How to Spot a Smart Investment Property

Invest in Potential: 5 Ways to Spot the Next Mission or Williamsburg

By Holly Johnson


Any real estate investment comes with a certain amount risk—and that’s especially true when betting on the potential of an investment. Sometimes, however, these can generate the biggest reward. Investment property owners share their tips for spotting the next up-and-coming location.

Finding a real estate hot spot before it's actually hot is any investor's dream. By investing in a budding area early, smart buyers can secure a deep discount, wait it out and turn a profit once values surge.

San Francisco's Mission district offers a glimpse at how buying at the right time can yield huge results. The historic city's oldest neighborhood, this cozy and eclectic area has always been known for its arts and culinary scene and strong Latino roots. But, as Silicon Valley's elite hone in on the area, prices have risen accordingly. Today, the Mission is known for much more than its uniqueness and diversity; it's known for off-the-charts housing values where properties regularly sell for 30 percent over list price.

Need another example? Consider the Williamsburg region of greater Brooklyn. There, the median home price per square foot surged to over $1,000 for the first time in 2014 and continues to rise today. While that's bad news for buyers, it means more money in the pocket of investors who bought before the market took off.

So where does a small property owner start if they want to sniff out the next Mission or Williamsburg? Consider these five points... and, above all, be willing to take a risk:

1. Local awareness:

Ask around to see if people have heard of the area to gauge local awareness and potential for growth. “By the time everybody knows the neighborhood, prices will be at a premium," says Sam Dogen, owner of two rental properties in San Francisco that have doubled in value since he purchased them in the early 2000s.

2. Current housing values:

To see where an investment property could be priced in a few years, gauge values in nearby neighborhoods. "Look for a home that is selling below its value in the market," suggests Mayer Dahan, who owns five investment properties around Los Angeles. "It is smarter to buy a bad house in a good neighborhood than to buy the best house in a bad neighborhood. The value of the surrounding houses will cause the value of yours to increase."

3. Diversity:

As gentrification happens, as seen in the Mission for example, prices tend to rise. Potential investors should look for diversity in the neighborhood early. “I look for neighborhoods that have a good mix of races as opposed to a predominance of one race," says Dogen. “A diverse neighborhood means there is a larger demand curve because all races find the neighborhood desirable."

4. Planned growth and development:

According to Dahan, plans for commercial growth are another excellent indicator that other investors are already betting on an area. “If there are shops, restaurants, grocery stores, spas and various other services planned in the surrounding area, [the area] is more likely to go up in value as time goes on," says Dahan. These companies have done their research and real estate investors should use this to their advantage.

5. Future plans for public transportation:

Dogen planned some of his San Francisco investments around proposed subway and bus routes on its west end. It was public record, so he just had to know where to look—and why to look there. As an investor, finding an area where public transportation is in the works is a great strategy.

When looking for the next real estate hot spot, landlords should consider more than what's there—consider what might be there in a few years or even a decade. Imagine what the area could be and then look for the data to support the investment.

“It's all about demographics and risk," says Dogen of hot-spot hunting. If small property owners can see potential and predict growth before it happens, there's serious reward in the early adoption of an area.

About the Author:
Holly Johnson
Holly Johnson is a financial expert and award-winning writer who is obsessed with frugality, budgeting, and travel. In addition to serving as contributing editor for The Simple Dollar, Holly writes for well-known publications such as U.S. News and World Report Travel, Personal Capital, Lending Tree and Frugal Travel Guy.