Don’t Buy Rental Property in a Declining Market – Here’s Why

Any time I’ve ever heard an investor talking about buying property in a declining market, I ask them why. Not because I’m judging them, but because I’m truly interested why they would take the risk. For me, declining markets have never held any appeal, and I consider it far too risky to buy property there. The explanations I get from these investors usually center on the affordability of the properties, and while there’s no denying the appeal of a cheap buy-in, it’s still not enough to tempt me.  Here’s why.

 

Market Features

First, let’s go over what it even means to be a growth market or declining market. There are a few distinct features that illustrate the difference between the two, and they are:

 

Growth Market

  • Population increasing
  • Diverse job opportunities
  • Stable industries
  • Desirability to live there

 

Declining Market

  • Population decreasing
  • Few jobs
  • Industries/businesses are shuttering
  • Poverty/crime on the rise
  • Not a desirable place to live/work/visit

 

Property Value

Property value is directly impacted by the type of market you’re in – it’s basic economics in the area of supply and demand. If you’re in a growth market where jobs are plenty and people are moving there, the demand for housing will be high. The supply, however, may not match that demand, and therefore property prices will go up. On the other side of the coin, we have declining markets, where the exact opposite is happening. Industries are dying, jobs are scarce, and people are fleeing the area for better opportunities elsewhere. The result of this is vacant properties and plummeting home values.

 

Cash Flow/Appreciation

For an investor looking in this type of market, this means property can be bought on the cheap, as I mentioned. However, it also means that it will have to be rented out on the cheap, too, which can seriously affect your cash flow. Then there’s the little problem of appreciation, or lack thereof. Homes in declining markets are typically very slow to appreciate, if they do at all. Even then, you may be stuck holding onto it for years, and all the while your cash flow is nowhere near what it would be in a growth market.

 

Tenants

Finally, you need to consider the type of tenants you’ll have in a declining market, as tenant quality can greatly impact your success. Declining markets typically have lower quality renters. All of the high-income people have left in search of better opportunities, so you’re often left with low-skilled workers who aren’t earning that much, and therefore cannot afford as much for housing. There may be other problems that accompany this, too, such as vacancy, crime or damage to your property. Don’t get me wrong; high-income renters don’t automatically mean they’ll be awesome tenants, and lower earners aren’t always going be crappy renters. However, when speaking in general terms, this is usually the scenario you’ll face – and it can be a stressful and costly one.

 

My suggestion: don’t take the risk. Look for growth markets to invest in, and avoid the potential pitfalls that come with declining markets.

 

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