4 Things to Understand BEFORE Investing in Markets with Declining Populations

by | BiggerPockets.com

Small towns with declining populations exist in every state. As an active real estate investor, it is almost inevitable that you will come across, find, or be presented with opportunities to purchase properties from motivated sellers in areas with a dwindling population. While some of these opportunities may seem profitable on the surface, there are other factors that may need to be considered before investing time and capital.

When investing in cities with declining populations, you must perform due diligence to understand the entire marketplace plus your exit strategy. Below are a few areas to watch out for when real estate investing in cities with declining populations.

4 Things to Understand BEFORE Investing in Cities with Declining Populations

1. Understand the zoomed-out marketplace.

It is important to get an understanding of the entire local marketplace and know where most locals live in relation to the real estate property you are looking to purchase. Investing in areas with a larger population typically will increase the chance you will be able to quickly sell and profit from your investment property. Conversely, selling in an area with a declining population may limit the amount of serious buyers you are able to find for this property. If people are truly leaving the city in droves, it is important to understand why.

Related: Is Airbnb Really Ruining Rental Markets?

Pro Tip: Speak with local real estate in this declining area to get an understanding for the number of days on the market similar properties are experiencing.

buy-and-hold

2. Understand any mass exodus that may be occurring.

There is typically a very logical reason for any serious reduction of people in a town. Perhaps there was a major factory that went out of business or moved states, or maybe this major company just laid off a majority of its workers in town. Even worse, perhaps an entire industry left the area (think Detroit) or a major contamination made it unsafe for the residents to live there (think Flint).

Pro Tip: When investing in any new towns you are not familiar with, stop into the local Chamber of Commerce, police station, or nearby convenience store to ask about local crime rates and why the city seems to be becoming a ghost town.

3. Understand seller and buyer demand.

This is really where the rubber meets the road. If this shrinking town’s population is dwindling, then statistically this town is experiencing a “buyer’s market.” The reason for this is there is likely a higher supply of sellers and a lower demand from just a handful of buyers. While you can likely purchase a property for a substantial discount from a motivated seller, you may have a difficult time selling or renting this property for the same reasons the current seller is experiencing.

Pro Tip: Over time, cities and populations certainly grow and expand. If the particular property you are looking at is in an area next to a growing metropolitan city, it may make logical sense that in the next few decades the metropolitan city will grow and expand into this currently declining market. It may make financial sense to buy and hold properties within what is commonly known as the “path of progress.”

landlord-lessons

Related: Newbies Beware: Failing to Adjust to Market Tides Could Leave You High & Dry (or Underwater)

4. Understand your unique advantage (if any).

What are you doing that is so special or magical? If the real estate seller you just purchased from was having a very difficult time selling his property, why do you think you will be able to resell the same property any more easily—and for a substantially higher profit? The answer to this question is that you need to bring something different the seller was lacking. Perhaps you can:

  • Market/advertise the home better so it is seen by more potential buyers.
  • Fix and clean the home so it is more attractive to more potential buyers.
  • Sell with owner financing, thereby eliminating the need for a buyer to find a bank.
  • Renting, thereby appealing to any local renters.
  • Physically move the home to a new (higher demand) area.
  • Performing some other alternate strategy to increase demand in the home/property.

In conclusion, before purchasing any property in an area you are unfamiliar with, gain as much clarity as possible. Never feel bullied or rushed into purchasing or closing on any real estate opportunity. Remember that as the investor you are in control and that most sellers want your cash more than they want their property. Aim to take action daily and help local sellers. Whenever a question arises, never hesitate to reach out to seasoned investors on this website, either below or in the forums.

Have you ever invested in a declining market? Any tips you’d add to this list?

Leave your comments below!

About Author

John Fedro

John Fedro has been investing in manufactured housing since 2002. John now spends his time continuing to build his cash-flow business in multiple states while helping others enjoy the same freedom he has achieved. Find John here.

7 Comments

  1. Tim Sabo

    Good article with sage advice. We run our real estate business (flips and rentals) here in Johnstown, PA, otherwise known as Flood City. In 1977, the third major flood in less than a century ravaged Johnstown, and took what was left of our industrial base with it. Johnstown’s economy has never recovered, and has seen a drop in population from around 66,000 at its peak to around 20,000 in 2010 (U.S. Census). Today, Johnstown is the third fastest-shrinking city in the U.S. (24/7 Wall St.)

    Rentals are a sound investment-usually-in a struggling economy, but here in Johnstown, even running rentals can be a challenge due to the lack of income of many of the inhabitants. We get a lot of Section 8 tenants-so many that the local housing office has shut down the Section 8 list-and many of them can’t even come up with security deposits.

    The challenges are plentiful, opportunities slim: BUYER BEWARE!

    • Tim Sabo

      That sounds like sarcasm there @Dan.

      We live here; this is my hometown. Sometimes people decide to live in their hometowns and work to rebuild those communities decimated by blighted economic conditions. We do understand that one needs to invest intelligently, and flips are a challenge for sure in a declining market, with fewer qualified buyers interested in purchasing a property here. But instead of just bailing, or criticizing those that stay, we believe in investing our lives into a bigger purpose: renovating rentals and homes for folks to live here, folks that will build this community into the next generation. Places like Pittsburgh, which is close to us, faced many of these same issues just a decade ago, so we invest-not blindly or foolishly-but to build something. Investing in a town like Johnstown is a great way to learn how to manage property renovation with financial prudence: we don’t have $100,000 flip margins, so we have learned how to be smart with every cent and frugal in all matters. And we have made profits, although we aren’t seeing the $100,000 at the end of each reality TV show,

      This is real life, and we are proud to be a part of it.

  2. Miguel De Dios

    Any feedback in Memphis tn. Especially Shelby county, I have seen several properties extremely low. seller finance at 8 % rate no banks involved the management company holds the note n offers to do all the paperwork electronic. So no need to fly to Memphis.

  3. John Barnette

    I think exactly because of this fact is why real estate values nationally do not appreciate much above underlying inflation. Areas with increasing population and likely increasing economic and job base do above average and areas with declining population do below average. I don’t see how there is anyway around this.

  4. John Murray

    In the US the great indicator of a growing local economy is the presence of people 25-45. Find where they are moving and you will profit. See where the super markets are and the size of them. This age group likes urban convenience, recreation and a quality of life that surrounds a vibrant life experience. If the local economy cannot provide this you will not make money. This age group has low practical skills but higher education, they are willing to pay to the nose for this lifestyle.

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