How to Evaluate Neighborhoods when Investing in Real Estate
The reputation of particular neighborhoods can be based on many factors. If you plan to invest in real estate, this is something to take into consideration. Certain key or essential elements differentiate the neighborhoods with good reputations and positive trends from the areas that are stagnant or trending the wrong direction.
If you don’t have school-age children, you may not be concerned about the reputation and test scores of the local schools. But whether you’re investing in residential or commercial income properties, schools matter. The demand for residential and commercial property (and the subsequent value of the property) is highly correlated to the quality of local schools.
Ask any real estate agent about the impact of schools on the demand and sales price for a home in a great school district. Likewise, employers use the quality of local schools in recruiting their key personnel — and sometimes even relocate company facilities to be near areas known for their schools.
The Internet can be a very useful tool in determining the quality of local schools. Most school districts have websites that include information on the test scores of their students for mandatory state and federal testing. Unfortunately, many people make snap judgments about school quality without doing their homework. Visit the schools and don’t blindly rely on test scores. Talk to parents and teachers, and discover what goes on at the school.
Crime can have a significant and sobering effect on the demand and desirability of all types of income properties. No one wants to live in a high-crime area, and commercial tenants and their customers neither work at nor patronize unsafe businesses. No areas are going to be crime-free, but you don’t want to find out after the close of escrow that you have purchased a rental property that is claimed by rival gangs. Before you make your investment decision, consult these sources:
- Local law enforcement: Contact local law enforcement and obtain the latest and historical crime statistics.
- Local newspapers: Newspapers (and their websites) often have a police blotter section that provides information on major and even petty crimes in the community.
- Sexual-offender databases: Laws require certain convicted sexual offenders to register with local law enforcement. These databases allow you to identify the general locations of convicted sex offenders who have committed sexual offenses against minors and violent sexual offenses against anyone.
These databases aren’t foolproof. A few states haven’t been consistent in their efforts to maintain and make them available. Also, people required to register don’t always follow the requirements, but at least you can find out about the known ones.
Even if not legally required in your area, be sure to advise your tenants to check the database; this information is dynamic, and everyone needs to make his own decision about the safety of his family.
Pride of ownership
Pride of ownership is an intangible attitude that has tangible results. Pride of ownership also has no economic boundaries — even modest-income areas can really look sharp. Look for rental properties in neighborhoods that reflect pride of ownership — well-kept and litter-free grounds, trimmed plants, beautiful flowers, fresh paint, and so on. This curb appeal helps you attract and retain your tenants.
Although everyone may have a different perception of exactly what constitutes a well-maintained property, pride of ownership is readily apparent, and the effort made by business owners and homeowners to keep their properties looking sharp is important to real estate values.
You may find that some of the more aesthetically pleasing areas look that way for a reason. Homeowner’s associations and business parks typically have a board of directors and architectural review committee that routinely inspect the properties under their jurisdiction, as well as review and restrict improvements to meet certain standards.
Other areas may have informal committees of neighbors who band together to keep their properties in tiptop condition. This tendency is also true of multifamily residential and commercial properties, and these properties usually must also submit to local laws and regulations enforced by the building or code enforcement departments.
You can control the appearance, condition, and maintenance of your own property, but your options are limited if the properties surrounding it fall into disrepair. Your purchase of a fixer-upper and the investment of time, money, and sweat equity won’t be rewarded financially if the surrounding properties are in a state of disrepair and have owners who don’t really care.
Property values, occupancy, and rental rates all sag when property owners no longer take pride in their property. Avoid declining neighborhoods that display the red flags of dispirited owners — poorly kept properties, junk-filled vacant lots, inoperative cars in the parking lot or street, graffiti, vandalism, and deferred maintenance. Neighborhood deterioration is a blight that spreads from one property to another.
Role play: What attracts you to the property?
One of the best ways to evaluate the prospects for a particular neighborhood is to play the role of a residential tenant looking for the best place to call home. Go back in time to when you made the decision to live in your neighborhood. What were the primary criteria you used to make that determination? You’re probably typical of many of your potential tenants. They prefer rental properties in close proximity to various amenities, all of which can be captured in a property knowledge sheet.
Property knowledge sheets
One of the best ways to have the answers to the questions that may be raised by your rental prospect is to prepare a property knowledge sheet for each of your rental property locations. A property knowledge sheet contains all the basic information about your rental property, such as the size and type of the rental unit and the unit number (for multiple-unit properties), plus the age, type of construction, and other important details about the unit.
A thorough property knowledge sheet also contains important information about the local neighborhood and general area. Like the chamber of commerce or visitor’s information bureau, you want to be able to answer questions accurately about the area. Rental prospects are generally interested in knowing about employment centers, transportation, local schools, child-care, places of worship, shopping, and medical facilities. You can really make a positive impression on your rental prospect if you can tell them where the nearest dry cleaners or Thai restaurants are located.
With all this vital information from your property knowledge sheet at your fingertips, you can be ready to answer your rental prospect’s questions. The more you know about your property, the easier it is for you to offer important reasons for a prospect to select your rental over the competition.
Property knowledge sheets can definitely give you the edge over your competition. Because you’re often competing with large multifamily rental properties, you need to be prepared to answer important questions about the area. Often, immediately knowing a detail such as whether a certain child-care center is in your area can make the difference between success and failure.
Commercial property considerations
Looking at a property from a tenant’s perspective is also useful if you’re investing in commercial properties. Remember that your commercial tenants are in business to make money — and their location is often a key factor. Have you ever seen a small retail center that includes several vacant suites with butcher paper in the windows? That is the universal sign that a property is in financial trouble and in need of proactive ownership, management, and leasing — or the spiral toward foreclosure will continue.
Right down the street from a failing property, you may find another retail property with long-term leases and a waiting list, because successful retailers almost always flock together. That explains the success of many regional shopping malls that command high rents. Sometimes, just getting the right anchor or primary tenant in a commercial, industrial, or retail income property is all it takes to start the chain reaction toward the dream for any landlord — high occupancy, high rents, and low turnover!
Finding well-situated properties is easier when you’re considering investing in an area where you’ve lived your entire life but not as easy for investing in other locales. Nonetheless, every area has potential if you know what you’re looking for and are willing to take the time to do the research.