The landscaping is so perfect, the historic buildings perfectly preserved, and the security is tight. Surely this neighborhood is an ideal place to invest in a rental property, right?
Assume nothing. Every one of these features, and many more, can be a sign that a neighborhood is not welcoming to investors.
The risks of buying property in disadvantaged or unsafe neighborhoods are well-known, and covered extensively. But there’s far less focus on the opposite, which is when a neighborhood is just too “nice” to be investor-friendly. There are oftentimes regulations galore and overzealous community members committed to keeping strangers and progress out of these neighborhoods. There also tend to be issues with overcrowding: too many cars, homes, and humans on top of each other.
1. NIMBY neighborhood associations
This acronym, which stands for “not in my backyard,” signals kryptonite for developers, including fixer-uppers. NIMBY contingents will cripple a neighborhood's improvement potential, simply because they want nothing touched and no one new coming in -- even if buildings are currently empty and falling apart. Anything from renovations to landscaping to perfectly benign neighborhood improvement projects will be met with ferocious resistance. Whether you bought a single-family home with hopes to repaint and renovate, or a crumbling block of empty retail spaces you hope to replace with a mid-rise multifamily development, NIMBYs will stand in your way at every point, even if technically the zoning is on your side.
2. Historic designations
One of the most frustrating things about charming historic neighborhoods is that there are rules around what’s allowed to be changed or updated in the charming historic buildings. Homes that are historically significant to their municipality, locality, or state may be protected by multiple zoning and historic preservation bylaws. If you’ve ever looked around a wonderfully quaint historic property and wondered why the plumbing is so clunky or the place is so drafty, the answer might very well be it’s just too hard for owners to get into the guts of the place and fix it up without raising historic preservation committee alarms.
In order to remodel a historic home, owners will typically need to get approval from the local historic commission or conservation commission first. Making it through this round can be a challenge, and typically requires a commitment to work with architects and engineers already known and respected by the local commissions for the duration of the project.
3. Restrictions around renting
Most popular vacation cities and cities with a lot of transitional residents have strict laws around renting, which associations and buildings bolster with even stricter rules of their own. A great rule of thumb is, before you even get into serious discussions about a property, check the city and HOA rules around rentals.
A typical situation is, an investor finds a beautiful, nicely priced condo in a neighborhood that’s mere yards from the ocean and thinks, “Wow, I've found my cash cow vacation rental,” but does a little bit of research only to find out that the city doesn’t allow short-term rentals (i.e. Airbnb and all variations of it), and that the building itself only allows one rental per property per year. Some will also have a one-year waiting period before renting, during which time the property has to be the owner’s primary residence.
4. Permit parking only
In congested urban core areas, building management will actually talk up a single designated parking spot per residence like it’s a major selling point -- and indeed, one space is better than none. But if your property is a two bedroom and prospective renters are adults each with their own car, lack of parking in or near the building is a major deterrent. This issue is compounded in “nice neighborhoods” that have instituted paid or permit-only street parking with hyper-vigilant parking monitors handing out tickets.
Even if you have a 1BR and are only considering renters with one car max, you still need to ask the building manager about guest parking, because a building that never has any guest spots, ever-ever-ever, means that any time your renters want to have guests over, they either have to get a ride in or roam the streets looking for a spot.
5. HOAs that just aren’t that into you
Typically homeowner associations (HOAs) are friendlier to owners than renters. But when HOAs are not investor-friendly, and someone insists on renting anyway, HOAs can become equally difficult to both parties. It’s very normal for HOAs to have decision-making power over what renters come in, so if they don’t approve of your choices, they may be able to enforce the blatant power move of rejecting their application. They can also make people feel unwelcome in a myriad of more subtle ways, like imposing fees for minor infractions, or throwing away belongings left in shared spaces, or having security stop and question people even though they have keys.
Before you buy in any community where the HOA is a factor, thoroughly sleuth online for former resident reviews -- and if you see lots of angry complaints from former renters, it’s probably not investor-friendly.
6. Slow permitting, inspection, and approval turnaround.
It typically takes a city a couple weeks to issue permits or schedule an inspection, and of course, both processes are important to the renovation/upgrade process. If you're looking in a city where permits and inspections take three times longer than average to turn around, you will need to adjust your entire renovation/capital improvements timetable and also the projected time when you'll be able to begin using the property.
7. On the vacationer pedestrian path
This one tends to affect properties in rural, i.e. ski town and beach resorts, as well as cities. If a property is near a walk-up public attraction or pathway to one, whether it be a beach or hiking trails or a sledding hill, you may end up with a lot of people tromping through your property during vacation seasons. Even if they don’t actually cut through your backyard, it can still be very intrusive… even just try getting out of the garage when hundreds of beachgoers have decided the traffic lights and crosswalks are for decoration only.
Sometimes a fun, exciting neighborhood gets its character from the restaurants and bars surrounding it -- in which case, the main thing to beware of is a property that’s too close to a main thoroughfare or cluster of bars. Also, check to see what the city’s designated closing times and quiet times are.
The harder element to gauge after a simple first visit is the transportation noise. Study a map in your early neighborhood scouting to see whether the property is next to any highways or train tracks. If the neighborhood is near an airport, check to see if the property is under a plane approach pattern often used by air traffic control.
Will the neighborhood be nice to you?
We tend to think of “nice” in terms of pretty, safe, convenient to attractions, upscale -- general quality-of-life markers. But nice to live in isn’t necessarily great for business. If you notice one or more of the things from this post in a neighborhood you’re checking out, think twice about buying a rental property there.