(FORTUNE Small Business) – David Frayne parks his Volkswagen outside a shabby, lemon-yellow house near a bleak highway overpass beneath which drifters drink beer all day. The lot next door features a broken-down Honda Civic, several stained mattresses, and a rusty tricycle. We're in Compton, Calif., a depressed Los Angeles County community best known as the home of drug gangs and rap groups. Compton is an unlikely place to make money in real estate. Yet Frayne's Long Beach-based company, Affinity Neighborhoods, is sinking millions into Compton and other poor districts in California and Arizona.

Since Frayne launched Affinity in 2003, the company has bought 47 dilapidated houses in Compton, Long Beach, and Los Angeles, which have been independently appraised at $16 million. Thus far, the inner-city houses that Frayne has bought, fixed up, and sold have generated average returns of 50% on his investment. His secret? Technology. To help him pinpoint neighborhoods with potential, Frayne, a former database programmer, built a software application that he calls "the Scraper." It culls information from databases that track everything from crime statistics to school test scores to weather reports. Sophisticated algorithms correlate the data with houses on the market. The software then sets purchase prices and predicts appreciation based on factors such as property setbacks, square footage, and amenities. (For more on how the Scraper works, see the box at the end of this story.)

The Scraper digs through about 1,000 likely properties each night, spitting out the best candidates. In the morning employees fan out to eyeball the houses. Once Affinity zeroes in on an area, it buys properties in clusters On any given day Affinity might look at 30 houses and bid on two or three. "Our technology and market analysis are designed to ensure that we are in the right place at the right time," says Frayne. To fund his acquisition streak, this driven developer has raised $12 million from equity investments and bank loans.

Frayne, 40, started moonlighting in real estate back in the early 1990s, when he worked in the Bay Area as a database manager for a division of Johnson & Johnson. He began fixing up dilapidated houses in beleaguered neighborhoods, partly because that was all he could afford. His hope was to make enough to retire early and pursue his dream of becoming a classical composer. He bought his first fixer-upper in Hayward for $140,000, spent $50,000 for a renovation that took 12 months, and sold it for $250,000--a 32% gain. He was hooked.

Frayne nagged friends and family to invest with him, eventually buying 31 houses on downtrodden Oakland streets. It wasn't easy selling early investors on the promise of ghetto real estate. It took Frayne two years to persuade his mother to invest. But the bets paid off. Frayne rehabbed houses and flipped them for profit rates as high as 100%.

Frayne claims something else happened in the neighborhoods where he invested. Drug dealers disappeared. Bars came off windows. Residents started picking up trash. "It was like spring had arrived," he says. "Things got brighter." The dual strategy of making money and revitalizing neighborhoods became the underlying philosophy of Affinity Neighborhoods, which Frayne formed in 2003. "I am through complaining about the world's problems," he says. "I want to show people how they can make money in a clean, cooperative way."

When the Oakland market rose beyond his means, Frayne dove back into his database and headed to Southern California. Having identified Compton as a market opportunity, Frayne went door to door asking residents to clean up their yards. His pitch: Cleaning up would boost property values and reduce crime. He collected 200 written commitments.

Along with his wife and toddler son, Frayne has lived in the neighborhoods where Affinity invests. For a while he even shacked up in the rundown Long Beach house where rapper Snoop Dogg once lived. "He knows these markets to a gnat's ass," says Richard Hollingsworth, president of Gateway Cities Partnership, a nonprofit community development group in Paramount, Calif. Gateway sent 50 volunteers to paint houses and plant trees on a Compton block where Affinity rehabbed homes. In concert with Affinity, Gateway plans to invest $2.5 million worth of private funds to buy another 50 houses over the next year. "There's not enough federal money to solve the housing problems in this country," says Hollingsworth. "You have to bring the marketplace to the issue."

At least in Compton, Affinity's investments have yet to produce measurable crime reduction. And many urban renewal experts are skeptical of Affinity and other developers that don't provide alternative housing for residents who are priced out of gentrifying neighborhoods. "You fix one problem, but you create another," says Jan Breidenbach, executive director of the Southern California Association for Non-Profit Housing.

Thanks to the roaring real estate market, Compton's high crime rate hasn't blunted Affinity's high returns. Average home prices in California have risen nearly 21% in the past year, a rate that beats any housing boom in the state during the past 30 years, says John Karevoll, a real estate analyst with Dataquick Information Systems in San Diego. In Compton, house prices have soared 43% in the past year. But what happens when the real estate boom finally busts?

Sensing that home prices in Los Angeles have peaked, Affinity is currently investing in parts of Phoenix where the Scraper says properties are still undervalued. The company now has eight houses in escrow there and is looking to buy as many as 30 more in the next three months. Eventually Frayne hopes to raise $100 million to buy houses in depressed neighborhoods nationwide.

Frayne's backers know his model is risky. "This is a very complicated thing to do," says Steve Meyer, CEO of Los Angeles-based Platinum Realty America, a major investor. "To make it work, you need a huge volume." And if the real estate market does cool down, Affinity will need flawless execution to keep prospering. But Frayne is energized by the challenge-so much so that his musical ambitions are on indefinite hold.