For most of us who live in large cities, buying real estate in established neighborhoods is either not possible or requires a massive amount of leveraging. It is becoming especially difficult for first-time home buyers to purchase anything not in the suburbs. For most of us who want to live in the city proper, our choice typically is to try to find a home in a less than desirable neighborhood and hope the neighborhood becomes hot and the property values rise accordingly. A good local example would be Leslieville 5-6 years ago. Leslieville is a neighborhood between the downtown core and the Beaches- an upscale community. It use to be a blue-collar neighborhood inhabited by workers who worked in the local factories; it still maintains some of its rough and tumble roots as the Hells Angels have a club-house there. Today, Leslieville is being gentrified; the yuppies have moved to Leslieville in search for affordable housing and are turning it into an upper-middle class neighborhood- a BMW dealership now marks the south-western border of the neighborhood.

How do we find the next Leslieville? I asked my real estate agent and friend’s wife who is a real estate agent and their advice is below in quotes. My comments are where indicated:

• “Ask a real estate agent”

Although this may sound self-serving, the reasons are pretty logical. To paraphrase both agents- real estate agents have access to data such as average days houses are on market, average price increase, historical price data and other information that tells a buyer if a neighborhood is beginning to increase greater than its usually does.

• “Look for a Starbucks”

“Once a Starbucks goes in, its the universal sign the neighborhood has arrived.”  I would also look for chain stores moving into a neighborhood that would be considered consumer discretionary stores rather than consumer staples retailers as a sign that the neighborhood is on its way up.  A lululemon would be a good sign.   Leslieville has a store that sells Apple computers. The only issue with a Starbucks moving into the neighborhood is that big business has figured out money is moving into the neighborhood and you are at least halfway up the price escalation curve. For the true ground-breakers, you have to get in before Starbucks does.

• “Look for the art galleries”

In my simple mind, there are two type of artists- the starving ones and the ones who sell to rich people (I write this tongue in cheek). Art galleries typically sell to people with lots of disposable income.  Artists also tend to be good at either leading or finding trends. When an adventurous artist opens the first art gallery in the neighborhood, he/she is really saying “I believe this neighborhood is both cheap and has good upside to grow.”  When the 2nd and 3rd galleries move in, you know the 1st one was right and things are on the up and up.

• The neighborhood becomes very young

This one is my own. I remember a lot of friends moving to New York City when we were all in our mid-20’s and they kept living in Red Hook- a neighborhood in Brooklyn.  They couldn’t afford to live on Manhattan island. A lot of young professionals began to cluster there and the neighborhood began to shape up. Well sure enough, Red Hook became “hot” and the prices began to increase; 10-15 years ago, people who were young and had just arrived in New York City didn’t want to live in Brooklyn. Now? Red Hook has an Ikea which is the Starbucks of furniture retailers.

• Look towards the fringe of established neighborhoods

This one is also my own. Gentrification pushes those who cannot afford to live in neighborhoods with increasing cost of living to the fringes of those neighborhoods. As those neighborhoods become established, they begin to expand and absorb typically the poorer fringe.  As a good example, take any established neighborhood in your city and think about how developers who build on the fringe of those areas brand that development as being part of the established neighborhood. The Beaches in Toronto now pushes Gerrard to the north accordingly to developers- for those who do not live in Toronto, Gerrard is nowhere near the Beach (its easily a 20 minute walk to the boardwalk).   Think about moving into the fringe of an established neighborhood and becoming the poor cousin of the community for a while. It may be a good move.

If anyone has any other tips, please feel free to share.