Author Topic: If you want cash flow, buy in areas with declining population  (Read 2865 times)

clarkfan1979

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On a recent Afford Anything podcast, Paula Pant said that she is buying rentals in Montgomery, AL because of strong cash flow. The main downside is that population declined by 4% over the past 10 years, according to her podcast. When I looked it up, I found a decline of 2.5%.

Thoughts?

aasdfadsf

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Re: If you want cash flow, buy in areas with declining population
« Reply #1 on: April 24, 2022, 09:08:03 AM »
My first thought is that over the long-term, appreciation will be bad and possibly negative in places where the population is declining. However, I have noticed that P/R ratios tend to be very good in places like that, while they are super high in rapidly growing cities. I'm not sure why that is. It may be that rents are a lagging indicator.

I'd probably avoid it because of the risk of a catastrophic crash in valuation. What if the city gets abandoned entirely? (Not going to happen to Montgomery, but maybe in the rust belt.)

roomtempmayo

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Re: If you want cash flow, buy in areas with declining population
« Reply #2 on: April 24, 2022, 09:19:33 AM »
Thoughts?

A friend has several apartment buildings in midsized southern cities.  Memphis is one of his big areas.

Apparently run down apartments go for peanuts.  He keeps the good tenants, and renovates around them.  They're glad to work with him because he's making significant improvements.  Taxes are really low, and rents are 2%+.

One complication he mentioned is that he often buys properties that banks don't want to finance directly.  He started his portfolio by getting individual investors.

maizefolk

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Re: If you want cash flow, buy in areas with declining population
« Reply #3 on: April 24, 2022, 02:59:55 PM »
My first thought is that over the long-term, appreciation will be bad and possibly negative in places where the population is declining. However, I have noticed that P/R ratios tend to be very good in places like that, while they are super high in rapidly growing cities. I'm not sure why that is. It may be that rents are a lagging indicator.

The annual return has to be higher to get people to buy depreciating houses. In places where people are able to tell themselves they'll make money on the appreciating value of a house, it takes much smaller rents (as a percent of purchase price) to convince people to buy rentals.

The same reason companies in declining markets tend to have much more favorable P/E ratios than new or rapidly growing ones.

theoverlook

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Re: If you want cash flow, buy in areas with declining population
« Reply #4 on: April 25, 2022, 08:21:52 AM »
I've noticed the same with commercial properties for sale in declining areas. You can pick a building up for peanuts and the rent makes for amazing cash flow - if you can fill it. I haven't actually had the nerve to pull the trigger on any of these amazing deals because my fear is that the property could sit vacant for years and vacant commercial property is very expensive to hold.

Archipelago

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Re: If you want cash flow, buy in areas with declining population
« Reply #5 on: April 25, 2022, 11:39:42 AM »
I've noticed the same with commercial properties for sale in declining areas. You can pick a building up for peanuts and the rent makes for amazing cash flow - if you can fill it. I haven't actually had the nerve to pull the trigger on any of these amazing deals because my fear is that the property could sit vacant for years and vacant commercial property is very expensive to hold.

I'm considering purchasing underperforming CRE and converting it to another use. I.e. large vacant building into small, efficient apartments. What you describe seems to be the only type of real estate not selling so hot in comparison to almost all other real estate.

Basically, taking something that can't be reliably rented, and converting it to another use which is currently seeing historical demands?

Any thoughts on this?

Boll weevil

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Re: If you want cash flow, buy in areas with declining population
« Reply #6 on: April 25, 2022, 04:46:42 PM »
Did she say anything about the clientele or location?

Montgomery is a bit unique in that there’s an Air Force base there that focuses on training, so there’s a lot of churn as people get cycled through, and it probably isn’t going anywhere. So is she getting properties away from the base where the tenants’ behavior is likely similar to what’s going on in other shrinking areas, or is she buying properties within commute distance of the base that are basically an island of stability?

Boll weevil

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Re: If you want cash flow, buy in areas with declining population
« Reply #7 on: April 25, 2022, 05:11:55 PM »
I've noticed the same with commercial properties for sale in declining areas. You can pick a building up for peanuts and the rent makes for amazing cash flow - if you can fill it. I haven't actually had the nerve to pull the trigger on any of these amazing deals because my fear is that the property could sit vacant for years and vacant commercial property is very expensive to hold.

I'm considering purchasing underperforming CRE and converting it to another use. I.e. large vacant building into small, efficient apartments. What you describe seems to be the only type of real estate not selling so hot in comparison to almost all other real estate.

Basically, taking something that can't be reliably rented, and converting it to another use which is currently seeing historical demands?

Any thoughts on this?

1. What’s the current zoning situation? You might have to get it changed. And then you’ll probably want complementary zoning nearby. (In other words, you probably don’t want to be a small island of multi family surrounded entirely by industrial).

2. Is it livable? Are there shopping, restaurants, schools, and all the other creature comforts most people want within a reasonable distance (or will there be in the near future)?

3. What has the land been used for in the past? (And not just the previous owners. Go back as far as you can.) Stay away from anything chemical (including gas stations and dry cleaners).

4. Do you have the money to build out all the units at once, or are you relying on the sales of the first few units to finance the rest? Are you going have to clean up asbestos, lead paint, etc?

aasdfadsf

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Re: If you want cash flow, buy in areas with declining population
« Reply #8 on: April 26, 2022, 10:07:11 AM »
Montgomery is a bit unique in that there’s an Air Force base there that focuses on training, so there’s a lot of churn as people get cycled through, and it probably isn’t going anywhere.

It's also the state capital, so there is a certain base of government workers and related businesses that aren't going to go anywhere no matter what else happens. That puts a floor under how hard real estate there can potentially crash.

aasdfadsf

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Re: If you want cash flow, buy in areas with declining population
« Reply #9 on: April 26, 2022, 10:10:59 AM »
The annual return has to be higher to get people to buy depreciating houses. In places where people are able to tell themselves they'll make money on the appreciating value of a house, it takes much smaller rents (as a percent of purchase price) to convince people to buy rentals.

The same reason companies in declining markets tend to have much more favorable P/E ratios than new or rapidly growing ones.

Thanks, that makes perfect sense. Although it seems that one would have to predict whether prices would appreciate or not beforehand, so maybe this is at least in part a feedback phenomenon.

maizefolk

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Re: If you want cash flow, buy in areas with declining population
« Reply #10 on: April 26, 2022, 11:16:31 AM »
The annual return has to be higher to get people to buy depreciating houses. In places where people are able to tell themselves they'll make money on the appreciating value of a house, it takes much smaller rents (as a percent of purchase price) to convince people to buy rentals.

The same reason companies in declining markets tend to have much more favorable P/E ratios than new or rapidly growing ones.

Thanks, that makes perfect sense. Although it seems that one would have to predict whether prices would appreciate or not beforehand, so maybe this is at least in part a feedback phenomenon.

Yup. But a big part of whether to expect the value of a property to increase or decrease is just whether a given city/region is growing or shrinking. While those trends can reverse they're actually reasonably stable over the 5-10-15 year time frames many investors are thinking about with real estate. Rust belt cities have been shrinking at least since I was a kid. Sun belt cities and the 5-ish biggest cities where the vast majority of new economic development have been happening have been growing. The first group has ridiculously good price to rent rations and the second group ridiculously poor.

waltworks

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Re: If you want cash flow, buy in areas with declining population
« Reply #11 on: April 26, 2022, 12:44:14 PM »
For me the biggest consideration is property taxes, because if population is declining, taxes often spike out of necessity to keep paying for public services (and often pensions for retired public servants). It's very hard to cut back spending on things like police/fire/road maintenance, so taxes tend to climb pretty fast at the same time as the value of the properties is declining.

You can make it work if the cash flow is good enough and you're willing to accept the possibility that you'll end up giving the property back to the city for nothing.

-W

clarkfan1979

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Re: If you want cash flow, buy in areas with declining population
« Reply #12 on: April 26, 2022, 01:04:46 PM »
I've noticed the same with commercial properties for sale in declining areas. You can pick a building up for peanuts and the rent makes for amazing cash flow - if you can fill it. I haven't actually had the nerve to pull the trigger on any of these amazing deals because my fear is that the property could sit vacant for years and vacant commercial property is very expensive to hold.

From my experience, if it's an amazing deal, it's very easy to pull the trigger. I think you are describing a high cash flow/high risk asset, which may or may not be an amazing deal.

August26th

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Re: If you want cash flow, buy in areas with declining population
« Reply #13 on: April 26, 2022, 03:12:35 PM »
Can you clarify which episode this was? Thanks.

clarkfan1979

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Re: If you want cash flow, buy in areas with declining population
« Reply #14 on: April 26, 2022, 03:51:04 PM »
Can you clarify which episode this was? Thanks.

https://www.youtube.com/watch?v=ECW2BU0v60c

The specific point I referenced starts at 50:10.

Overall, it's a pretty good discussion on cash flow vs. appreciation. Because this forum puts a high value on exiting your W-2 asap, it makes sense that this forum leans more toward cash flow. However, I think cash flow vs. appreciation is a personal choice. It depends on your current financial situation and your long-term goals. If you hate your job and you want out asap, go with cash flow. If you are a high income earner not looking to quit any time soon and don't want a second job managing C rentals, buy in A class neighborhoods that barely cash flow, but are more likely to appreciate. 

PMJL34

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Re: If you want cash flow, buy in areas with declining population
« Reply #15 on: April 27, 2022, 11:19:15 AM »
Not a bad take at all Clarkfan. I agree with most of that. I also agree that this forum puts too much emphasis on cashflow.

However, there's wide range/spectrum between cashflow only investment and appreciation only investment. Personally, I wouldn't recommend a cashflow only or appreciation only investment. With that said, I certainly lean more towards cashflow because that's something that I can better predict/control. At the same time, I bought in a VHCOL city and not the rust belt, so I clearly sacrificed cashflow/low entry price for city desirability/demand.


iris lily

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Re: If you want cash flow, buy in areas with declining population
« Reply #16 on: May 27, 2022, 07:21:33 AM »
I've noticed the same with commercial properties for sale in declining areas. You can pick a building up for peanuts and the rent makes for amazing cash flow - if you can fill it. I haven't actually had the nerve to pull the trigger on any of these amazing deals because my fear is that the property could sit vacant for years and vacant commercial property is very expensive to hold.

I'm considering purchasing underperforming CRE and converting it to another use. I.e. large vacant building into small, efficient apartments. What you describe seems to be the only type of real estate not selling so hot in comparison to almost all other real estate.

Basically, taking something that can't be reliably rented, and converting it to another use which is currently seeing historical demands?

Any thoughts on this?

I’m talking to a neighbor about taking his charming old Victorian commercial space, which he is unable to rent, and turning it into residential. He claims his Commercial insurance rate is some ungodly amount I can’t even remember Because I was PTSD shocked by that amount.

But it is zoned commercial. The city considers it a commercial property and how do you get that changed from a commercial tax rate to a residential tax rate?

I don’t know.

Sibley

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Re: If you want cash flow, buy in areas with declining population
« Reply #17 on: May 31, 2022, 09:41:58 AM »
I've noticed the same with commercial properties for sale in declining areas. You can pick a building up for peanuts and the rent makes for amazing cash flow - if you can fill it. I haven't actually had the nerve to pull the trigger on any of these amazing deals because my fear is that the property could sit vacant for years and vacant commercial property is very expensive to hold.

I'm considering purchasing underperforming CRE and converting it to another use. I.e. large vacant building into small, efficient apartments. What you describe seems to be the only type of real estate not selling so hot in comparison to almost all other real estate.

Basically, taking something that can't be reliably rented, and converting it to another use which is currently seeing historical demands?

Any thoughts on this?

I’m talking to a neighbor about taking his charming old Victorian commercial space, which he is unable to rent, and turning it into residential. He claims his Commercial insurance rate is some ungodly amount I can’t even remember Because I was PTSD shocked by that amount.

But it is zoned commercial. The city considers it a commercial property and how do you get that changed from a commercial tax rate to a residential tax rate?

I don’t know.

You get it rezoned to residential. Easier said than done of course, but go talk to the city. Or a real estate attorney might have some insight into the process.

 

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