Investing in a declining market?

Question

Hello everyone,

I've yet to make my first deal and have been scoping out a couple of fourplexes in a neighboring city. The upside is the cash flow- about a thousand a month- on the properties but the downside is the area property values have been declining about 7% a year since 2006 and the market has showed no signs of turning. Should I buy in for the excellent cash flow and hope the market turns or pass on the area?

Thanks

Chris

Ned Carey · Answer

I see it is your first post so welcome to BP Chris C.

What will cause value to go back up is people moving into the area. People moving out of the area will cause values to continue to drop. Have Jobs left the area? Are there plans for jobs to come back? Are investors renovating in the area. Are new amenities coming to the area to make it more desirable?

I know you wanted and answer not a lot of question so here is what I do.

Baltimore City has been declining in population for 50+ years. While many positive things are happening there are many negatives that are a drag on growth.  I am happy to invest here because I am buying at well below market or at least well below the intrinsic value.

My feeling is if I am buying well below market, If teh market falls I am still in a decent position.

I know I didn't give you the easy answer but I hope this helps  - Good Luck - Ned

Will Barnard · Answer

Pay little to no attention to Zestimates on Zillow. The only metric to evaluate a property value is actual sold comps with necessary adjustments for discrepancies between the subject property and the comp.

Will Barnard · Answer

Welcome to BP Chris. Difficult to answer your question as each investor has different needs and goals. If cash flow is the main goal, then so long as you get the cash flow, go for it. Another approach in a declining market is to keep buying better and better deals on the market downturn.
Typically, the better the cash flow, the lower the appreciation and vice versa.

Karen Margrave · Answer

Chris C. You've received good advice. Do some research on the economic forecast for your area. What is the unemployment rate? After military related industries, what other industries drive the economy? Are there any colleges or universities nearby? What is the crime rate?  Just start googling stuff and doing some research.

Will was right too, you cannot rely on estimates of property values, you have to find a good source of actual values based on real sales.

Welcome to BP. Also, fill out the keyword alert and maybe that will help you too.

Tevis Verrett · Answer

Chris, listen closely to my brothers Ned Carey and Will Barnard.  Glenn is spot on also.

At a pivotable time, Enron and Lehman Brothers were a really good and undervalued deal to be had also.

My strong suggestion is to hire a very expensive demographer and ask her about the tenant mix and what is the future of your subject property.

This small investment might just save you an expensive education.

Be well,

Tevis

Chris C. · Answer

Thanks for the feedback.
The area has been experiencing a population decline since the 60's. The last two years have been stable. I haven't found out why but with the city being a huge Navy town...government contracts being cut. The city does have enterprise zones but the neighborhood I am considering is not one of them. That being said, the property is priced about 15% below the Zillow market value- a hedge against further decline, for a couple of years anyway.
At this point, cash flow is more important than appreciation.

Thanks for all the great feedback.

Glenn Espinosa · Answer

To expand on what Will was talking about regarding needs and goals - One factor to consider when weighing between cash flow and appreciation (while you can have both, typically it's one or the other) is if you need cash flow now to live.

Typically if you are younger and making good money with your day job you can argue that asset acquisition is more important than cash flow (buying marginal deals but at higher frequency). In the long run owning more will result in a higher networth.

If, however, you are closer to retirement and will need cash flow soon to live on, you may best be served by foregoing appreciation and hunting out cash flow cows.

A balance of both is what I would recommend but the optimal strategy could be one or the other depending on your situation, goals, needs.

Food for thought.

Investing in a declining market?

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