4 Things to Understand BEFORE Investing in Markets with Declining Populations
Small towns with declining populations exist in every state. As an active real estate investor, it is almost inevitable that you will come across, find, or be presented with opportunities to purchase properties from motivated sellers in areas with a dwindling population. While some of these opportunities may seem profitable on the surface, there are other factors that may need to be considered before investing time and capital.
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When investing in cities with declining populations, you must perform due diligence to understand the entire marketplace plus your exit strategy. Below are a few areas to watch out for when real estate investing in cities with declining populations.
4 Things to Understand BEFORE Investing in Cities with Declining Populations
1. Understand the zoomed-out marketplace.
It is important to get an understanding of the entire local marketplace and know where most locals live in relation to the real estate property you are looking to purchase. Investing in areas with a larger population typically will increase the chance you will be able to quickly sell and profit from your investment property. Conversely, selling in an area with a declining population may limit the amount of serious buyers you are able to find for this property. If people are truly leaving the city in droves, it is important to understand why.
Related: Is Airbnb Really Ruining Rental Markets?
Pro Tip: Speak with local real estate in this declining area to get an understanding for the number of days on the market similar properties are experiencing.
2. Understand any mass exodus that may be occurring.
There is typically a very logical reason for any serious reduction of people in a town. Perhaps there was a major factory that went out of business or moved states, or maybe this major company just laid off a majority of its workers in town. Even worse, perhaps an entire industry left the area (think Detroit) or a major contamination made it unsafe for the residents to live there (think Flint).
Pro Tip: When investing in any new towns you are not familiar with, stop into the local Chamber of Commerce, police station, or nearby convenience store to ask about local crime rates and why the city seems to be becoming a ghost town.
3. Understand seller and buyer demand.
This is really where the rubber meets the road. If this shrinking town’s population is dwindling, then statistically this town is experiencing a “buyer’s market.” The reason for this is there is likely a higher supply of sellers and a lower demand from just a handful of buyers. While you can likely purchase a property for a substantial discount from a motivated seller, you may have a difficult time selling or renting this property for the same reasons the current seller is experiencing.
Pro Tip: Over time, cities and populations certainly grow and expand. If the particular property you are looking at is in an area next to a growing metropolitan city, it may make logical sense that in the next few decades the metropolitan city will grow and expand into this currently declining market. It may make financial sense to buy and hold properties within what is commonly known as the "path of progress."
4. Understand your unique advantage (if any).
What are you doing that is so special or magical? If the real estate seller you just purchased from was having a very difficult time selling his property, why do you think you will be able to resell the same property any more easily—and for a substantially higher profit? The answer to this question is that you need to bring something different the seller was lacking. Perhaps you can:
- Market/advertise the home better so it is seen by more potential buyers.
- Fix and clean the home so it is more attractive to more potential buyers.
- Sell with owner financing, thereby eliminating the need for a buyer to find a bank.
- Renting, thereby appealing to any local renters.
- Physically move the home to a new (higher demand) area.
- Performing some other alternate strategy to increase demand in the home/property.
In conclusion, before purchasing any property in an area you are unfamiliar with, gain as much clarity as possible. Never feel bullied or rushed into purchasing or closing on any real estate opportunity. Remember that as the investor you are in control and that most sellers want your cash more than they want their property. Aim to take action daily and help local sellers. Whenever a question arises, never hesitate to reach out to seasoned investors on this website, either below or in the forums.
Have you ever invested in a declining market? Any tips you’d add to this list?
Leave your comments below!