Growing up witnessing gentrification

Of course, original landlords love when their neighborhood gentrifies – they can either sell and cash out, or enjoy soaring equity and rental income – while others kick themselves for not having been bold enough to invest earlier in the area. Foreseeing and profiting from such a phenomenon can be tricky.

When this trend started in Paris, I was in high school living in the south of France and had other concerns; I was too young and self-absorbed to even care to notice. When I moved to the tough northern suburbs of Paris to attend engineering school in 1998, I became more sensitive to real-estate headlines in the media. As I witnessed my new, run-down neighborhood gentrify and prices rise up, I started wondering if I would be priced-out forever when the time would come for me to buy a place in the capital or somewhere around it.

In 2000, I was too broke a college student to even consider jumping in the bandwagon, and a 1940’s built, commonplace hundred-thousand-euro two-bedroom flat sounded like all the money in the world to me. It’s ironic to see now how 2000 prices sound cheap by today’s (or even 2004’s) standards, even with inflation kicking in.

Are cap rates dropping in the gutter?

By fall of 2004 when I had saved enough money to consider pulling the investment trigger, real estate prices had never been so high in Paris and its suburbs in more than 20 years. While rents had been increasing too, it was nowhere near as wild as the square meter price surge.

Therefore from an investor’s standpoint in 2004, a year’s worth of rent money collected from an average Parisian income property purchased then and there could hardly make up for the yearly mortgage payments. As the following diagram shows, cap rates were dropping sharply and it was as if income property as an investment just had lost its edge. So what was a beginner like me to do?

Globally yes, but not locally