Do you understand the importance of gentrification as a property investor?
It’s something that many investors overlook and as a result, they rely on the general market for their property’s capital appreciation.
Warren Buffet is quoted as saying that "you will never be truly wealthy until you find a way to make money in your sleep".
Property investing can certainly fit that description, but how do you improve the equity in your property without relying on the market or adding value.
The answer may be gentrification.
It’s a way of forcing up your property’s value without lifting a finger and while you are sleeping.
I have seen the benefits of gentrification in my own portfolio and experience tells me, there are two clear signs of gentrification.
Here is what to look for and where to find it.
The first sign we look for to show that an area is gentrifying is from a location perspective.
It is often those inner to middle ring suburbs that were initially overlooked, but have now become in higher demand as prices move out of reach in nearby suburbs.
You will start to see tired old warehouses or run-down shops in surrounding streets, starting to be given a new lease of life.
They may be transformed into a trendy café, microbrewery, or maybe a new hairdresser or bakery.
Residents soon start to become spoilt for choice as there is no longer one coffee shop or takeaway restaurant, but many, many more to choose from.
The demographics also start to change as the older retirees or social housing tenants start to move on and busy young professionals take their place.
As a result, we also see the average income for the location shift up a gear as this higher-income earning demographic moves in.
The area soon has a whole new vibe and is seen as the “place to be”.
With the suburb now changing from a macro perspective, it also now becomes evident at street level.
The new demographic does not want to live in old, tired, run-down properties, so they start to make changes.
They renovate or knock down and rebuild to meet their appetite for a more contemporary home and to match the ever-changing, trendier landscape.
Developers also start to enter the suburb to transform warehouses and properties into much more modern and desirable housing.
As a Buyer’s Agent at ground level, I look for areas where houses are being rebuilt, concrete trucks are on the go and new renovations are occurring.
All are good signs gentrification is well underway.
If you manage to find this type of suburb it will assist your property to grow in value.
We see this in a few different ways.
Firstly, we see demand rising sharply once an area starts to gentrify as it is still deemed “relatively affordable” when you factor in house prices of neighbouring suburbs.
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The liveability and choices on offer are certainly a big drawcard for people who want choices.
Older homes are being then removed and replaced with more modern contemporary housing.
At Metropole, we quite often target these older established properties, as they represent an opportunity to add value with perhaps a renovation or a development.
It is not uncommon though to land bank and hold these assets for the short to medium term.
In the meantime, it is common for many emotional owner-occupiers to buy in the surrounding streets and pay far too much for far less than what our client had purchased.
They then spend far too much (again), knocking over the existing property and substantially overcapitalising on their “dream home”.
Money is not an issue when you have the capital and the desire and will likely be there for the next decade or more.
One or two of these redevelopments in a nearby street is not enough to shift prices, but over a 4 to 5 year period and dozens of homes being transformed, it drives up the property values.
Land, in particular, starts to become in very short supply and as a result, this demographic will pay an absolute premium for an older, tired, established home.
It has not been uncommon for our clients who purchased in Brisbane to revisit their property value 2 -3 years later, to find what they originally paid for the house is now the new land value.
Where to Look?
As I have alluded to, it is best to look for the often overlooked inner to middle-ring suburbs in more established locations of our capital cities.
There is a requirement here for a shortage or scarcity of available land.
Steer clear of the outer and newer style suburbs and land developments.
You will often find larger parcels of land still to be developed and land is freely available.
All the homes in this area are often much newer and it is rare to see the streetscape change so often with houses being upgraded or knocked over.
In outer locations, incomes are often less and people have less disposable income and are unlikely to substantially over capitalise as they do elsewhere.
Another reason monitoring incomes is an important factor.
Gentrification can be a simple way to force the value of your property up without substantial time and effort.
Look for areas in the inner to the middle ring of our CBD’s across our major capital cities.
Signs include a wave of new boutique shops, cafés, and an upgrade to tired and old lifestyle precincts.
I always like to monitor the streetscape for change also.
Houses being bought and either knocked over or rebuilt to a premium level on a regular basis is a positive sign.
Look for areas where there is a shortage of land and peoples’ incomes are well above the average.
This allows them to get emotional and pay too much, while overcapitalising.
As this continues to happen in and around your property, prices continue to climb and you haven’t even lifted a finger.