1 room).

This would be enough to live for free, pay property taxes, and set aside money for reserves, all while building up equity!

Potential for Appreciation

As the neighborhood improves over time, the property value is likely to increase, allowing you to capture appreciation. If your property appreciates and is able to cash flow a little bit, then you’re in good financial shape. When rates get lower, then you are able to cash-out refinance to use as a down payment on another property.

Note: cross-collateralizing assets may be risky. Use at your own caution.

Equity Buildup

The golden equation in accounting 101 is Assets = Liabilities + Owners Equity.

The liability is the mortgage, the asset is the house, and the owners equity is the equity you put down (aka down payment).

When you pay down your residential loan, you are building up equity. In this case, your tenants are paying down the loan and reduce your living expenses.

Cons:

Burdens of Being a Landlord

Dealing with property management headaches like maintenance requests, screening tenants, collecting rent and more requires work, especially if you have a busy day job.

Househacking is a good “intro to landlording” to see if you like it or not. Some folks do not like to deal with property management or tenants and may get taken advantage of.

If you’re in a state with tenant friendly laws, be careful and educate yourself on how to deal with tenants correctly. Seek legal advice when necessary.

Reduced Privacy

Sharing walls and common spaces with tenants can take adjusting, from noisy neighbors to lack of outdoor space solely for your use. For some folks, the thin walls in a fourplex meant hearing neighbors and gave her less autonomy over the property.

Now this may not be a dealbreaker for everyone, but if you’re coming from a cookie-cutter suburban home, then sharing walls may make for stark changes.

If you have noisy neighbors, then be prepared to live next to your tenants as well and deal with that accordingly.

Financing Difficulties and Potential Buyers

Unlike owner-occupied homes, lenders are often warier of financing multi-family house hacks. It’s a lot more paperwork to go through and you could get charged with private mortgage insurance (PMI) if you put down less than 20%.

Expect tighter qualification criteria, higher interest rates, or larger down payment requirements. 75% of rental income may be considered to help you qualify for a larger loan, but that also means the leases will be scrutinized by the lender.

The pool of buyers for a fourplex is also smaller and the property might sit on the market for longer.

Conclusion

House hacking can offer an unparalleled hands-on education and early boost for new real estate investors in the right markets. But consider the obligations and tradeoffs to see if it aligns with your investing style and tolerance.

Tips for Juggling Real Estate Investing and a Full-Time Job

I’ve been able to balance building a fledgling real estate portfolio and having a 9-5 job. When people say “you have to go all-in to real estate to build your empire”, it’s a bunch of B.S.

Here’s what I have found that works for certain people. Remember, not everything will be applicable to you. Pick and choose what makes sense for you.

Look for turnkey rentals requiring less active management upfront or repairs. Some PM companies may place a tenant for you and will only contact you if things go wrong.

A property manager’s job is to handle maintenance, screen tenants, collect rent, etc. It usually costs between 5-10% for long term rentals based on number of units. That management fee can also go as high as 25% for Airbnb management. Sometimes, they also handle renovations as well.

Reinvest profits from early successes into passive funds rather than active investments, especially if you .

Team up with other investors to split acquisition costs and workload on renovations or new purchases. My business partner and I split the workload – he’s far more detail oriented and will nudge me to complete tasks I forgot. I am very friendly and great at networking which helps us find new capital, deals, investors, and opportunities in general.

Whew! This is almost 1500 words. These letters are getting longer and longer!

Thank you for reading. Once again, please email me if you have any topics you’d like to cover.

PS: Would you like me to publish my eBook into a paperback or hardcover? Looking for people who have experience doing it.

Goodbye!

-Mo