As the traditional American suburb continues to adopt the most appealing qualities of cities—vibrant street life, cultural amenities, and public transit—in order to appeal to a new generation of homebuyers, many first time buyers still itch for true city living.
And in each booming city emerges distinct neighborhoods offering amenities and investment opportunities worth the often turbulent home-buying process. “A lot of the rise in pricing we’ve seen over the last 20 years isn’t just a part of the normal real estate cycle,” says Constantine Valhouli, co-founder of the real estate research firm NeighborhoodX.
Simply put: investing in cities are a good bet. But for the budget-minded buyer a few questions loom large: What neighborhoods can I actually afford? And which ones will be a good investment? The hope, of course, is that landing in the right neighborhood will pay off—much like longtime residents of Brooklyn, New York or Oakland, California have pulled in impressive profits for getting in early.
Still, making the right investment in the right neighborhood requires research. “There are both qualitative and quantitative factors,” says Valhouli. “The numbers will never tell the full story on its own, but the anecdotal doesn’t tell the whole story on its own either.”
Buyers on a budget should prepare to study everything from asking and selling prices in neighborhoods to the absorption rate. On top of that, pounding the pavement to see what’s actually happening in neighborhoods—like the new coffee shop on the corner, or the state of the local bus line—is crucial, too. Here are a few tips to help the intrepid home buyer find the perfect neighborhood to investment in.
Understand your budget and decide what type of investment you’d like to make
Knowing your budget may seem like a given, but in the excitement of the home-buying process some details can get overlooked. You’ll want to work with a broker to pick apart your income so you know everything from your liquidity to debt-to-income ratio. Once the financial details are out in the open, a broker can help you decide on a realistic down payment and purchase price. A good broker will also tell you what neighborhoods most closely match your budget.
Once you know how much you can spend on a home, decide what kind of investment you want to make. Do you plan to live in your home long-term, or is there the possibility you may sell in the short term? Would you be willing to live in a home that generates income—say, a townhouse with a unit that can be rented—or would you rather live in an apartment and hold out until its value increases? Answering these questions can help you decide the best type of property for your budget and needs.
Study local pricing
Analyze the current and past pricing in apartment buildings and homes around the neighborhood. The internet will be your greatest ally, as most brokerage aggregation sites, such as Zillow and Streeteasy, show a price history of properties. “You really only need to look at pricing over the past two or three years,” says Kenny Bellini, a broker who specializes in emerging neighborhoods across Los Angeles. Don’t just look at the average sales prices of neighborhoods—analyze price appreciation for recently-sold properties, as well as how much properties are selling over or under ask. It’s also worth checking local brokerage firms for market reports, which often break down these numbers quarterly.
Don’t forget to check the absorption rates
Another number to dig into, through real estate websites or local brokers, is a neighborhood’s absorption rate over the past year. “It represents the pace of the market and is comprised of the number of sales and listing inventory. To calculate the monthly absorption rate, take the total amount of listing inventory in a neighborhood and divide it by the number of sales in the month. The final result will show you whether sales activity in the neighborhood is cooling or heating up. As Miller notes, “It represents what the market ‘feels’ like and this is a far more important trend than price.”
Trace the path of neighborhood growth
Rising home values is often a game of proximity—people and businesses priced out of one neighborhood will likely move to the closest, more affordable neighborhood, and the cycle begins again. So if you can’t afford your dream neighborhood, check nearby areas in close proximity that offer lower asking prices. “If you look down on a map in a city like Chicago, you see how the city grows from the inside out,” says Bellini. He notes that in less-dense cities, like Los Angeles, you can pick out “pockets” between popular neighborhoods, such as Del Ray, between Venice and Culver city, that offer good bets for rising home values. And of course, read up on how gentrification has affected the neighborhoods you are interested in.
Check for existing neighborhood amenities
Some of the fastest-growing cities are known for their walkability and distinctive neighborhood amenities, so look to invest in neighborhoods with those offerings. One major factor for investment should be close access to public transit, whether that be a train, bus, or bike lane. Another is access to greenery and open space, whether the neighborhood boasts a local park or a short walk to a waterfront. A neighborhood with a strong sense of community—residential streets, community gardens and commercial corridors—is a good sign, too. More affordable neighborhoods won’t always boast fully-formed commercial strips, but existing coffee shops, grocery stores and local restaurants are usually a sign that there will be more to come.
Pay attention to the details
You’ll pick up a lot just by walking, shopping and talking in neighborhoods you’d like to invest in. If you believe you’ve settled on your desired neighborhood, then take the research to the next level. For example, how reliable is the public transit? And are there any big renovations in the near future? The well-serviced Brooklyn neighborhood of Williamsburg will lose its L train line for two years beginning in 2018, which will likely affect the neighborhood’s property values in the short-term. Has the city shared any plans to invest in parks or green space in the neighborhood? Does the city have any plans to rezone the area to accommodate new development? Are there existing school boards, block associations, or community boards, and what are their concerns?
Don’t be fooled by statistics
You may be tempted to refer to existing crime statistics, but you shouldn’t take those numbers as the end-all, be-all. “Crime stats don’t tell the full story,” Valhouli says. “A New York City police chief has said that if you want to make the crime in a neighborhood go down, you just reclassify a misdemeanor as a citation.” Instead, ask for local input—from existing homeowners, business owners, and brokers—to get a better picture of safety concerns in the neighborhood.