A Look at the Rewards, Risks & Rules for Investing in Rural Rental Properties
Ever thought about rural or small town investing?
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It’s a tempting proposition. Imagine the idyllic rolling fields, quaint historic towns, and charming places where everybody knows everyone else’s name. Perhaps the local real estate even offers strong returns?
Venturing away from cities has its benefits for real estate investors. Let’s take a deep dive into them before turning the leaf over to look at the risks and rules for success for rural investing.
Bucolic Bliss: Advantages of Rural Investing
Do you know how many real estate investors there are in New York City? Tens of thousands. What about in Shady Acres, Iowa? Maybe one or two, if any. (Okay, so I made up Shady Acres, but you get the idea.)
Less competition is a recipe for higher returns. Who is going to bid against you at foreclosure auctions? Who is going to get into a bidding war with you over Widow Wilson's run-down estate that needs major renovations?
You can often score killer deals in rural areas because you aren’t competing with a hundred (or a thousand) other investors and landlords all looking to get in on the same neighborhood.
According to Zillow, the average home price in U.S. urban areas at the beginning of 2016 was around $269,000. In rural areas, it was around $170,000.
The price per square foot numbers were even more stark: Urban areas clocked in at $198, while rural areas logged only $108—nearly chopped in half.
That means that investors will have less money tied up in any given deal and lower cash barriers to invest.
Statistics are less handy for comparing regulation in urban versus rural areas, but where statistics fail, common sense prevails. Is anyone going to argue that the landlord-tenant regulations in rural Idaho are more strict than those of San Francisco? Or New York City, Los Angeles, Chicago, Baltimore, Seattle, Portland… need I go on?
Red, blue, conservative, liberal, socialist; however you feel about the role of government and regulation, the fact is that tighter landlord-tenant regulations exist to protect tenants, not landlords. Less regulation on landlords and real estate investors makes life easier for them.
Lower Property Taxes
Property tax rates tend to be higher in urban areas compared to rural areas.
For example, in the Mid-Atlantic region, the average property tax rate in urban areas is 2.11%, compared to 1.55% in rural areas.
That’s $1,120/year in higher cash flow—almost $100/month!
Residents in rural areas and small towns tend to move less frequently than the residents in trendy urban neighborhoods. That’s great news for landlords in rural areas, who might rent to the same couple for 30 years!
Statistics comparing rural and urban turnover rates are surprisingly scarce, but anecdotal evidence suggests that housing turnover rates are substantially lower in rural communities.
Lower Crime Rates
Rural areas and small towns have lower crime rates than cities. It’s common sense, but it’s worth pausing to look at just how wide the gap is.
As of 2015, the violent crime rate in cities with populations over 250,000 was 734.2 (crimes per 100,000 residents). Compare that to small towns with populations between 10,000-24,999, which had a violent crime rate of 269.8. In other words, the violent crime rate in cities is nearly triple the rate in rural areas!
Is the difference in crime rates only for violent crimes? Nope. Cities with over 250,000 residents had a property crime rate of 3,359, while small towns of 10,000-24,999 people had property crime rates of 2,461.
Easier Networking & Brand Building
In small towns and rural areas, everybody knows everybody else. That makes it much easier to build a brand and a reputation in your investing niche.
It’s also far easier to identify key people who are “in the know.” For example, maybe Linda down at Linda’s Diner always seems to be the first to know about news around town, or maybe Bill with the county council is the guy to talk to about county zoning and economic development plans. These local linchpins are much more obvious and easier to befriend in small towns.
As you get to know some key people around town, they’ll become brand ambassadors for you. For example, when Constance sits down at Linda’s Diner and says she needs to sell her home within the next 30 days “or else,” who do you think Linda will tell her to call?
Easier Pulse-Taking & Trend Projecting
As alluded to above with Councilman Bill, it’s easier to understand the economy and real estate market in smaller towns and rural areas. Often, the local economy is based on a staple industry, and the town’s fortunes are tied to that one industry’s investment in the area.
Small real estate markets also tend to be more stable. They may not spike up through gentrification, like a suddenly-trendy urban neighborhood that the artists and coffee shops and hipsters all moved into overnight, but they aren't likely to collapse with an inbound crime wave or suffer urban decay either.
Stability and easier forecasting make it much easier to predict long-term rental returns, making investments more attractive.
Risks & Rules of Rural Investing
More Dependency on Single Industries & Employers
Simple economies may be easier to understand, but they can also be much more susceptible to collapse from losses in one industry.
Remember Michael Moore’s Roger & Me? Well, don’t watch it; it’s tedious and preachy, but it’s a case study of what happened in Flint, Michigan when the auto manufacturing plant closed. Spoiler alert: Bad things happened.
Be extremely careful when investing in any town that’s too heavily dependent on one industry for its success.
Less Demand for Housing
Sure, there’s less competition, but the subtext might read “less demand.” And with fewer housing turnovers comes fewer people moving at any given time.
All of that can spell trouble for vacant rentals or properties listed for sale.
Any local real estate agent can tell you with about 30 seconds' research what the average days-on-market numbers are for home sales and rentals. That's a good starting place, but sift through recent listings to get a sense for what's moving quickly, what's not, and why. Talk to local landlords if you can find any, and get their take on housing demand. Satisfy yourself that you won't have a property sitting vacant for six months as tumbleweeds blow by.
Thin Industry Support
How many property managers service the area? How many real estate agents? How many contractors? How many lenders fund deals there?
Real estate investors rely heavily on industry support services. It’s no surprise that one of the first challenges faced by new real estate investors is building a team of trustworthy, dependable support servicers. But options may be few and far between in the hinterlands.
Do your homework on who’s offering local support services, and double check that you have reliable, professional options for every member of your “mastermind team” that you’ll need.
Lower Density Means Longer Drives
In urban neighborhoods, investors can walk the streets. They can walk by houses faster than investors in rural areas can drive by them.
There’s a convenience to higher-density areas. Small towns can still have manageable densities, but prepare for long drives and other inconveniences that come with spread-out rural districts.
Expect Well & Septic
There’s nothing inherently bad about wells and septic systems, but they come with their own maintenance costs for property owners. Build these costs into your CapEx or maintenance budgets if you buy a home on a well and septic system.
Know Thyself—and Thy Market
Rural and small-town investing is a different animal. It has some unique advantages over dense urban areas, but it also comes with a different set of risks.
As in any kind of investing, know what you’re investing in and invest in what you know. If you grew up in rural Iowa and you know the towns, the people, and the local economies and their rhythms, then it could be a perfect niche. Or if you move to a small town and fall in love with it, perhaps it’s a win waiting to happen.
But if you’re a city slicker at heart and are only considering rural areas for strategic reasons, think twice before opening your checkbook. You need to truly understand an area before investing in it, and that level of understanding requires spending plenty of time there.
As my mother always said, “Do what you love, and the money will follow.”
Have you had success investing in rural areas or small towns? What tips and tricks can you share? Or maybe you have a cautionary tale of woe to pass along to your fellow investors?