Should I invest in a dodgy suburb?

Sometimes investors will look at a property and think, “I don’t want to invest in that house ... it’s in a dodgy suburb!”

When you think about “dodgy” suburbs what comes to mind? Perhaps a few places, like South Auckland or Aranui (in Christchurch).

Investors don’t want to spend hundreds of thousands of dollars to buy a property that tenants then trash.

But here’s the thing: “dodgy” suburbs change over time. And sometimes, an area that carries the stigma of being “dodgy”, isn’t that bad at all.

In this article, you’ll get an unbiased analysis of the pros and cons of investing in a “dodgy” suburb. That way you can decide whether investing in these areas is the right choice for you.

We use the word “dodgy” because that’s the word we’ve heard investors use again and again. This article isn’t here to perpetuate a stereotype. It’s here to break down some of those stigmas.

What is a “dodgy” suburb?

When referring to a “dodgy suburb” we’re talking about an area that is generally:

· Lower income/lower socio-economic

· It might have higher crime rates

· It might have a lack of development or a sense of disrepair

· Or it might have an “unsafe” reputation

It’s important to remember there is a big difference between a suburb with an unfair “dodgy” reputation and one that is just bad.

To tell the difference, property investors need to set aside the stigmas and focus on facts.

Because sometimes you might think a suburb is dodgy – but in fact it works as an investment.

Which “dodgy” suburbs should I invest in?

When it comes to “dodgy” suburbs, there are two main types:

· Areas in long-term decline. These are suburbs that are unlikely to improve in the future

· Areas that are experiencing gentrification. These are areas that are likely to get better over time.

Most investors avoid areas that will continue to be “dodgy” in the future.

But they might consider an area with a bad reputation today that will improve over time. That improvement could come from businesses moving into the area; that creates employment opportunities.

Here are some real-life examples of “dodgy” suburbs:

In Auckland:

· Mangere Bridge and Mangere – these are both in South Auckland. Some people think these suburbs have a terrible reputation. But, we often recommend properties in these areas as they are experiencing development.

· Otara – is an area we are more cautious about, given that we’ve observed less development planned there.

In Christchurch:

· Phillipstown, Waltham and Addington – people used to think these suburbs were “dodgy”. But today they’re improving and attracting development.

· Aranui – is an area we are more cautious about, given that we’ve observed less development in the works.

Pros of investing in “dodgy” suburbs

Now let’s get into the pros and cons of investing in a dodgy suburb.

Here are some of the opportunities:

Pro #1 – Lower cost

Because dodgy suburbs carry a stigma, they are often cheaper. This also happens because there are more renters (and fewer owner-occupiers) in these areas.

This makes them attractive to bargain-hunting investors.

Pro #2 – Good capital growth

If you invest in an area that becomes nicer over time, it will likely increase in value faster.

Why? Because gentrification takes away the stigma. That increases demand for properties, which pushes prices up.

Look at this map of Auckland suburbs. See how property prices in “dodgy” suburbs like Mangere Bridge and Mangere went up fast?

Pro #3 – Higher yields

Yields in dodgy suburbs are often high.

Why? Because there are a lot of renters in these areas. This means rents are healthy. But because there are fewer property buyers, the house prices are lower.

That means you get a good rental return for the money you spend.

For example, rental yields are higher in South Auckland compared with the rest of the city.

Pro #4 – Lots of tenants

Generally, fewer people own their own homes in “dodgy” suburbs. So there are lots of people who rent.

That can make it easier to find a tenant.

That’s especially true if you buy a property close to where people work. Or if you invest in an area close to public transport, shopping malls or other infrastructure.

Cons of investing in a “dodgy” suburb

There are legitimate reasons why investors hesitate when looking in a dodgy suburb.

Some of the main fears are:

Con #1 – Worries about the type of tenants

Some property investors will say, “I’m not sure about that area because of the type of tenant it will attract.”

They fear the tenants will have more social issues and be more unreliable in paying the rent. Or, they might worry that the tenants won’t look after the place.

While this is a legitimate concern, be careful not to tar all tenants with the same brush. While there may be a few “rotten eggs”, there are also lots of friendly, hard-working Kiwis who live in these areas. Because that’s what they can afford.

Remember, you can vet your tenants to find the one you’re comfortable with.

Con #2 – “Too many” Kainga Ora (State) houses

Some property investors don’t want to buy a house in an area with lots of Kāinga Ora homes nearby.

Some investors think: “I'm not sure about that area … it's full of state housing. People who rent from Kāinga Ora will annoy my tenants. So, it’s going to be hard to rent my property.”

It’s easy to think that lower socio-economic areas are full of Kainga Ora builds.

But again, it’s essential to consider the facts.

There’s a good chance you already live on the same street as a Kāinga Ora property and don’t even know it.

There are 67,000 rentals managed by Kāinga Ora.

These make up about 10% of the rental properties in New Zealand. And since about 40% of houses in Auckland are rentals, Kāinga Ora manages about 1 in 25 Auckland homes.

So, if your street has more than 25 letterboxes, there’s a good chance at least one is a Kāinga Ora house.

Again, it’s also important to recognise that not all Kāinga Ora tenants appear on Crime Watch or Police 10/7.

Yes, some will have social problems and show anti-social behaviour.

But Kāinga Ora also serves disabled people, like those in a wheelchair. Or people who are down on their luck. These people need places to live too.

Con #3 – Higher crime rates

Other times, investors will say, “I’m not sure about that area because – I saw on the news there was another stabbing.”

At the time of writing, our financial advisers are recommending properties in Massey. Shortly after that there was a media headline that read: “Massey Stabbing”.

We get it. That’s not exactly a positive headline, and could make investors nervous.

But, just because a suburb improves doesn’t mean it will be perfect overnight. This is one of the factors to consider when purchasing in these areas and weighing up the pros versus the cons.

Also remember that crime is unavoidable wherever you choose to invest.

You might be surprised to hear that a posh area like Epsom is a crime hotspot too.

Since people have more valuables in their homes, there is a higher chance of break-ins.

Con #4 – Worries about the suburb’s reputation

Other times investors will say, “I’m not sure about that area because – I grew up in X suburb, and I know how bad it is”.

Sometimes, “dodgy” is a perception.

What’s considered dodgy in Christchurch may not be dodgy to an Aucklander – and vice versa.

For instance, if you grew up in Massey (West Auckland), you may still have the same perception you had as a kid, even if you haven’t lived there for years.

But someone who grew up in Wellington wouldn’t have those same perceptions. To them, they might look at the numbers, see the property and decide to invest.

If you live in a city you are more sensitive to these stigmas compared with people who live outside your city.

Someone from outside the city can be more objective.

People from Christchurch are often happy investing in South Auckland; they don’t have 30 years of stigma to fight.

And it goes the other way too.

For example, an Aucklander might go for a site visit in Phillipstown, Christchurch. When they drive down the road they’ll see tree-lined streets. They’ll also see yields and low property prices.

They're happy to invest because they see it as it is today, not how you remember it when growing up.

Is investing in a “dodgy” suburb the right choice for me?

The bottom line is, don’t let your preconceptions get in the way of a good investment.

As long-term property investors, you should ask: “What will the area be like in 20 years when I sell the property?”

Rather than asking, “What is the area like today?”

But from our analysis, many “dodgy” areas stack up as worthy investments because they have:

· Good population growth

· Property prices are affordable

· And they have higher rental yields.

Having said that, if investing in a dodgy suburb causes you to lose sleep – it won’t be the right investment for you.

At the end of the day, invest in an area that you feel comfortable with.