Investing in Small Towns

44 Replies

What do you look for in a small town a couple of hours away from a metropolitan area and are trying to buy and hold? Is there a certain unemployment rate you look for? Specific industries? A certain percentage of population growth? Something else?

Pretty interested in this as well. Seems to be much more affordable to start in these types of areas but not sure on the opportunity that actually exists.

Demographics are important but there is a lot more to consider. Look for areas with solid employers, colleges, hospitals, etc. These are areas people want to buy and sell in. I would also talk to someone at the local Board Of Realtors. They have data on what the inventory situation looks like in that area. Active and sold listings, average days on market, price/cost per sq.ft, total sales, new listings, average sale price and on and on. It's a ton of info. My local Board actually publishes this info in a newspaper flyer every month. They even compare it to the prior 2 years. It's a great snap shot of what's going on.

@JOHN DALEY to me, there are 2 things that are important. 1) an solid employment base, and 2) average days on market. The employment base is pretty self explanatory. The days on market tell me how often people are buying in that area and what I can reasonably expect.

This year we have purchased 16 properties to buy and hold and 7 of them have been in small towns on the outskirts of a major city. But not too far outside. I would say each property is 10-30 minutes from a Walmart or movie theater. Also, there are several prisons and a few colleges 15-35 minuets from these properties which creates the solid workforce in the area and they are not too far out of town to commute but they are much more affordable than in the city.

@Shiloh Lundahl for the small towns with colleges, do you focus on buying property for student housing or do you still look to rent out to non-students?

I think it depends on what is happening to the underlying job base and population trends in that small town. If jobs and people are moving into that town, you have a potential gold mine. If people and jobs are leaving, it is most likely a value trap - cheap, but going to get cheaper. Better to pay more and enter a market where people want to live today.

I don't own in a small town, but my parents do. A town of around 15,000 - 20,000 people in Kansas, 2 hours away from the nearest legitimate city. It was their primary residence. They moved out in the late 90's and it's been a rental ever since. The problem is it's a one horse town. It is adjacent a military base, and that's what keeps the town alive. It's economy is completely dependent on it.

Everything was fine until recently. After a long term tenant moved out they couldn't get it rented. They've had it on the market to sell for a month. Not a single person has looked at the house. The troops are all deployed at the moment so the town's economy is running at a snails pace.

@Michael Tierney What trends do you look at and at what point do you pull the trigger? Is it after one or two years of positive growth? Longer than that. I am looking to invest about an hour to two hours outside of Asheville (Marion, Spruce Pines, Forest City, Cullowhee, Brevard, Landrum SC, Newport TN specifically).

@Jonathan Hulen I am assuming this isn’t the first time this has happened. Does the economy slow that way when the units deploy or is this a unique situation? Anyone else having experience investing around military bases. There are a lot that are in small towns and I would be interested to see if this situation is unique or not.

I also go to www.BestPlaces.net and look at the percentage of rentals and the vacancy rates.  It's personal preference, but I want at least 35% of the population renting (and really shoot for at least 40%) will less than 10% vacancies.  Good luck!

@JOHN DALEY , not exactly an answer to your questions, but...If you live in Asheville and are looking to invest outside of your market, I would suggest Greenville/Spartanburg.  I have a small apartment building, three houses, and some trailers in Spartanburg that do really well.  You have to be careful because some areas are garbage, but you can find a decent house in a good neighborhood for $25k to $45k that will rent for $550 to $650.  I've have good luck with long term tenants that pay on time, stay long term, and do not damage property.  If you have a little more money or want nicer property, Greenville has some decent deals as well.

In my experience, anything 30 to 40 mins outside of Asheville is blowing up right now and "deals" are hard to come by.  There are a lot of investors in the Asheville market from out of town that are just looking for places to park their money.  They are cash buyers and will pay market price, because it's yielding a higher return than putting it in a money market.  It's hard to compete with that!

Originally posted by @JOHN DALEY :

@Michael Tierney What trends do you look at and at what point do you pull the trigger? Is it after one or two years of positive growth? Longer than that. I am looking to invest about an hour to two hours outside of Asheville (Marion, Spruce Pines, Forest City, Cullowhee, Brevard, Landrum SC, Newport TN specifically).

@Jonathan Hulen I am assuming this isn’t the first time this has happened. Does the economy slow that way when the units deploy or is this a unique situation? Anyone else having experience investing around military bases. There are a lot that are in small towns and I would be interested to see if this situation is unique or not.

 Spruce Pine and Brevard are decent areas (if you can find anything) because they are still within commuting distance to AVL. Marion is not really considered within the AVL area even though it's not really any further away than Brevard. Keep in mind that the only reason anyone is going to rent in these areas is because they can't afford anything anywhere near AVL any more, meaning you have to really find some low-end stuff. FWIW, I don't invest anywhere in the AVL area because it's too expensive for buy & hold. If you want to do anything around here, new construction is really what you want to aim for. Make your strategy fit the geography. The other towns you mentioned I don't think are ideal for rental property, as there are better choices closer to employment in all those cases - Newport, for example, most people are going to work in Kville or are going to be on some kind of government assistance. 

@JD Martin I just moved to Asheville two months ago but am quickly learning that I need to get away from Asheville. I am just starting out and don’t really have the Capitol to invest in Asheville so I starting to look in areas a couple hours away. How is the Knoxville/Chattanooga Area for investing?

Derek, where would you recommend to invest around Greenville and Spartanburg? I am not familiar with those areas and wouldn’t know where to start looking.

Originally posted by @JOHN DALEY :

Jd Martin I just moved to Asheville two months ago but am quickly learning that I need to get away from Asheville. I am just starting out and don’t really have the Capitol to invest in Asheville so I starting to look in areas a couple hours away. How is the Knoxville/Chattanooga Area for investing?

Derek, where would you recommend to invest around Greenville and Spartanburg? I am not familiar with those areas and wouldn’t know where to start looking.

 Knoxville is still a reasonable play for rental property. It is growing, has a huge university and medical presence, property is still (relatively) inexpensive, and Tennessee is a very landlord-friendly state (some counties fall under the state tenant-ll act and some do not, Knox does). 

Agree with all of the above- Asheville is an extremely tough market to break into, since retail prices have soared over the past two years while rents have remained fairly stagnant. For outlying areas, I would add the additional caveat of seeking a high rent/square footage ratio. Large houses that rent for $700 per month are generally far less profitable than smaller houses that rent for the same. I look for a 1% MROI in AVL, and more like 1.3%+ in outlying areas to account for this difference, as well as the increased vacancies and fewer options for solid tenants.  WIth that said, finding 1.3% in those markets is vastly easier than finding 1% in AsheVegas. Good luck!

@JOHN DALEY You really just have to go down and drive the areas.  There will be three streets with junk houses and people just hanging around all day (not working), then two streets that have well kept houses, clean yards, and people that have lived there for years and are committed to the area.  Then the next street will be crap again.  I can say to avoid Una and Saxon all together.  When the market starts improving around the downtown, prices rise, and neighborhoods start turning around, I feel like Saxon and Una will be where all the druggies and trash will congregate.  I can't give you a technical reason why, I just feel like it's isolated from any new construction, train tracks run through in all directions, and there are fewer nice streets houses in the midst of the crap.

There is a CREIA yahoo group you can join where people post deals all the time, I'd jump on that.

@Chris Harjes why do you think rents have stayed stagnant?  I've noticed the same thing and it blows my mind.  In the 5 years I've had rentals in Asheville, supply has gotten lower and lower and we are apparently in a housing 'crisis'.  Yet, most of my properties are 3 bed/1 bath 1,000 sqft close to town and I can't seem to break $1,200/month.  I used two different property management companies and both talk about demand being high and how they can get more per month than I can on my own....they start out at $1300 or so, but always end up at $1200.  These are simple but clean houses with nice features.  I have friends that rent moldy garbage and still pay $1200.

I have a theory- rent prices run ahead of retail prices (at least lately in AVL). Rents were rising so fast in 2015 when I started that I was renting houses well above the current market (and way above the market then) just because there was nothing available. Now that folks like us (and a few massive apartment projects) added more supply, we're achieving stagnation even with continued demand increases. Retail prices have lagged behind, but are also lately settling in per recent waveforms. I think we'll actually see lower rents in the next ten years or so as more apartments spring up, and as the "hot" trend of everyone moving to AVL cools down. So I'm a little picky about what I buy these days....

What is the cause for Asheville’s real estate boom? Was there business that came in?

If the Asheville rental market seems to be tapping out, is it time to sell in Asheville or do you keep your rentals?

I think Asheville is all hype.  There are some businesses that have come in, but nothing that brings in high wages or even that many number of jobs.  I've been here for 11 years.  I used to be a smallish town with a lot of charm and character, plus it's in the mountains with is a big draw.  This got national attention for whatever reason, and it snowballed since then.  I feel like Asheville was 'talked' about just as much as Boone years ago (not much).  But once we got put on one publication's list of 'top place to blah blah blah', then more publications and media outlets caught on.  Once word got out, people with cash came in to buy everything they can at inflated prices, remodeling and reselling to others with cash and so on.

I purchased most things 4 to 5 years ago and I've slowly started unloading in Asheville in the past year or two.  I have a few mulitfamilys that do well that I'll hold a bit longer, but I've unloaded most single family homes. 

You can get some good cash flow out of small towns however the problem comes when you sell the property.  There is often little to no demand in the area, most of these places don't appreciate, and it takes a long time to sell.

If you are interested in investing in a small town I would pay close attention to prior purchase prices in the area and how long it is taking to sell similar properties.  Sure you can hit a home run if the highway rolls through or a Wal-Mart enters town but you have to make your decisions based on known facts.

@John Woodrich so what facts do you look for? Are you looking for specific businesses? What numbers are you looking at?

Are you just looking at prior purchases or are there other numbers?

Originally posted by @JOHN DALEY :

Are you just looking at prior purchases or are there other numbers?

I haven't pulled the trigger on any small town investments although we may have different definitions of them.

First off my only interest is in cash flow.  If cash flow looks good I look to see if I can find property managers in the area then I look at historical appreciation.  The last items is usually where I stop.  Find that most of the houses are from 1900 - 1930, have been owned for 10-20 years and are selling at the same price.  If you can't book on any appreciation to offset CapX expenditures the true cost ends up being a huge hit to cash flow and can bust the deal.  

As mentioned prior, you can get into a property in a small town for less money but rents are lower and expenses become increasingly more important.  It is a lot easier to cover a $2,000 A/C unit when you are when you are collecting $1500 per month than it is when you are only collecting $850.  

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