Property Investment

How Does Gentrification Affect Property Management?

What is Gentrification?

Neighborhood gentrification is the transformation of a low-value area into a high-value one. It generally begins with "urban pioneers" of the middle class who move into neighborhoods near city centers, encouraging more and more of them to do the same. According to London and Palen in their 1984 report,these pioneers are commonly alternative-lifestyle artists & grad students looking for convenient, affordable housing, especially in "fixer-upper" neighborhoods with a little history in the architecture.

Gentrification eventually begins attracting more affluent buyers. As the average income of the neighborhood increases, businesses that cater to the middle and high markets appear in the same area, resulting in less local small businesses.

As this activity draws attention, city governance devotes more resources to the area and real estate developers purchase land before their values greatly increase, both of which rapidly spur development. As property values increase, so do taxes, which are allocated towards street repairs, utilities, schools, community parks, and other neighborhood improvements. Increased police activity starts to drive crime out, too. The area is safer, filled with new retail and service jobs, and younger-skewing residents.

The Controversy of Gentrification

Despite the benefits, gentrification has a bad reputation and many critics. The term itself comes from "gentry," as in the wealthy friends of the ruling class in old monarchies. Due to the influx of new well-off homeowners and renters, many poorer, long-time residents are said to be forced out.

However, in two studies covered in Time's article "Gentrification: Not Ousting the Poor?" and USA Today's article "Gentrification a Boost for Everyone," it was revealed that the poor from these neighborhoods move out at most 0.5% more frequently than from non-gentrifying poor neighborhoods. People aren't being forced out, but rather the rapid change is due to succession; with the new popularity of the neighborhood, recent vacancies are being filled with wealthier buyers and renters. Also, poor neighborhoods have many properties that are vacant or rundown to begin with, meaning that not every middle class renter displaces an old resident.

Since gentrification comes about due to individual tastes, choices and free market forces, it is not easily reversible by the time it's underway. You, as a landlord, must simply adapt with it.

How Gentrification Affects Landlords & Property Management

If you own and rent out property in a gentrifying neighborhood, then you have a new set of challenges ahead of you. Your potential gains in profit are great, but there are many financial and social issues that you must consider, which are addressed below. You may consider selling the property, but you will likely get a much better reward if you maintain and rent it until prices have peaked before you sell.

Property Values Increase

The most important change is that you're going to see increases in the assessed value of your property or properties. The most commonly used and accurate assessment method is the Comparable Sales method, also known as the Market Approach. This is used for private homes and the rental of buildings that have 2 to 4 units maximum. Apartments and condos are valued under the Income Approach, gauged on their potential income from renters. This rate is the projected annual income from the gross rent multiplier divided by the current value of the property, and is generally reserved for commercial properties.

The Comparable Sales method compares your property to similar properties in order to estimate the market value of your property. The more similar two properties are, the more accurate this assessment is. It generally compares properties in the same or similar neighborhood, have roughly the same square footage, and have the same number of bedrooms and bathrooms.

Initially, property values increase slowly; however, as gentrification progresses, they increase more and more rapidly.

Property Taxes Increase

Property tax increases affect the landlords of properties in gentrifying neighborhoods because this changes how profitable a property is. The landlord is responsible for paying property taxes, which are assessed on the millage rate. The millage rate is a location-specific amount per $1000 of taxable value of a property. For instance:

  • You have a property with assessed value of $100,000 where the local taxable value is 20% and the millage rate is $10.
  • Multiply the assessed value (100,000) by the local taxable value (20%) to get the taxable property value of $20,000.
  • Multiply the taxable property value by the millage rate ($10) to get $200,000.
  • Divide this by 1000 to get your property tax of $200.

Gentrification also leads to greater coverage of services like 911 Police and Fire, and greater use means more dollars spent, which is drawn from the local property taxes. Despite this issue, there are many tax breaks for landlords that you can take advantage of to level the playing field.

What Do I Charge?

Facing the realities of increased costs from property taxes and the fact that everyone around you will be charging more for their rent, you will need to increase your rates eventually. You should wait to increase until any current tenants you have are signing a new lease or moving out. Respect your long-term renters. Make sure you know the laws related to rent increases before you take any action.

When you do have the opportunity to increase rent, you should be sure to cover the increased expenses from taxes and other factors (such as renovating your property to appeal to a more affluent market). A report from Williams College called "Why is Gentrification a Problem?" points out that both local and remote landlords have great incentive to contribute to neighborhood renovations, as they can "reclaim the cost in rising rent." You can do a lot of the ordinary maintenance yourself, but heavy remodeling is costly and time-consuming, so don't forget to factor it in.

The Williams College report mentions that during gentrification the number of families decrease in an area while the number of singles and couples increase. Also, the median age skews younger, so tailor your property to support their needs, and you can be sure to always have a renter.

Social Issues of Gentrification

Despite the fact that gentrification does not necessarily displace people, the longtime residents of these neighborhoods still often feel strongly against the changes. In these areas, the presence of new outsiders is pretty noticeable. If you have a family who has stayed a long time in your property, they may feel that you are planning on raising rent prices on them before anything has happened. Large protests often accompany the beginnings of gentrification.

By the same token, new renters can also feel discrimination from the current residents. The mentality of repelling "invaders" can manifest, leading to hostility towards newcomers. It is your job as landlord to ensure that tenants of differing backgrounds are able to live peacefully side-by-side, and that incoming renters feel safe in their new home, lest they leave and you end up with costly vacancies. Depending on the area, many of these newer occupants will be college and grad students, who sometimes fail to get along with older residents even in neutral situations. Be sure you know how to manage student tenants.

Remote Ownership

If you rent out property in a gentrifying neighborhood that you do not live in or near, it is generally best to seek a capable property manager to handle the day-to-day issues. This is due to the enormous social issues listed above-a property and its tenants in areas undergoing this politicized process require much more attention than a unit in a stable market. The manager you select may well be managing many complaints and maintaining satisfaction to prevent vacancies, so be sure that they are up to it.

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