Buying a Rental in a Slowly Declining Area - Seeking Advice

5 Replies

I am looking purchase my first four family and have largely been looking in a town about 20 minutes from where I currently live.  I grew up in this town and know the area well.   I have found 2 four families which exceed the 1% rule fairly nicely (1.5-1.6%).  However, for better or worse, the town isn't growing and property values have dropped some in the last ten years, and I don't have any reason to think they will go up.   The town is decent with lower crime rates but generally blue collar, with some smaller pockets of white collar. Even though I am solely interested in cash flow and not appreciation, I can't help but to feel concerned about the long term property price stability in the area.  

I am curious if anyone has an opinions on investing in this type of area.  Is it better to look for growing areas and for less cash flow? Or do I ignore the potential price declines and stay focused on cash flow?

Thanks in advance for any insight or experience you're willing to share. 

Thanks,
Eric

For reference here's a link to the real estate trends for this area: http://www.trulia.com/real_estate/Belleville-Illin...

If you are saying the crime is low and it is a fairly populated area... I would wonder what makes you think the area is declining over any other area?

Have you done the comps? Or compared the last 6 month solds across to the other areas you think are going up?  What about compared to this time last year?

If the rent rate is good and you can get the property at a bargain... for a long term, those would be my primary factors in making a decision

Thanks for your thoughts James.  I think the biggest factor in the slow decline is white flight, sadly.  The town is near East St. Louis and over the years as East St. Louis has declined many of these residents are flocking to this nearby town.  As this has occurred many long time residents are packing up and leaving.  I am not saying this is right, but it is the reality of what's occurring. 

It sounds like you are saying that in your book, this slow decline wouldn't be a big factor for you as long as the cash flow is strong and I can get a good price.  I appreciate that insight.


Thanks,
Eric

Hi @Eric Castelli ,

If I were considering a market with those conditions I would check out adds for other rentals near by. I would expect that with a declining population there would be high vacancy rates. The vacancies might eat into your otherwise seemingly favorable numbers. Check for adds offering "first month free" etc...I'd also reach out to other PMs in the area and see what (if any) issues they're experiencing. Appreciation aside, the decline might also hinder your cash-flows in this way. I'd also be curious about the condition of the units ($$$).

Admire your thought in this Eric... Dr Schumacher (of buy and hold fame and authorship) really convinced me you can't overlook larger demographic and economic factors. 

We know from history once teeming, high demand Detroit suburbs are blighted, unmarketable or even some bulldozed. 

But it can go both ways--once blighted areas are now experiencing gentrification (hello Starbucks) and it is controversial but prices often end up going up.

And this is not just about renting--which you can likely do--but could you ever exit? I also like James' idea... If the fourplexes have been on the market 36 months with ten prices drops, I would run. Also, look at how you feel about this area long term (jobs, development, social services, even safety, etc). Also, think of practical things--like going there every night in winter to shovel snow, etc...

Thanks Michael and Warren for your feedback.  I am definitely still on the fence here as to how to proceed.  Unfortunately, there just doesn't seem to be a lot of inventory in my neck of the woods so I am torn on whether it is better to wait for something to pop up in better town or just get started.  

Thanks again,
Eric