Investing in markets that are declining

[Harry Lippincott]

Hello My name is Harry. I am new to real estate investing and I have been doing a lot of research in the Scranton, PA market as a possible target area for my first investment property. First and foremost, the prices here are within my reach and I have found several properties that seem like they will cash flow nicely and the ROI looks good as well however the population and economy seem to be steadily (yet very slowly) declining. I'm trying to figure out if my concern is warranted or should I assume it is relatively safe to invest here since the decline seems to be flattening over the last 15-20 years. How much weight do you put on growth in your target market vs good deals that cash flow and have good returns?

[Kate Daye Ruane]

Hi Harry!

I work and invest in the Scranton market. I am not originally from here, so I keep an objective view of the overall city and the real estate market as I'm not really emotionally tied to an area. With that being said, 100 years ago Scranton was a BOOMING and rich city, with the world at it's feet - you'll see this in the architecture as you pass through downtown and the ornate homes in many areas. In previous decades, the economy has in fact declined as the innovations and industries that made it so rich became dated or outsourced. With that being said, In the past decade and especially in the last few years Scranton has seen a giant revitalization of it's downtown, with old beautiful buildings that sat vacant being turned into luxury condos and apartment buildings, shopping, and commercial space. Additionally, you'll find endless restaurants, activities such as skiing, festivals, and markets. Millennials have been "coming home" after graduating college instead of "going away" with the increase in business here and the remote work capabilities (even pre-pandemic).

I would feel comfortable investing here, and my proof is in the pudding (I do invest here). I can't speak for overall "declining" markets, as when looking at other areas myself, it seems each place has it's own story to tell. I feel that as long as you take care of your property, you shouldn't see detrimental depreciation simply due to local conditions. Jobs are coming into our area at a great rate, with shipping, warehouse, and other labor related fields that would create a stable landlord tenant environment. Of course, this opinion isn't considering national economic tragedies, other uncontrollable items, or recommending to purchase everywhere and anywhere in an entire area. 

To specifically answer your question in regards to the weight on market (which I will consider appreciation related) vs. the weight on cash flow, that's a highly personal preference and a question that I specifically ask every client when they reach out to me for assistance. What is important to you? What is your short term goal? What is your long term goal? Do you want more than one property? These are answers that help me help you decide. 

It's kind of a diagrammable answer as a whole. In speaking in extremes, higher cashflow often entails more long-term risk (just like the stock market). The property is likely to be in close need of more repairs, non-stabilized, and in a variable location.   "Safer" purchases might be purchased at a higher dollar amount and don't have the highest rate of return, but it's always going to produce a smaller, steady and stable income stream as well as likely appreciating. I think you should think about where you are in your investment portfolio and what you are personally comfortable with risking and capturing on your next purchase.

If you want to know my recommendation for a beginning investor:
1. Any deal you'll do with me is better than NO deal. Some money is better than NO money. Don't overanalyze yourself out of starting.
2. I prefer first-timers to get something safe and stable with a solid return, as opposed to a risky high-cash flow "deal", ESPECIALLY if it needs repairs and you aren't local or experienced in those items. I've seen the "repairs" that they plan to do slow portfolio builders down to a grinding halt, while they are continuing to pay expenses on something without capturing income. Once you are more comfortable in the market with stable income flowing in, you will have that extra income to play with and take those risks.