Would I live here?

One question a real estate investor inevitably asks herself is: “Would I live here?”

There’s a pitfall in this question. Unless you’re a FHA buyer or you’re after a duplex, chances are that you’re not going to live where you invest. So before you ask yourself whether you would live there, ask yourself if you are your ideal renter.

How do you know?

The basic way neighborhoods turn from low rent to high rent is the following 4-step process:

1) there’s something interesting about a poor neighborhood,
2) under-employed artists & hipsters move in,
3) employed artists & hipsters move in,
4) youngish executives and entrepreneurs move in.

Which one of these are you? I’m guessing you’re either category 3 or 4, or the fifth category – you’re established elsewhere.

So which stage of the process do I invest in? Ideally, stage 1. However, that’s the riskiest and you need a strong imagination. Stage 1 areas include Boyle Heights, Lincoln Heights, most of Highland Park, San Fernando Valley, and Westlake. You’re in these investments for the long haul and you’ll need a good management company.

It’s easier to invest in stage 2 neighborhoods because there are already tangible signs of gentrification. These include the best areas of Highland Park, Glassell Park, Mid-City, Virgil Village, and USC. You won’t get top rents now for these units, but give it five years. Here you’ll find cash-flowing properties with good upside.

Stage 3 neighborhoods include Echo Park, East Hollywood, and Atwater Village.  You’ll overpay in these neighborhoods because everyone wants them.  That is, unless you know how to buy out tenants and renovate.  You missed the boat by about two years on good turnkey deals, unless you’re spending north of $1.5M on 8+ unit properties.

Stage 4 neighborhoods are Silver Lake, West Hollywood, Hollywood and Downtown.  These areas have been established for a while and the only good investments you’ll find are $1.8M or more, with cash to develop.

So rather than asking yourself where you would live, ask yourself what kind of renter you want, and how long you can wait for her. The longer you can wait, the more upside you’ll find.

Leave a Reply