Rio rush

November 21, 2013, 12:16 PM UTC

Early last year a Brazilian music producer named James Cesari hopped onto the back of a motorbike taxi and roared up to the top of one of Rio de Janeiro’s favelas. There on a hillcrest in Vidigal, an area that had suffered years of gang violence, he found his dream home. Set amid a tangle of electrical wires, potholed roads, and small eateries, Cesari’s one-bedroom cost 15,000 reais (about $7,500), plus about 50,000 reais (about $25,000) to renovate. Now the living room has a view of Ipanema’s beaches and the tropical islands beyond. Cesari, who is 36, gazes out at the view from his couch and says, “This place is priceless.”

Few outsiders dared venture up the vertiginous slopes of the favelas, turned off by the reputation for lethal gang battles in several of them. Then Brazil’s government launched a heavy police crackdown, pivotal to hosting the 2014 World Cup and 2016 Summer Olympics. Murders have dropped, and Carlos Veiga, chief of Vidigal’s Pacifying Police Unit says things were far worse in the past. “Police died. Criminals died. Residents died,” he says. Today the armed traffickers are gone, replaced by officers patrolling in bulletproof vests, rifles at the ready.

Vidigal’s locals worry that real estate speculators could price them out and ravage their rich community life. In some favelas, residents have begun pushing back against outsiders. “People sell, move far away, and then regret it,” says Vidigal’s resident association president Marcelo da Silva. But to outsiders “Vidigal became irresistible,” says Rio architect Helio Pellegrino, who bought two houses in 2008 for about $50,000. On Dec. 7, Pellegrino will open Vidigal’s first tourist hotel, with a bar and restaurant. He estimates the property is now worth about $1.5 million. And recently a clothing store manager offered Cesari about $500,000 for his hilltop house. “I told him there is no way I would sell,” Cesari says.

This story is from the December 09, 2013 issue of Fortune.