Investing in a city with poor fundamentals

9 Replies

As I begin to look for a second buy and hold rental property in Providence, RI , I have begun to look more closely into the fundamentals of the city for growth and future rental increases.  The city is known for having high taxes and the state has struggled with creating/keeping jobs in RI.  Recently a few companies have announced they will setup "tech centers" in Providence which will create jobs but that is after being given a major tax incentive.  There aren't many clear benefits which would keep these companies in Providence after the tax incentives dry up.  

My question would be, should I continue to buy in an area which doesn't have a strong outlook for the future but currently has good returns?  I have a great knowledge of the city and neighborhoods which is valuable for determining deals as well as I can use the owner occupied loans to take advantage of lower down payments.  My fear would be a decline in housing demand and therefore lower rental prices.  

I'm not coming from much experience, so take my opinion as it is but in my RI experience.  Rent is rent and Rhode Islanders are unique.  The state doesn't grow much but it doesn't shrink much either, people just can't leave this beautiful s--hole haha,  I feel like the rental market in Cranston - Providence - Warwick will always be there with small fluctuation.  

Christian, it's hard to overestimate the value of local knowledge, i.e., really knowing a market.

But on the other hand you're certainly right, the state is not business friendly at all, the tax burden is quite high, and given the future pension obligations I don't see that getting better in the future at all. 

Also, this part of the country in general (the northeast) isn't really where the growth has been or seems like it will be soon.

I think the near term price trends are good so if you know the area and already own something here I'd say you would probably do well if you continue buying, but I'd also recommend keeping a close eye on the market, especially starting about 3 years from now (at years 3, 4 and 5).

In particular pay attention to when prices seem high (sellers are still commanding higher prices) but days on market are increasing (they are taking longer to get those high prices) - it's like when the roller coaster starts to slow down at the top of the hill.

We are shortening our time horizon for new acquisitions from planning 10 years out to thinking more like 5 at this point, just based on where things seem to be in the market cycle, and I suspect in ~3 years we'll be looking to sell under-performing assets.

@Anthony Thompson @Christian Allen really interesting topic guys. I'm a new real estate investor based in Boston (have done two deals in Providence in the last six months). From a cash-on-cash or cap rate perspective, Providence seems like a winner. I've done analysis on close to 100 deals at this point between Boston, Providence and Charlotte NC (wife's hometown) and Sydney Australia (my hometown) and Providence is a clear, clear winner on cash flow. 

Now Charlotte, Boston and Sydney have been crushing it the last five to 10 years from an appreciation standpoint and are at a point where it's very hard to cash flow. My default philosophy is buy-and-hold with cash flow properties but it's hard to stomach the asset values in these other markets are most likely going to run past Providence in the next 10 years.

hi everybody!! im a new up and coming invester trying to get back into it again. back in 2005 i did a flip when my partner and i didnt know much about investing or how to rehab a home. but we made some mony. then we built a house in bristol ri. thats when we lost control and eventually lost the house asthe market was crashing in 2006. dont know why i didnt stick with real estate but went and learned how to be a carpenter. even though we lost the 640,000 house. i still left with more knowledge then what i came in with. i am here to learn from you guys. maybe help a few and build and network with this great community. Thanks!!

I couldn't agree more, @Stephen Torti . As someone who grew up in RI, 99% of my friends and family still live there and will never leave. :-) I do love Providence - it has great food and culture and "down city" continues to improve and provide more for its residents and visitors. From pretty much anywhere in RI, the beaches are just a short car ride away. I agree the rental markets are still pretty strong in Warwick/Providence/Cranston, although the job growth has been pretty slow in recent years.  It's been great to hear that GE and other companies will be adding much-needed jobs to the local market.

@Steph C. Yes, downcity is very nice now and I've been sensing a trend toward smaller cities among the early college grads and if you're looking at small cities, Providence is a good choice.  Low rent, amazing food, amenities like uber are easy to access.  Good stuff so we'll see where that goes from here

Absolutely, @Stephen Torti. I know many people who have had kids or relatives go to school in the Providence area and they stick around afterward, due to many of the reasons you mentioned above.  

Regarding food, I tell people all the time that they need to try all the awesome food in the Providence area. I love Boston, too, but sometimes I really don't want to pay $30 to park when I'm just a few minutes from Providence, can get fantastic food there, and usually can find free parking to boot!  When we have out of town relatives visit, they usually ask us to take them back to Federal Hill for dinner!  

Providence is quite simply a sanctuary city. As a result, regardless of job growth, taxes, etc, there will always be a solid rental market so long as the longstanding trends continue.

May there be some variation in the rents? Yes, but if you purchase well, you can ride waves of all shapes and sizes.

I have lived in the city for most of my life, and it doesn't have an enormous swing.

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