The economics of redevelopment, or gentrification, aren’t as easy as one might be tempted to assume. After all, its’ not really as easy as “buy 5 houses for $300,000 and sell 10 for $500,000 = all profit.” Because it’s not all profit. Even tearing down 1 house to build a 3 unit rental structure can be a money loser. This may seem counter-intuitive, after all, how can replacing 1 unit with 3 units not be profitable?
The costs of acquisition and construction are significant. If you bought a house for $300,000 and demolished it entirely (added costs), then to build a 3 unit rental structure (assuming 1,500 sq ft per unit, 4,500 sq ft at $130 per sq ft construction costs) is going to cost you $585,000 in raw construction costs alone, and that is being conservative. This doesn’t even include the Planning, Zoning and Legal costs to get the approvals. On top of which, the reality is the City will charge you development fees for each unit you build.