Invisible Dividers and the Importance of Knowing Your Market
When evaluating any investment property it’s important to either be an expert in your market, or partner with someone who is. As I mentioned in my article “Real Estate Isn’t Local, It’s Hyperlocal!”, location plays a huge role in the success of your investment. Some location based metrics can be easily be found with a quick google search, but others are not so apparent. In this post I’d like to share with you the importance of knowing about “Invisible Dividers” in your market.
When evaluating investment properties either for sale or for rent, it’s important to look at what comparable properties, or “comps”, have sold or rented for in the area. No matter what kind of property you are looking at, it’s important to look at the value of similar properties. This applies not only for buying and selling single family homes but also for apartments, mobile home parks, or any other kind of property. If you are considering purchasing a property that will be leased, it’s imperative that you look at what similar properties are renting for.
My first rule in looking at similar properties is remembering that not all properties are equal, even if they are close by. A two bedroom house will rent for a different price than a four bedroom house and a house with a pool will sell for a different price than a house without a pool. An economy studio apartment in a garden style building will rent for a different price than a luxury condominium in a high rise.
When beginning my evaluations, I generally start with a neighborhood list. These lists can be easily found online through sites like citydata.com, neighborhoodscout.com or even wikipedia.com. Google maps will sometimes also delineate different neighborhoods. Two homes may be less than a quarter mile apart, yet not be appropriate comps because they could be located in completely separate neighborhoods.
After I’ve looked at the dividing lines between neighborhoods, I’ll pull up a map and begin to look for geographic barriers that could mark further separations. These could be major roads or thoroughfares, freeways, train tracks, or natural barriers such as hills or rivers. Some cities have very large neighborhoods with internal divisions, while some cities with smaller neighborhoods have recently seen gentrification. During gentrification of a neighborhood, there are often pockets or blocks that appreciate faster than others.
One can get a pretty good idea of an area simply with online research, but it is still important that you visit your market in person, or partner with locals before investing. My reason for saying this is that online research will not always reveal the presence of “Invisible Dividers.”
What do I mean by “Invisible Dividers?”, Invisible Dividers are barriers that are not readily noticeable to those not familiar with a city or neighborhood. Often these barriers form hard lines that are not recorded on the books, but nevertheless act as dividers as powerful as any concrete wall.
An excellent example of this phenomenon is in Kansas City, MO. I started my investing career buying Single Family Homes in Kansas City. I was investing out of state from California and did a lot of my research from afar. It was only after visiting the city and connecting with local investors did I learn about Troost Avenue, an Invisible Divider within Kansas City. Troost avenue is a street that runs North to South through the city. These days, Troost looks like any other street in the city but locals and savvy investors know its significance. On one side of the street, homes can go for double or triple the price of homes on the other side. These homes have similar build dates, finishes, and floor plans, yet the value is radically different, even for homes a mere two blocks apart.
That seems crazy right? How can two homes of the same size, same finishes, same features, and not separated by any major barriers be valued so differently. The answer lies in the history of the city and stretches back decades. During segregation, Troost avenue was the unmarked barrier between the “white” side of town and the “black” side of town. Everyone knew the street was the dividing line and the legacy of that dividing line remains to this day, even though it’s been decades since the Civil Rights movement. Thankfully Kansas City is taking big steps in moving past that tragic chapter in its history and many young home buyers and investors, many of them friends of mine, are choosing to eschew Troost as a dividing line and work to break down this barrier and move forward towards a more inclusive future. Sadly, such deeply rooted divisions can take a long time to move past.
It’s important to be aware of these kinds of details when looking for comps so you can develop an accurate valuation for your property. Inaccurate valuations have led many investors to overpay for properties or overestimate their selling price which can affect the profitability of your investment. Until next time, happy investing!