Investors should recognize the dynamic nature of real estate markets. Nothing is static; change is constantly occurring. Changes not only affect individual properties, but also neighborhoods, communities, and regions.
Individual properties, districts, neighborhoods and entire communities often follow a four-phase life span:
Stage 1: Growth: a period during which the area gains in public favor or acceptance.
Stage 2: Stability: a period of equilibrium without significant gains or losses.
Stage 3: Decline: a period of diminishing demand and acceptance.
Stage 3 causes a decline in population and creates a large gap between the actual and potential value of space.
Take for example East Franklinton area in Columbus, OH. East Franklinton lost more than 4 per cent of its population from 2000 to 2010, compared to Columbus as a whole, which experienced nearly a 10 per cent increase. Given a national trend toward smaller households, the number of households within the East Franklinton area decreased by more than 11 per cent compared to city and county increases of nearly 9 per cent.
Residents East Franklinton area earned relatively low incomes, and most lived below the poverty level. A full 70 per cent of residents lived below the poverty level significantly more than the 17.2 per cent figure for the city and the county poverty rate of less than 15 per cent.
Stage 4: Renewal: a period of rejuvenation and rebirth of market demand.
Rejuvenation efforts are almost always initiated by the government supported by local communities. These start with core residential redevelopment. An influx of new residents encourages and supports the creation of new amenities such as “supermarkets, schools, and other public and private facilities,” as in the Warehouse District in Cleveland, Washington Avenue in St. Louis or Over-the-Rhine in Cincinnati. Through investment, vacant lots and buildings can be transformed in ways that “can enhance the quality of life” of community members.
Investing in these areas is both for flippers and people who wish to buy and hold. The best strategy is to invest early but hold as long as you can before flipping or upgrading to hold and earn maximum yield. Please be aware of local regulations that might put a limit on how long you can hold before you have to start fixing or upgrading.