What is Gentrification?
Honestly, I hate the definition for gentrification. Per Wikipedia, gentrification is, “the process of renovating and improving a house or district so that it conforms to middle-class taste”. I think middle-class is a super subjective term. It makes it sound like people want every area to look like a suburb with white picket fences and strollers everywhere.
Gentrification is happening throughout many cities right now and generally takes place near the downtown core. During our parents generation, most couples left the city for the suburbs to start a family. The current generation is doing something different. They are headed back to the city.
Here’s what happened when our parents left the city. The areas where they had once lived in the city, were no longer seen as the most desirable areas to live. The suburbs were the place to be. Therefore, prices rose in the suburbs and dropped in the city through simple supply and demand. Since prices were cheaper in the city, many people who couldn’t afford the suburbs moved into the city and bought properties.
Well, now supply and demand is reversed. Millennial and Gen-Xers want to live in the city again and are returning in droves. Of course, these folks still want to have all the amenities that are available in the suburbs. They want high ceilings, open floor plans, new kitchens, stainless steel appliances, and the most eco-friendly housing products available.
Well guess what? Those items aren’t available in these old houses. Remember, it wasn’t the wealthy people living in the city 20 years ago. Houses weren’t updated because people didn’t have the money to update them. So now, Gen-Xers and Millennials have remodel these homes to meet their standards. Hence, gentrification.
What does it mean for investments?
Generally, gentrification is great for investors. There’s a lot of updating of houses in areas that may have been neglected. It also means that demand increases for these homes, which drives prices up and up.
`Plus with gentrification happening in the city core, it means there’s not a lot of room for expansion. The city core is already developed and won’t expand much. So high demand in a limited area generally equals profits!
Have I seen Gentrification firsthand?
Yep, gentrification took over Denver when I moved there nearly 7 years ago. We lived near an area called Five Points, which was known as one of the worst areas of the city. Let’s be clear, the worst area of Denver was never anything like the worst areas of a place like Chicago or Detroit.
However, Five Points was “full of crime” and “used to be one of the worst areas in the city” per Denver residents. By the time we got there, it wasn’t that bad. You maybe saw some people begging for change or being drunk and belligerent. But, crime was by no means rampant.
Well here’s what happened when gentrification rolled into Five Points. Vegan bakeries popped up, micro-breweries opened, and fancy coffee shops started buzzing with yuppies. When the yuppies rolled in, prices started to climb.
We bought a 4-plex right in Five Points in the midst of the gentrification process and it has paid off in spades. Our renters saw it as fashionable to live in an up and coming area and the rents showed it.
Here’s what happened to prices in our Five Points area. Houses in the early 2000s sold in Five Points for around 200k. When we moved there in 2010, it was typical to buy a house for 400k and now finding a house under 500k is pretty much non-existent. Our 4-plex is now worth well over 700k thanks to gentrification. Hooray profits!
Are there downsides to Gentrification?
For investors, not really. Generally areas with gentrification taking place are ripe for buying properties that will appreciate.
However, gentrification isn’t great for the people who lived in these areas prior to the gentrification process. Increasing prices tend to drive out the people who lived there previously. Investors take over their neighborhood, drive up prices, and drive them out. Not everyone is comfortable with this part of being an investor. To me, it’s business and simple economics. To others, it is not.
What markets are prime for Gentrification?
Asheville, Austin, Denver, and Portland are some of the hottest areas for gentrification. You may notice something in common with all of these areas as well. They are hot, hot, hot real estate markets.
Lately, I’ve been looking at Kansas City and Indianapolis. These are two other cities where gentrification is starting to happen and most likely will continue. I am hoping to invest here in the next year. Now, I just must convince my husband!