Is 2021 the year for small-town investing?

11 Replies

I think everyone can agree that 2020 was really rough on city life. Lockdowns, riots, and crazy housing prices drastically raising the entry-level for new investors. The impact 2020 had on the city seems to be dumped right into 2021. However, this is not the case in most of America. I live and invest in Joplin MO. with a population of around 60k. and when I turn on the news it is almost impossible to relate to any of what I hear. We have been lockdown free since about last June. The school has been in person since last fall, restaurants have all been open, and with a few exceptions life is basically back to normal. Home prices have gone up a bit, but it's still a very accessible market. If you have been saving and have 50k ready to deploy, you can use that cash to buy and rehab a decent house. And we have no shortage of potential tenants waiting for good rental property.  

So this got me thinking that investing in a smaller market with a population of 50k-80k might be the play to make in 2021. Typically when you are investing in these markets you won't see much in appreciation, but the stability of these markets has been proven to cash flow well and hold their value when everything else seems incredibly volatile. 

My question is: Am I way off? Or is this a great time to look towards smaller markets if you want to get into affordable and stable investing and take a break from the super expensive and intensely competitive bigger city markets?

I agree. I’m a bit north of you in Lamar, Mo. 2020 was a great investment year for me. This year I have been focused on stabilizing the 9 doors I bought last year, other wise I would continue to buy.

@Sawyer Smith depends on the investors financial position and investment strategy. I agree, I think the lockdowns implemented by big cities have discouraged many first time and even seasoned investors. As you mentioned, if your investment strategy is soley focused on producing cash flow, then smaller markets (50-80k population) with affordable housing might be the way to go. If you're someone that is looking for appreciation growth in your property over time, I would not rule out big markets yet. @Brandon Turner talks about this a lot, essentially saying that your invesmtent strategy vill vary depending on the conditions/factors of the market. 

@Michael Dumler I completely agree. However, do you think that if you are living in a larger metro area like Tulsa or Denver and looking to get the most for your money, perhaps a smaller more stable market would be a better ROI? For example, we have a really nice 3 bed 2 bath home that we spent $120k on and is renting for $1,200. It would be pretty normal in a Bigger market to that same house would cost $400k and only barely rent for more than ours. (I also admit that I could be way off on the numbers for different markets. I have only barely studied them,)

I'm surprised to see Tulsa grouped together with Denver in that comment. I think Tulsa is bigger than Joplin, but definitely not in the same ballpark as Denver. I like the idea of smaller towns. I like the idea of 30 miles or so outside of a "small" city like Tulsa.

Tulsa is benefitting from the huge growth of the DFW and OKC markets. I think Tulsa is trending upwards for sure, and has lots of room to grow more! That's my next market (I'm currently focused on OKC). 

@Sawyer Smith

OKC is in the same boat but our metro population is much bigger at around 1.4 million. So, I'm not sure it's "small town" but certainly regional. After a short shut down we've stayed open and tenants have been able to work, pay rent and move into new properties! Our inventory did drop and we're in a seller's market but overall cap rates are good and price points are still very competitive. C class areas from 60-100k are generally at 7% cap rates.

I'm curious to hear how other cash-flow-focused markets that are more conservative are doing? Anyone want to chime in? 

Our portfolios in smaller towns (Northern New England) have been going gang busters with 99% rent collection and  record demand for vacancies (with price increases), and no inventory in sight.  We continue to double down in these markets with off-market and brokered opportunities where we can get significant day 1 cash flow for investors, value-add and historic migration shifts.  

I think you could think of small towns like bonds and growth areas like stocks (simplified). You get the cash flow from the smaller markets immediately, but not much appreciation, and perhaps a ton of growth in equity in larger areas with a lot of migration and job prospects. I grew up in Carthage, MO, family is all over SW MO and lived for 12 years in Springfield. I've been living in the Seattle area the last 5 years. The house I rent here was purchased for $300k in 2012 and is now worth $1M. Let that sink in for a moment. And if you owned several of these properties? As mentioned on the podcast, the growth markets end up being the cash flow markets eventually, just not immediately. This house is well over the 1% rule now, it just took a few years for that to happen. Fair market rents on this home for rent are $3500 now (and likely $4k before too long) and $700k gain in equity. I'm jealous :). I think the NW Arkansas area with the Wal Mart ecosystem boom is going to be a great cash flow and equity market this decade.

We'll see how Covid impacts long term migration over time. I think it would be great to see the remote work trend continue, and for some of the leading businesses to move HQ's and operations centers to less expensive areas as Tesla has done (and Expedia did in Springfield, creating >1k jobs).

@Sawyer Smith I always kinda go back to the idea that investing works when people know what the end goal is and build a strategy based on the end goal and risk tolerance. So if someone is pretty risk averse and wants real estate for long term cash flow I’d encourage them to go all in on markets like Joplin and OKC where they haven’t been as impacted by covid. But if someone wants the appreciation and has the capital to ride it out, bigger markets that have been hit by covid probably make more sense. It sounds like you’ve found a good market for what you’re looking for!

@Alyssa Dyer Totally agree. I've had a lot of success in my goal of replacing my job income with rental cashflow. And I think a part of that is because I'm in a market where the amount of cash you need to get started is low. But if cash flow wasn't the goal then Joplin might not have been the right place. I'm curious, in your market are you able to achieve both? appreciation in the higher end neighborhoods, but cheaper and more cash flowing properties on the outskirts of OKC? They say the best market to invest in is the one you know, and if the market you know can accomplish a diverse range of strategies then you might have a good thing going for you!

@Sawyer Smith that totally makes sense and I agree. When it's feasible I tell people to invest where they are. OKC is kind of weird right now (I think everywhere is, haha). For years appreciation had to be forced through a rehab, but our average sales price is up like 15% since 2018 (or something close... don't hold me to that exact %). I'm not convinced it is sustainable. I know there are parts of the city I could play with appreciation but I've stayed conservative with my investing. I'm working to build a portfolio that will fund my life later on... but I like my "9-5" gig so I don't worry about cash flow too much.