Is Buying on the Fringe as Profitable as They Claim?
I’ve been investing in real estate long enough now that I feel like I can recognize not only a great deal with a specific property, but also major potential in an up-and-coming neighborhood. And that’s one of the hallmarks of successful investing, isn’t it? To invest in areas that are on the rise, looking for factors like population growth and new development to point you in the right direction.
I don’t disagree with this at all. However, I’ll be the first to point out that the competition to get into these areas can be stiff. If a place is truly up-and-coming, then I can guarantee that you’re not the only investor who’s noticed this. Other investors have too, and chances are they’ve already been descending on the area and snatching up properties.
For some investors, this can be a major drawback. Not only are the prices higher due to increased demand, but they’ve got to be ready to put an offer on virtually anything that comes available, before another investor grabs it. Not everyone can do this, nor does everyone want to make rapid-fire decisions like this.
And that’s where fringe buying comes into play. Buying on the fringe means buying in neighborhoods that are right next to (or very close) to those up-and-coming neighborhoods. They’re areas that are starting to be revitalized, but haven’t quite gained the title of “hotspot” yet. There are still plenty of rundown homes and buildings, and there’s definitely a mixed bag of opinions on whether or not the area makes for a good investment. Incidentally, there’s not nearly as much competition from other investors.
Personally, I like the fringe. Yes, it may be a little bit riskier, because you never know if an area is really going to become as popular as you hope it does, but that’s a risk I’ll take. Why? Because if that area does explode in popularity, I stand to make HUGE gains, both in cashflow and appreciation.
The trick, of course, is in correctly identifying which fringe neighborhoods are going to pay off. This requires a lot of background research, and to be totally honest, it’s best if you stick with your own local market for this type of investing. This is mainly because, as a resident, you should already have a decent understanding of neighborhoods and local trends. You should know where development is happening and which property types are the best vehicle for investment. If you don’t know offhand, no big deal. Some research and financial modeling on property types and rental rates in select neighborhoods will give you a good idea.
I’ll give you an example. In my local market of Kansas City, there are a number of neighborhoods that have undergone a dramatic revitalization in recent years. The one I’ll name specifically is South Hyde Park. In the last decade, this neighborhood has become extremely popular with millennials and young families who like the easy access to popular spots like Westport, downtown, and the Crossroads, as well as the proximity to parks and other recreation. It’s extremely walkable, and the homes have a lot of character and charm. Naturally, home prices in South Hyde Park have skyrocketed and the competition for them is fierce.
So that’s why I’ve turned my attention to neighborhoods bordering South Hyde Park, like Manheim Park and Squier Park. While properties in SHP are going for $200k-$300k, I can buy a home in Manheim or Squier for $60k or $80k. No, they’re not in pristine condition, and no, the neighborhoods aren’t quite as great as SHP, but I believe they will be. I believe these fringe neighborhoods will become the new hotspots. And it’s this gamble I’m willing to take.
So to answer the question that’s the title of this post, YES, buying on the fringe is as profitable as they claim….so long as you do your homework and pick the right fringe neighborhood in which to invest.