Know This Before Investing in a City with a Declining Population

Most of the markets I reference in my posts are those that doing great, like Kansas City, Nashville, or Dayton. But the reality is that for every high-performance market out there, there is another that’s not doing so hot (looking at you, Detroit). These markets, for one reason or another, are facing declining populations, limited job opportunities, and stunted economic growth.

While I usually urge investors to avoid these markets and focus their efforts on the high performers, I know there is another segment of the investing population who thrives in declining markets. These are the guys and gals who are able to swoop into a city like Detroit, buy property for pennies on the dollar, and rake in the profits.

So obviously, there are definitely people out there who are successful at investing in declining markets. And this is the reason I often hear cited when I talk to investors who are considering doing the same. “Well, my buddy Dave just bought a property in Detroit for $1,000 and it’s already cashflowing - he’s making a ton of money!”

Well, good for Dave. But I always say this in response: there are some factors you MUST understand about declining markets before you try to be like Dave.

1. Not all investors are created equal. What I mean by this is that what works for someone else won’t necessarily work for you. Your situation is different from theirs, and so are your strengths and weaknesses. You cannot go into a declining market and invest in property and expect to have the same outcome as your investor buddy who’s making a fortune in the same market. Your strategy will be different from theirs, and there is no way for you to mimic exactly whatever it is they’re doing.
2. There’s a reason the population is declining - find out why. Before buying up property in this type of market, you must find out why people are leaving. Any time there’s a mass exodus occurring, there is always something driving it, whether it’s a recently closed factory or a dying industry. Find out what that thing is, and then figure out what impact this will have on your investment and what the chances are for the situation to turn around. It can be helpful to talk to a local realtor or another investor in the area, or even the local economic development department or chamber of commerce. These last two will know best what the area’s plans are for the future, and you can use this information to gauge long-term profit potential.
3. Your risk level will be higher. Declining markets do present a bit more risk, mainly because it can be more difficult to occupy the unit with high-quality renters. When people are leaving a city in droves, the ones who stay are often the ones who can’t afford to leave, and this is who will make up your tenant pool. Another layer of risk is added when the time comes to sell the property, which leads me to my next point...
4. Your exit strategy may not work. It can be extremely difficult to sell a property in a declining market. These markets are most definitely buyer’s markets - not seller’s. In order to make your property more appealing to buyers, you may have to lower the price or put money into expensive upgrades to make it more attractive. And even then, it may sit on the market for quite awhile before a buyer comes along. How you’re going to sell the property is absolutely something you must consider before buying it, especially in this type of market, and you must accept the fact that selling will not be easy.

All of these factors combined paint a rather dark picture, but that doesn't mean investing in a declining market is a terrible idea. In fact, the future may still be bright. Maybe the market you’re considering is poised for re-growth, or maybe it’s located near another market that’s trending upward and will absorb some of that positive growth.

The key to success with this type of investing lies in this: knowing exactly what you’re getting into, having realistic expectations about it, and always, always, ALWAYS, trusting the numbers. If it doesn’t add up on paper, it’s not going to add up in real life.