Saturday, January 22, 2011

Gravity of Neighborhoods

Over the past 6 months I have spent at least one week a month scouring the Mid West for specific neighborhoods to invest in.    I have been investing in real estate in one form or another for the past 30 years.  This is the first time I have amazing investment opportunities in single family homes.

In the course of driving through many neighborhoods in many cities I had an observation & insight that, for me, is quite useful.   Neighborhoods that consist of architecturally ornate homes seem destined to one of two extreme plights.   The fortunate ornate home neighborhoods retain high net worth owners and, at a very great cost, are maintained and often improved.  On the other hand, the architecturally ornate neighborhoods that lose their wealthy benefactors all seemed to have fallen to being or fast becoming slums.     The weight of gravity - i.e. the cost of maintaining those significantly ornate properties, is beyond their economic means.    And after gravity begins the process of pulling them down, the process is, I believe, irreversible.

What does this insight afford me in terms of making investment decisions?  First, if I find a property that "works" from an financial perspective in a gravity laden  neighborhood, I need to strongly consider whether I can maintain it moving forward, but more importantly can my neighbors maintain their properties.  If they can't, I will get sucked into the hole that depression will make.    Secondly, there are neighborhoods that have housing stock that is not highly ornate - homes that are far more practical from a maintenance and upkeep perspective.   All other things equal, I feel that they present a fundamentally much better investment venue.   

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