The following is an excerpt from my book, Before You Buy Rental Property: The ethical investor’s guide to buying a rental home:
Before you invest, you’ll need to think about how your favorite neighborhood will change in 20 years. Will there be a new shopping mall next door? Do you think the local shops will close because of a nearby superstore? Is crime getting better? Are the schools getting better? What about jobs? Have you thought about where your tenants are going to work? Why do you think the quality of life there is likely to improve? You don’t need to find them a job, but if there are no jobs nearby, they aren’t likely to sign a long-term lease.
Example
This is a picture of the racial makeup of the neighborhood in Charlotte where I grew up as it changed from 2000 to 2010:
The darker the shade of blue, the more white the part of the neighborhood it is. The darkest shade is over 90% white according to the census. Little sugar creek forms a natural boundary down the middle of both maps, denoted by the solid white or blue line.
From 2000 to 2010, the whole map grew more racially diverse. But if you zoom in and study the map block by block, each block grew more racially homogenous.
In 2000, this was pretty much a white neighborhood on both sides of the creek. By 2010, blacks and Latinos made up nearly half of the neighborhoods on the left side of the creek, but the right side was still homogenous. It had gotten 10% more diverse on the right to 50% more diverse on the left side of the creek.
In 2015, home prices for the left and right sides of the creek differed by about $250,000. Crime was a much bigger problem on the left side. Schools were poorer on the left side. Economically speaking, the left side was the “wrong side of the tracks”, or creek, on every measure.
In my previous post, I explain that the current social science research finds that neighborhoods with more racial and economic diversity also have better growth prospects. Property values rise faster when communities are health.
So why did the increased diversity fail to yield an increase in property values?
There is no common ground or social meeting space in the middle of either neighborhood in the Charlotte map. Compare with this map of Northwest Washington, DC – where you find Columbia Heights, Adams Morgan, Mount Pleasant, and Shaw:
There are no highways, train tracks, rivers, creeks, or parks dividing these DC neighborhoods. And so racial makeup becomes more diverse and property values have increased. The people buying homes in the Charlotte case had a different attitude towards race. And they did precisely because those attitudes were never challenged by crossing paths with “the other” as would happen in a city with dense quarters, like Washington, DC. The “white flight” to the suburbs in Southern American cities served to calcify attitudes about the other.
What researchers found to be the case nationally – that diversity is associated with growing property values – played out in opposite directions in both the Charlotte and Washington examples. Where communities remain isolated, you find a neighborhood doesn’t blossom. Where they integrate around common meeting places, prosperity follow. For this reason, I would never invest in the area where I grew up in Charlotte today.
I would love to buy property in Northwest DC. In the middle of this DC map you find my church – All Souls Church. They fought for equal rights in the 1960s, set up fair housing enclaves in the 1970s and 1980s, and were the place where the DC mayor signed a marriage equality bill in 2013. Of course this church is not solely responsible for these communities coming together, but its presence is associated with many factors that make a community healthy. It is a proxy indicator of prosperous neighborhoods. The absence of common meeting grounds creates neighborhoods that are nothing more than ethnic cloisters.
The absence of a any facility or social institution that both communities share on the Charlotte map means it it likely that home prices will remain flat on both sides of the creek. People looking to move into a community with a healthy vibe will look elsewhere.
This is one example of the kinds of lessons I highlight in my book. How do you spot future prosperous neighborhoods that are “up and coming?” Study demographics and city plans and understand Gentrification’s effects on cities.
See also: Gentrification: solve for X
ChewyChunks 