Unpacking Real Estate Investment Considerations with a Tale of 3 Neighborhoods

Introduction

Any of the non-real estate financial investments you might have — money market funds, brokerage accounts, IRAs, or 401k plans — typically offer a variety of stocks and bonds. Bonds can act as a hedge to more volatile (but also more lucrative) stocks. They can also be used to produce a reliable stream of income. How you allocate the stock to bond ratio in your portfolio depends on a variety of factors, including your investment goals, timeline, and your appetite for risk versus reward.

The same risk versus reward factors apply when considering real estate location investments. What kind of locations are you drawn to? Does the real estate investment ultimately contribute to your bottom line?

Maybe you’re drawn to the potential reward of up-and-coming “rising star neighborhoods.” These are properties in neighborhoods undergoing change and revitalization with a lower price and lots of upside (read: Millennials renovating older homes in or near the city center). Or perhaps you prefer the safety and security of a “blue chip” property in a tried-and-true location with a history of increasing value. Maybe you’re not entirely sure where to make your next real estate investment.

This blog post will illustrate how data can clarify these risk/reward and price choices through the story of three neighborhoods. Each neighborhood has its own character and opportunity that may suite different investors. The goal: To show how digging a little deeper into the data can help you better align your real estate portfolio and your investment goals.

The Characters

The three locations, or “characters” profiled (Blue Chip, Rising Star, and combined Blue Chip & Rising Star) each have positive and negative price drivers that Scout Vision® Trends & Forecasts recognizes as key influencers of home value appreciation. Below (see Figure 1) is a synopsis of these top price drivers for each location, which will be referenced throughout the post.

Figure 1

The “Blue Chip”

Less than 20 miles from Manhattan, just off the Palisades Parkway, you’ll have the pleasure of being acquainted with 11 Old Dry Dock Road, in Alpine, NJ (see Figure 2, below).

With the Hudson River as a backdrop to its sprawling 5-plus bedroom homes, Alpine’s Old Dry Dock Road has the air of Old-School Money (Take your pick: Membership at the Alpine Country Club or the Alpine Swim and Racquet Club. Or maybe dressage in Bergen County is your thing).

Figure 2

As of Q2 2017, the Median Home Value for the neighborhood around 11 Old Dock Road was $1,882,140. Over the next 3 years, Scout Vision predicts that the price will continue to rise (to $1,938,107).

Based on past appreciation and existing fundamentals, this location ranks in the top 20% of all neighborhoods in the nation for investment security. Like a bond, or even a “Blue Chip” stock, this neighborhood is likely to hold value, even in an economic downturn.

However, there’s more to the story. While Alpine will likely be a wealthy location for the foreseeable future, it’s not necessarily the right investment for you.

• The price of entry is steep. Alpine is significantly more expensive than nearby surrounding neighborhoods (averaging $885 per square foot, vs. $499 per square foot for homes in nearby neighborhoods).

• The opportunity for price appreciation is lackluster. Even at that high price tag, Alpine still scores very low on Scout Vision’s Opportunity index. In fact, Alpine is projected to appreciate a mere 2.97% over the next 3 years (2017 Q2-2020 Q2) (see Figure 3, below).

• Several negative key price drivers outweigh the positive. Back to that earlier character synopsis (see Figure 1). Most of the red is reserved for Alpine. Trends for the regional housing market, income, and population are all pointing downward. Safe and secure as Alpine may be, it is under no pressure to grow substantially in value — just like the bonds in a retiree’s portfolio.

Figure 3

The Moral of the Story: This is the U.S. Savings Bond of investment properties: Safety and security that comes at a price (read: little appreciation).

The “Rising Star”

This is the average teenager who, after flying under the radar for years, comes back to school from summer vacation looking completely different. Classmates take notice: Wow, how on earth did I ever miss this person?

This title belongs to 500 Hyde Street, in San Francisco, CA, one of the most expensive cities in America (see Figure 4, below).

If you visited San Francisco for the first time over the last 20 years, you were likely to hear/read this warning: “Avoid the Tenderloin. Especially at night.” That is slowly changing. The densely populated, very walkable neighborhood is attracting Millennials and young, single professionals. These individuals want to live in city centers, within easy commuting distance to their professional tech and healthcare jobs.

Figure 4

In a city where real estate is booming, the Tenderloin area may be one of the few locations where relative bargains still exist. As of Q2 2017, the neighborhood around 500 Hyde Street is significantly less expensive than nearby surrounding neighborhoods (averaging $773 per square foot, vs. $939 per square foot for residential property in surrounding neighborhoods).

Furthermore, the Median Home Value for the neighborhood around 500 Hyde Street is $499,980. And it’s set to take off: Scout Vision’s 3 Year Appreciation Forecast of 39.18% puts the neighborhood’s forecast Median Home Value at $695,849 in Q2 2020 (see Figure 5, below).

Completely opposite from the venerable savings bond, Old Dry Dock in Alpine, NJ, Hyde Street is a hot stock flying high — but with little history of being a top performer. How is this possible? The Risk/Reward Ratio.

• High Appreciation, High Crime. Despite the continued migration of educated Millennials betting on gentrification, crime is still a serious problem in the Tenderloin and surrounding neighborhoods (more about that later). In fact, in this neighborhood, residents have a much higher chance of becoming a victim of violent crime than in the rest of the city (1 in 62 in the Hyde Street neighborhood, vs. 1 in 127 in San Francisco).

Figure 5

The Moral of the Story: You can get incredible value in San Francisco — if you’re willing to put up with some risk.

The “Blue Chip & Rising Star”

A short Uber (or bike ride) away from Hyde Street, you could very well have the best of both worlds: Welcome to 455 California Street, in San Francisco (see Figure 6, below).

What a difference a few blocks can make.

Heading in a slight northeast direction from the Tenderloin, 455 California Street is in the is heart of San Francisco’s financial district. Most noteworthy, this neighborhood is also home to myriad bars, restaurants, and night life. These are the places where both over-worked 20-somethings and stressed senior execs can easily congregate at any time of day or night.

Figure 6

It is exactly this vibe that earns this neighborhood the unique distinction of being both a “Blue Chip” and a “Rising Star” (see Figure 7, below).

• Opportunity: Thumbs up. The Median Home Value for this neighborhood is $1,598,723. Scout Vison predicts it will rise in 3 years, to $2,223,336 (2020 Q2). That’s a 3 Year Appreciation Forecast of 39.07%, the same as nearby Hyde Street, but with less crime.

• Investment Security: Thumbs up. This neighborhood is also ranked in the top 20% of all neighborhoods in the nation for investment security/peace of mind, based in part on a strong history of past performance.

Figure 7

The downside? Be prepared to pay a premium for the best of both worlds.

• Price per square foot…Raise the roof! To “get it all,” you’ll end up paying nearly twice as much per square foot as the neighborhood in the Tenderloin. In fact, be ready to shell out $1,429 per square foot (vs. $773 per square foot for the 500 Hyde Street neighborhood). This is a high price to pay for the attributes of the location and the history of rising values over the last 10 years.

• Crime is still an issue. While the neighborhood is safer than 500 Hyde Street, crime in the neighborhood still exists — the one black mark on an otherwise stellar location.

The Moral of the Story: Expect to pay a high premium for any location that appreciates like a stock with the relative security of a bond.

Conclusion

In summary, choose real estate investment locations like investments themselves. Are you most comfortable with the 80/20 split (more “Rising Stars” than “Blue Chips”)? Do you prefer a higher risk/reward? Can you find — and more importantly, afford — those less common “Blue Chip & Rising Star” locations?

Furthermore, once you determine your goals and timeline, tools like Scout Vision can help you:

• Unearth the best opportunities
• Avoid previously-unforeseen pitfalls
• Maximize your real estate investment returns with the level of risk you are comfortable with

About the Data

Industry veterans and PhD geographers developed Scout Vision by drawing on over a decade of research and development and leveraging the latest geo-statistical techniques and theory. Scout Vision’s 5-year Micro-Neighborhood™ Home Price Forecast is based on 200+ independent variables, 35+ unique data dimensions, and 21 custom, geographically nested, hierarchical models that capture market forces which operate at various spatial and time scales to drive price changes block by block.

Thus, Scout Vision uniquely identifies otherwise unseen opportunity by generating home appreciation projections that combine unprecedented geographic precision with up to 90% predictive accuracy.

Licensing Scout Vision®

For real estate investment firms with fewer than 500 properties or individuals with independent investments, take advantage of Scout Vision’s forecasting capabilities through a NeighborhoodScout Subscription.

For real estate investment firms with 500+ properties or companies needing API or large bulk file processing, request a data sample of up to 10 addresses and discover what Scout Vision Enterprise can do for your firm.