“The numbers look great on this one! What do you think?”
“Yes, I reviewed all the analysis and supporting assumptions. This is almost too good to be true after reviewing multiple deals. What are we missing? What is the neighborhood like?”
“What do you mean?!? It is in Tampa – one of the hottest markets in the country.”
“Hmm…let me check…I will also call our property manager. We can drive by the property together.”
… Turns out the property is in a high risk zone. So they passed on this hot smoking deal…
In a prior article we focused on how to select a market and key market criteria. Below we cover what the top five indicators of a risky neighborhoods are. We hope you find the information helpful, as you assess investment properties you come across.
(1) Crime rate (especially violent crimes such as shootings and robberies). A local boots on the grounds contact or your property manager would be a great resource to provide feedback. Absent that, there are numerous public sites where you can check crime activity (spotcrime.com, communitycrimemap.com, www.nsopw.gov, google views) and crime trends (city-data.com). Constant police presence would be another indicator of high crime levels. While it is not uncommon to have higher crime rates in large metropolitan areas, violent crimes, drugs, prostitution, and shootings are ones that create safety concerns and would not only deter potential residents, but will also make it more challenging to manage the property.
(2) Property condition. Run down properties and unkempt landscape would typically indicate the residents do not take much care of the property or the area. Higher crime rate or lower income status would be some of the reasons why. Poor road condition would indicate it is of lesser priority for the municipality as well. It almost creates a negative feedback circle as it discourages owners from investing in improvements to or maintenance of the property. Such factors will also impact rate of appreciation (or most likely lack thereof), which of course adversely affects your investment.
(3) High vacancy and population decline. Boarded windows, few parked vehicles in the evening or few people walking around, boarded/closed/closing stores and other retail establishments (e.g. coffee shops, restaurants, services) would all indicate high general vacancy and people moving out of the area. Crime, overall population decline, loss of major employer/high unemployment would be some factors that may drive those trends. This in turn would indicate low demand for rentals, which again adversely impacts your investment.
(4) Low or declining demographic factors such as high poverty rate (over 15-20%), low median household income (under $40,000), and high unemployment rate (2% or more above the city rate). Those factors directly impact delinquency levels, ability to raise rents, vacancy – all of which adversely affect your investment.
(5) Overall feel and especially after dark. As long as you feel safe to do so, drive around after dark or park your car outside the building to observe the activity and overall environment after dark. Is it peaceful and quite? Or do you see the dealers coming out, loud groups, fights, shootings, etc.? Would your property manager take on the building? Would you live there? These are some questions to help you assess that.
Some neighborhoods may feel risky but may be adjacent to more stable neighborhoods or on the so called path of progress. Thus, while the location may not look or feel great today, it may be only a timing factor given planned future developments. This is why it is always best to use a combination of data points (publicly available information, boots on the ground feedback, walking/driving around the area, and your own assessment) to evaluate the neighborhood within a market in order to decide if it is within your risk appetite and investment criteria.
Should you have any questions or want to learn more about real estate investing or for an overview of our target markets, please reach out to info@dbacapitalgroup.com.
Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.