Opportunity in Depressed Neighborhoods

This July, RealtyTrac published a study report that analyzed the “best of the worst” neighborhoods across the country. Surprisingly, Columbus, Ohio’s 43206 zip code was ranked 19^th on the list. While this zip code does include the prestigious German Village and edgy-cool Schumacher Place and Marian Village, really the article is referencing the area east of Parsons Avenue.

Sadly, however, most locals look at the Driving Park, Deshler Park, and South Orchards areas as down and out places that gentrification forgot. In fact, the Near Eastside/Near Southside areas are ripe with opportunity if one is looking through the correct lens.

I have been investing in the area for years. My experiences have not come without their own set of lessons learned but overall any headaches have been well worth the returns both financially and socially for the community. These neighborhoods are worth a second look because:

Low Property Acquisition Prices

Because demand is low for homes in the area, prices reflect the lack of interest. The low entry pricing is an opportunity to acquire property at prices that are below the cost to build. Whenever you can buy an asset less than its intrinsic value, it is worth considering.

Grandma’s house

The near east and south sides are predominately African-American communities. Often the black family structure centers on a matriarch that serves as the hub of activity and fellowship for the family.  These neighborhoods are full of elderly ladies who have provided good, stable lives for their children and grandchildren. These extended family members often come by for a visit and/or desire to live nearby. Investing in a neighborhood with strong family values and a build in a collection of “grandmas” provides stability in the community and investment returns.

Quality Housing Stock

Despite low sales prices, the 43206 zip code is full of quality housing. Many of the homes in this area were built in the 1920s-1950s when construction practices were more robust than they are today. Hardwood floors, intricate built-ins, pocket doors, and ornate fireplaces are all commonplace in this area of the city. While people in Westerville have to shell out thousands of dollars in search of charm, low-income residents in these neighborhoods enjoy these amenities every day!

Stable After Repair Values

The fact that home prices in the area have not really risen over the last few decades can be seen as a negative for the untrained eye. In fact, this is one of the most positive aspects of the area. Think about it, if you can consistently acquire assets for less than they are worth, strategically extract the value out of them and liquidate them at their full market value, then you have a recipe for wealth.

Stable/predictable crime

Let’s be honest, the eastern portion of 43206 has crime. And probably more crime than most of us would care to deal with. Nevertheless, the crime that occurs in this area is typically contained to gang bangers and the drug scene. The neighborhood is filled with many more well-intentioned, working-class residents that want a safe, clean, affordable place to raise their family than these bad actors. We never hear about the community gardens or afterschool programs intended to foster entrepreneurship. These areas have a lot to offer and a wealth of good people that mean well. Let’s not be fooled, crime does exist, but in all likelihood, it will not cross the path of an innocent resident.

Opportunity Exists in Fragmented Markets

Any value investor will say that fragmented markets are where the most opportunity lies. The same is true for investment housing. In the context of a neighborhood, fragmentation most readily presents itself in the mix of ownership. Ideally, neighborhoods with a reasonable vacancy rate as well as a mix of homeowners and renters are most desirable. East 43206 fits this investment criterion precisely. According to the RealtyTrac study, 19.4% of homes in the zip code are underwater. This means that the owner owes more on the home than it’s worth. This corresponds quite well with the National Association of Realtors estimate that there was a 19.6% vacancy rate in 43206 in 2014. The volume of vacant property allows investors and would-be homeowners to acquire the property for less money than would be required in other markets. The opportunity is ripe.

Investing in depressed neighborhoods is the ultimate social impact investing. Social impact investing is the concept that a company or investment should offer a double or triple bottom line. That is, in addition to the return on investment, the investment should also provide a positive impact on a community or address a systemic need.