Investing in declining areas
Rental Property Investor · Bedminster, NJ · Member since 2014 · 217 posts · 60 votes
Investing in declining areas
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Investor · Reading, PA · Member since 2015 · 102 posts · 119 votes
9yFollowing : ) I know a lot of investors that are doing this right now because they are unable to find deals in their markets. To me, it is more risk than I am willing to take on. My best advice would be to pad that vacancy rate.. A LOT. AND.. meet with the local chamber of commerce in these areas, and local township offices, and ask them what, if anything they are doing to revitalize and what jobs may be coming to the area. A lot of times they will have some insight on this. Its great if you can get in while things are down and about to swing back up. I'm from PA- and I know in northern PA there are a lot of just dying counties that used to be booming coal towns. Some of my investor friends have jumped in full force into these markets because they claim they can't find deals in our market. Some are just tip toe-ing into these markets and saying: "honestly, I don't know if I will even be able to find tenants so I am just buying one single family at a time and not buying a second until I see what kind of response I get on a for rent ad." On the flip side- a lot of the really hot markets are becoming too expensive for people to live and rent in, so they are living on the outskirts and commuting. I think you have to be careful about how far into the outskirts you are willing to buy. I believe the average commute time in the US is 30-45 min so I would take that into consideration. Also are there any hospitals, community colleges where you are buying or distribution centers-- stuff that usually brings steady jobs.
26 Replies
- Investor · Reading, PA · Member since 2015 · 102 posts · 119 votes9y
Following : ) I know a lot of investors that are doing this right now because they are unable to find deals in their markets. To me, it is more risk than I am willing to take on. My best advice would be to pad that vacancy rate.. A LOT. AND.. meet with the local chamber of commerce in these areas, and local township offices, and ask them what, if anything they are doing to revitalize and what jobs may be coming to the area. A lot of times they will have some insight on this. Its great if you can get in while things are down and about to swing back up. I'm from PA- and I know in northern PA there are a lot of just dying counties that used to be booming coal towns. Some of my investor friends have jumped in full force into these markets because they claim they can't find deals in our market. Some are just tip toe-ing into these markets and saying: "honestly, I don't know if I will even be able to find tenants so I am just buying one single family at a time and not buying a second until I see what kind of response I get on a for rent ad." On the flip side- a lot of the really hot markets are becoming too expensive for people to live and rent in, so they are living on the outskirts and commuting. I think you have to be careful about how far into the outskirts you are willing to buy. I believe the average commute time in the US is 30-45 min so I would take that into consideration. Also are there any hospitals, community colleges where you are buying or distribution centers-- stuff that usually brings steady jobs.
- Dunbar, WV · Member since 2017 · 16 posts · 8 votes9y
Also following! Your question seems to explain the West Virginia market almost exactly in some areas.
- Syndicator of Large Apartment Buildings · Glen Mills, PA · Member since 2009 · 1k+ posts · 1k+ votes9y
@Stephen Kunen be very cautious.
As area declines, jobs and economic growth are or will be tracking the same.
Simple view - if your tenant doesn't have a job they can't pay your rent.
- Investor · The Creek, WV · Member since 2014 · 890 posts · 1k+ votes9y
Originally posted by @Malachi Lindsey:
Also following! Your question seems to explain the West Virginia market almost exactly in some areas.
I'm investing in the Huntington area with every penny I have right now....but only on the right deals. More on the next post. Feel free to reach out if you want. I just took possession of my 4th house yesterday.
- Rental Property Investor · Bedminster, NJ · Member since 2014 · 217 posts · 60 votes9y
@April Crossley Thank you. That's exactly the area we are looking at (Northern PA). My gut feeling just told me not to touch those "too-good-to-be-true" returns.
@Brian Adams Agreed. Took a look at your website. Seems very interesting. Maybe we can work together in the future. :)
@Malachi Lindsey Thanks for following!
- Investor · Nelson, New Zealand · Member since 2016 · 11 posts · 3 votes9y
@Stephen Kunen whether or not it's a good idea is something you'll probably only know in retrospect. You know that you'd be taking a gamble with this purchase though. You're aware that the population is declining on an ongoing basis, this will impact demand for accommodation both now and going forward. Doesn't necessarily mean you shouldn't do it. You'd need to do your due diligence thoroughly. Try to find the local vacancy rate for rentals, and ask local realtors what product is in demand in that area.
What's the net yield that you're looking at? You may be able to find the same or similar in another market with better growth fundamentals. The US is vast, is this the only market you can find the cash flow you're after?
- Investor · The Creek, WV · Member since 2014 · 890 posts · 1k+ votes9y
This fits my market, and for a local investor I think it is a BLESSING. I honestly thank God every day that I am alive and ready to invest at this exact moment (in my declined market that is.)
Lots of things to consider and take in up front.
1. I invest strictly for cash flow. Re-sale value or the ability to sell the property down the road is not taken into consideration THAT much.
2. I look for homes/lots close to a business, school, daycare center, or corner lot.
3. I low ball everyone and only buy from desperate sellers paying all cash. With a down market, you will see houses sitting on the market for months. Those sellers get a little desperate. Also in my area, a lot of homes were just acquired from a family member dying, but guess what, the child or grandchild lives in Florida and doesn't plan to ever move back to the area. They don't want to pay taxes, someone to mow the grass, or worry about people breaking in. I offer VERY cheap prices on these types of homes.
4. You are going to have to do some renovations to the property when you buy them, but its very important that you do. Having clean, safe, and somewhat updated units will allow you to choose the very best of the low income housing. To me it has been great so far. I also get such great deals that I am able to rent for below market rent, drums up a ton of interest, and I am still getting great returns.
I'd love to comment more but I hear my little girl waking up. I'll check back in on this thread later, but to give you an example.
I bought this house yesterday for $7,000. I will put less than $3,000 into this house while doing most of the repairs/updates myself. Market rent according to rentometer is $772/month for a 1.3 mile radius. I think true market rent is $725-750. I will rent this house out for $700 and even after expenses I will be getting a 42% return on my investment.
The house needs cleaned out. I'll hire two random people pay them $50/piece to clean it out in a day. Then I will paint, change light fixtures, replace a window, one of the rooms has carpet that needs ripped up and replaced with laminate flooring (only way to go with cheaper rentals.) I have to replace the copper pipe thats a foot or so long going to the hot water tank, and replace the small copper pipe on the HVAC unit that goes from condenser. Then I will cut down those stupid trees and shrubs they have in the yard and rent the sucker out. Might also have to replace some appliances which I will buy from CL or somewhere for less than $100/piece if I have to buy them.
- Investor · The Creek, WV · Member since 2014 · 890 posts · 1k+ votes9y
Originally posted by @Brian Adams:
@Stephen Kunen be very cautious.
As area declines, jobs and economic growth are or will be tracking the same.
Simple view - if your tenant doesn't have a job they can't pay your rent.
Not true if you want to do Section8 Housing....which I havent done yet.
You will find a lot of good, blue collar, hard working people. They will either have a low paying but meaningful career such as Police, Fireman, Teachers and Teachers Aides, Bus Drivers etc. Or a young couple who just graduated and want something nicer than college dorms, but nothing fancy or expensive. You will also find divorced parents, maybe the single mom who doesnt want to deal with repairs, or the dad who doesnt want to buy a house in case they work things out or doesnt know how much child support will go up over the years.
I make my ads super strict and this weeds out a lot of junkies. I also clean my places up and rent below market rent so I have more applicants to choose from. Find desperate sellers so you can get super cheap prices. Longest my other 3 houses were on the market was 3 days, and I never had to list one of them at all.
I have found (in my area at least) that the housing market for buying is about as low as it can go, but there is still a strong demand for rentals, partly for the reasons I previously mentioned. Plus people get laid off so they are afraid to lock into a mortgage, they might be making good money right now but don't know where they will be in 3 years from now. With homes sitting on the market for months they would rather just rent than buy. We also have a major University in the town and it is the central hub for the surrounding areas. I also believe the city is growing more today than it ever has in my lifetime so thats another good thing for me anyways.
- Investor · The Creek, WV · Member since 2014 · 890 posts · 1k+ votes9y
I will also say that there are other areas in this region that I wouldn't invest in because the area IS declining, but the city I invest in is the central hub of the local area and is on the upswing for sure.
I actually live about 25-30 minutes south of the main city I invest in.
- Investor · Nelson, New Zealand · Member since 2016 · 11 posts · 3 votes9y
@Derek E No one can argue with the combination of your strategy, those numbers and your local knowledge. Awesome work! I think you really need a deep understanding of these markets to take out the risk of making a very bad purchase that could set you back for some time.
- Dunbar, WV · Member since 2017 · 16 posts · 8 votes9y
@Derrick E. great information! I would love to connect sometime to get a little more information on how all of this is working out for you.
- Investor · The Creek, WV · Member since 2014 · 890 posts · 1k+ votes9y
Originally posted by @Lynne Jackson:
@Derek E No one can argue with the combination of your strategy, those numbers and your local knowledge. Awesome work! I think you really need a deep understanding of these markets to take out the risk of making a very bad purchase that could set you back for some time.
Absolutely. You have to know the local market, the type of people that live there, and the trends of the local area.
- Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes9y
I would really dig into what is making it decline and is there a decent chance for it to pick back up. If you do invest, then be sure the cash flow can keep up with the decline. If you have an annual .5% decline then you need to project that in your numbers. If the investment still makes sense then look into it more. Some other things to consider. If you can cash flow, you need to think of the vacancies and the fact that they could be prolonged. What is the housing stock like in the city? If it is junk and yours is good, you could stay full, especially if your rent is at or below market. Also, you need to be prepared to sell for less than what you bought for or not be able to sell at all.
Good luck in whatever you decide!
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
What is your exit strategy in such a market? You probably don't even have one (at least not a profitable one) IMO ... I guess if you bought WAY below market value and planned to still sell for less than you bought it for in 5-7 years before CapEx (which always seems to keep up with inflation, even if the property values and rents do not) eats your lunch then you'd get close, but still seems like an awful lot of work for cash flow coupled with negative appreciation. It always strikes me as odd that everyone harps on and on about speculating with negative cashflow, but don't blink an eye about speculating in markets with sustained negative appreciation. I don't invest unless I have both, and don't invest unless I have MULTIPLE profitable exit strategies for me to choose from, already in place on day 1 ... if you can make that happen in a market like the one you describe, then more power to you ... turnkey operators do quite well, so maybe flip properties for profit to unsuspecting out of state newbie investors, if you can live with a business model like that.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes9y
Too many upswing markets to buy in.
You just have to make sure you get a deal. Generally that is found by going off market and not going to a seller that wants to extract every basis point out of a property with a sale price.
- Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes9y
There could be pockets of stability or growth in declining areas. I personally would not go out of my way to invest in the center point of a declining population area. It might add too much risk and consider the inflation adjusted loss to capital is very likely historically speaking. Declining population areas usually mean declining rents, values, schools, jobs etc...then add rising crime , vacancies, and higher property taxes to make up for tax base loss. It is usually the exact opposite of what most RE investors seek. Still a Californian or newbie on BP will be convinced it has great cash flow and be the next bag holder unfortunately. Perhaps that is where some of the faster money can be made in some declining areas.
Good luck!
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes9y
A declining market is risky for several reasons:
- The rents may continue to decrease
- The value of your property continues to decrease
- Your exit strategy options may decrease dramatically
- The tenant pool in that area can get sketchier by the minute
- Vacancies may increase
...... All very expensive problems.
- Rental Property Investor · Torrance, CA · Member since 2016 · 724 posts · 1k+ votes9yWhat if the number of new renters coming into the market outpaces overall population decline? Cities like Cleveland and Detroit have a lot of vacant houses overall, but a relatively low vacancy rate among active rentals. Something like 75% of Americans will be renters by 2050. I'm sure that number will be higher in poorer cities. Poor people that live in these neighborhoods don't have 30K cash to buy the house, and getting a mortgage on a 30K house isn't realistic. They are renters for life. I don't know enough to say these markets are good or bad. I'm just thinking out loud.
- Equity Raiser and Turnkey Provider · Cleveland, OH · Member since 2016 · 4k+ posts · 1k+ votes9y
Originally posted by @Account Closed:
What if the number of new renters coming into the market outpaces overall population decline? Cities like Cleveland and Detroit have a lot of vacant houses overall, but a relatively low vacancy rate among active rentals. Something like 75% of Americans will be renters by 2050. I'm sure that number will be higher in poorer cities. Poor people that live in these neighborhoods don't have 30K cash to buy the house, and getting a mortgage on a 30K house isn't realistic. They are renters for life.
I don't know enough to say these markets are good or bad. I'm just thinking out loud.
This is a good point. Many cities can be narrowed down to the specific area of the investment. Low vacant can be found anywhere if the home/price is right!
- Rental Property Investor · Orlando, FL · Member since 2016 · 463 posts · 220 votes9y
Originally posted by @Account Closed:
What if the number of new renters coming into the market outpaces overall population decline? Cities like Cleveland and Detroit have a lot of vacant houses overall, but a relatively low vacancy rate among active rentals.
Exactly. And what people may not realize is that, although the population of the city of Cleveland itself may decline, the suburbs (the working class ones all the way to the super posh ones) are doing VERY well, thank you very much. Houses in the suburbs that are in good shape and advertised for reasonable rents get A LOT of interest very quickly.
- Rental Property Investor · Providence, RI · Member since 2015 · 1k+ posts · 594 votes9y
What I would recommend is this. Find your target markets. Know those markets absolutely inside and out, what values are, what rents go for, and the demand for the units. If you can't fill something in 30 days having a tip top product, its time to find another market, city, town, etc.
Another strategy. If you buy the property right... I mean absolutely steal it, you can try to pump out the best product at the least expensive price. Create demand where there is none. If you have the nicest, most economical property even in a less dense market, you'll have 25 people fighting for your available unit.
- Contractor and Wholesaler · Detroit, MI · Member since 2015 · 9 posts · 1 vote9y
I think it depends on the investor/area. Here in Detroit I have clients that only want to buy in the declining areas as they still are renting between $500-650 per month. It all depends on the the investor and mayne their end goal.
- Realtor · Cleveland, OH · Member since 2015 · 2k+ posts · 857 votes9y
@Account Closed is on the money.
Plus in the City of Cleveland, prices have increased in the last year, along with rents in specific cities. So it doesn't fit all the categories of a declining market
- Investor · The Creek, WV · Member since 2014 · 890 posts · 1k+ votes9y
Originally posted by @Account Closed:
What if the number of new renters coming into the market outpaces overall population decline? Cities like Cleveland and Detroit have a lot of vacant houses overall, but a relatively low vacancy rate among active rentals. Something like 75% of Americans will be renters by 2050. I'm sure that number will be higher in poorer cities. Poor people that live in these neighborhoods don't have 30K cash to buy the house, and getting a mortgage on a 30K house isn't realistic. They are renters for life.
I don't know enough to say these markets are good or bad. I'm just thinking out loud.
You hit the nail on the head. My area is where a lot of people are moving into from the rural areas for various reasons. There is also a University in the city that helps keep renters in the area.
- Specialist · White Rock, British Columbia · Member since 2017 · 99 posts · 34 votes9y
Interesting topic, we only invest in emerging markets. But I like the comments about choosing areas that have declined and can't decline any more. Sound business plan if I have ever heard one. Goes well with the way we invest in the lowest priced rentals because they will always be full no matter what happens to the marketplace.
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