How to Classify/Rate a Neighborhood?
Neighborhood, subdivision and community are all words that can be used to describe the macro surroundings of a home, but what is the ultimate differentiating factor?
Many factors contribute to an overall neighborhood rating, including but not limited to:
-Average age of homes -Vacant lots -Median income of residents -Vacant homes
-Average price per home -Burn downs -Median rental rate -Proximity to schools
-Proximity to highways -City services -General condition of road -Crime rate
At the end of the day, investors are more interested in the numbers associated with individual deals, rather than descriptive words of a neighborhood. Numbers are in fact important, but it should always be noted; neighborhood classifications prelude to the issues and effectiveness of solutions concerning rental property variables.
How do classifications work, and what should an investor consider before comparing properties? It might be surprising for new investors, but the truth stands tested and proven—the highest neighborhood class ratings are not always coupled with a financially sensible ROI.
New construction homes, sparse rentals, historical residences, and private security will characterize an A-class neighborhood. While A-class neighborhood peculiarities vary from city to city, the residents are most often white-collar homeowners undeterred by high taxes and mortgage costs. High entry price points and a low demand among tenants contribute to the minimal viability of these neighborhoods to investors looking for significant returns.
B-class neighborhoods sometimes prove to be more attractive to investors, with dependence on stability and a “community feel”, rather than luxurious curb appeal. The B-class neighborhood is for investors looking for lower, but relatively stable returns. Middle class families often populate the homes here, because these neighborhoods are often in close proximity to schools and city parks. B-class neighborhood homes will rent at a slightly higher price than average, due to the high demand of the location.
The most common type of home that an investor will utilize for significant returns is located in a C-class neighborhood. C-class neighborhoods are often in areas that have many small businesses, high population density, and easily accessible public transportation. Homes range in age from 20-50+ years old, and often require mechanical and structural upgrades to attract new residents.
It is not uncommon to have one or two vacant homes in a C-class neighborhood, but the vacancy rates remain the lowest. These homes have relatively low entry points, affordable maintenance costs and are most commonly targeted by tenants looking for safe, economical living. The accessibility and community feel provide security and peace of mind to residents in C-class neighborhoods.
The category of D-class neighborhoods is often a last resort for investors, with volatile dependability and the lowest living standards. Burned down and vacant homes, undeveloped parcels, and high vacancy rates characterize these neighborhoods. While the returns on these homes are the highest for investors, they are the most dangerous investments to make. The urban decay here often attracts crime and a contagious neglect by city services. While it is possible to find structurally sound, attractive homes, the surroundings and lack of community drive the value down, and the likelihood property abuse up.
It is important to be familiar with municipal response-time trends, along with the types of services available when classifying a neighborhood. Dependable city services are important for rental homes, as they will keep tenants feeling safe, comfortable and most importantly—attracted to living in your property. Furthermore, you want to make sure that your investment will be protected, in the unfortunate case of required emergency services, or an eviction.
It is important to realize an important fact—classifications are always relative to the surroundings. The B-class neighborhood in an affluent township will greatly differ than a neighborhood of the same rating, in a more urban area. If investing in an unfamiliar location, a local professional opinion on the market can help avoid making the wrong moves. Do your own independent research on available sales/rentals, and make sure to drive through the neighborhood you intend to invest in, as nothing can beat seeing it for yourself.
Comparing the “Days on Market” (DOM) averages for different neighborhoods in a city will help in determining neighborhood classifications. The best neighborhoods will have average DOM’s of 30 days or less. A short DOM period indicates high demand for the area, and will most often point to the type of neighborhood best suited for real estate investments.
The hallmarks of an attractive real estate investment include a high ROI and a forward moving appreciation value. A high rental demand, along with low average maintenance costs keep midgrade homes (C and B class) at the center of most investors’ sights. A home can be upgraded in a matter of days to weeks, but the location is truly a factor that cannot change in a short amount of time. Third party inspections, photos of neighboring homes, and local value trends are useful in evaluating a property, and should always be considered when comparing neighborhoods to assess investment strategies.