Detroit 49 percent, Cleveland 48 percent, St. Louis 59 percent, Pittsburgh 51 percent, Buffalo 50 percent, Rochester 34 percent, Newark 38 percent. Those figures are the percentages of population loss since the 1950 census. But the list is far longer. Many major cities in the United States and some smaller ones have lost major population in the past 50 years. At the same time other cities grew and are growing leaps and bounds.
Why? Most important for us, what effect do declines in a city’s population have on rental property management and landlords. The Cato Institute wondered the same thing and studied the common characteristics that the cities they called “shrinking” have in common. They also wondered why some cities are highly successful and are growing rapidly. Here’s what they found out.
“Census Bureau data on finances show that higher spending and taxes are the main reasons the shrinking cities have low growth,” they reported in a policy analysis called “The Myth of America’s Underfunded Cities,” by Stephen Moore and Dean Stansel.
Among the findings:
Shrinking cities spend, on average, $1.71 per person for every $1.00 spent in high-growth cities.
Even though shrinking cities get a higher percentage of federal aid, they still have tax burdens about 50 percent above those of high-growth cities, and in many cases the tax burden per family is about $1,000 higher.
Shrinking cities, on average, have more than twice as many municipal employees per capita as high-growth cities. “In 1990 the highest growth cities had, on average, 99 city employees per 10,000 residents, while shrinking cities had 235.”
“Shrinking cities tend to rely heavily on income and property taxes for revenues, whereas high-growth cities rely heavily on sales taxes. High spending and taxes are a cause, not just a consequence, of urban decline.”
“The root cause of almost all the social, economic, and fiscal problems of America’s cities,” concluded the analysis, “is the steady flight of businesses and middle and upper income families from the inner cities.”
Landlords who own and rent out property in shrinking cities can attest to the stone walls they encounter trying to manage their properties. A glut of city employees doesn’t have enough to do and hates landlords. It appears that their mission in life is to make doing business in their city as difficult as possible. In fact, a private audit Scranton, Penn. in 1988 (then nearly bankrupt) found that “the city government appears to exist for the benefit of its employees instead of the people.” Wall Street Journal, Jan. 21, 1992.
What does all this have to do with investing in, owning and managing rental property? Everything in the world.
First, in spite of the fact that you can find some real “deals” on property inside shrinking cities, figure that managing the property will end up being a nightmare, what with the constant battles with city government, laws that protect bad tenants and courts that are always on the side of tenants who won’t pay the rent.
A “good deal” is one that actually turns a profit. A low price going in doesn’t mean that you can actually come out ahead with your investment. There’s a reason the price is so low.
Second, you will have difficulty luring good tenants to your properties. The best tenants, the ones with non-city jobs and good rental histories, as opposed to those who live on public assistance and are evicted a couple of times a year, will be either snatched up and held onto for dear life by other landlords; or, they will find places to live outside the city.
Third, real estate prices are flat or even dropping in shrinking cities, thus making your “good deal” investment not such a good deal after all.
It’s the difference between price and cost. The initial price may be low, but the cost of owning and managing it may be far higher than if you owned a property where the price was higher but was in a growing area.
In planning for successful investing in rental property look at the entire economic and political picture. If one area looks bad, buy in a place where the business climate is better. If you own property in a shrinking city, think about cutting your losses, selling out and buying in a nearby city or town that welcomes landlords and business.