Gentrification is a controversial and complicated topic that strikes a nerve among longtime residents. Basically, gentrification is when a neighborhood gradually transforms from a “poor” into a considerably “wealthier” area. Gentrification happens when young middle-class residents move into low-value areas in search of affordable housing — typically, this younger crowd is composed of artists, graduate students, and hipsters. This market moves into neighborhoods that are near city centers so that they can conveniently experience the urban lifestyle, but with the charm, affordability, and architecture of these ‘fixer-upper’ neighborhoods.
As more and more individuals move into the neighborhood, and as its economic value slowly increases, more affluent crowds begin to see the neighborhood’s attractiveness. Eventually, businesses that cater to middle- and upper-class markets begin to rise in the area, pushing small businesses away.
As the area rapidly undergoes gentrification, real estate developers race to purchase land as much land before their value skyrockets. The increase in property value results in an increase in taxes for public improvement projects such as building streets, maintaining drainage systems, and many more. And with heightened police activity, the area sees a reduced crime rate, which makes it even more attractive to almost every demographic.
Pros of Gentrification
Pros of Gentrification
#1 More options for retail and leisure
Gentrification brings in plenty of options for dining, shopping, socializing, and much more. As the younger crowd comes into the area, you’ll find plenty of new coffee shops, thrift stores, and other “hip” hangouts popping up. As a result, gentrification can generate new jobs in a community that might have been struggling with unemployment in the past. As a landlord, you’ll find that this transformation will significantly increase your property’s value and attract a wider pool of prospective tenants.
#2 More housing opportunities
Building developers will be buying properties left and right. Although the area is still considered low-value during the early stages of gentrification, buyers see the potential in turning them into profitable real estate investments over time. The rapid change of the neighborhood’s overall atmosphere will begin once wealthy buyers turn old buildings into upscale ones, and even construct high-rise structures such as condominiums, apartments, and commercial buildings.
#3 Cleaner neighborhoods
The process of gentrification involves maintaining a certain standard of cleanliness. Where trash was once lying around, there are now color-coded recycling bins. Rodents and other pests are nowhere to be seen. While not all low-value neighborhoods are surrounded by filth and rubbish, the surge of affluent residents can bring in more effective services to ensure better sanitation.
#4 Enhanced public safety
The area’s new residents will want safer streets. Gentrification benefits both new residents and long-term residents since it results in stricter laws and regulations. Regardless of their level of wealth, residents can be assured that they won’t get robbed on their way to work. The process of gentrification naturally draws more resources into the community, which pay for services including neighborhood watch programs, modern security systems, and additional police.
Cons of Gentrification
#1 Raised cost of rent
In gentrification, as developments go up, so does the cost of rent. Eventually, its original dwellers can no longer afford to live in the area. Unless rent controls are placed only on newly constructed buildings, many of those who have lived there for generations may be forced to move. An excellent example of how gentrification can raise the cost of rent in Brooklyn. For the past few years, city-dwellers have moved to the neighborhood because of its “hip” and “bohemian” lifestyle that the poster-child borough has been known for. Studies show that only 6% of 4,395 apartments in Brooklyn were rented below the average market rate.
#2 Higher turnover rate
More households will be moving in and out of neighborhoods. Gentrification doesn’t just affect lower and middle-class families — in fact, residents with excellent credit scores and handsome salaries are more likely to move out of these gentrified neighborhoods at a faster rate. It’s not because they don’t like the area — they simply choose to move to wealthier parts of the city or state. However, there are certain ways to prevent turnover, such as offering renewal incentives and showing tenants appreciation.
How Gentrification Affects Landlords
#1 Increased property values
The biggest change you’re going to see is the increase in the value of your property. A property manager can assess the value of your real estate investment and determine its projected annual income. Generally, property values increase gradually at the beginning of the gentrification process, but as more and more businesses and developers move to the area, values will increase more quickly. This means that there’s a greater potential for profit in a gentrified area. If you’re a landlord in a community that’s currently undergoing gentrification, you will eventually have to increase your rates.
#2 Increased property tax
Property tax and property value always go hand-in-hand. Landlords are responsible for paying the property tax, and since property tax is bound to increase because of gentrification, rental rates are expected to increase, as well. While this may deter your tenants, higher taxes aren’t entirely a bad thing. Gentrification leads to enhanced services such as 911 fire rescue and police, which are paid for using local property taxes.
#3 Social issues
Gentrification brings in a younger crowd. While this diversifies and “freshens up” the social scene and creates new activities for existing residents to try, it may also result in millennials clashing with the senior members of the neighborhood. If you own multiple properties with different types of tenants, it will be part of your job to make sure that everyone gets along.
How Property Managers Can Help
If you own a rental property in a gentrifying neighborhood and you don’t live nearby, it’s best to seek professional property managers to handle the day-to-day demands of property management. While a changing neighborhood offers the potential for greater profit, it can be difficult to maintain satisfaction and prevent turnover unless you’re committed to being completely present and hands-on, especially with the changes of gentrification listed above.
A property management firm like Luxury Property Care can help you navigate the highly controversial process of gentrification so that its effects work alongside — not against — your property investment goals.