Small Town Investing

28 Replies

I currently reside in Des Moines, IA and aim to purchase small multi family properties 4-20 units. I believe that Des Moines is a great market but many others are also starting to notice and invest here. Because of this I have expanded my scope to also look to other midsize cities in and around Iowa such as Omaha, Cedar Rapids, and the Quad Cities. During my property search I have come across many properties in small towns. Small towns have the pros and cons such as they are cheap and there is less competition but also obvious cons such as lower rents and uncertain volatile futures due to jobs coming or going. I do not plan on investing in small towns but it is sometimes quite enticing due to low prices. What are some of you folks doing in regards to investing in small towns such as strategies or horror stories. Thanks in advance!

I love small towns. If you own rental property in a small town a few things happen. When you post it for rent, you are the only show in town. There is nothing available to rent in a small town, so you corner the market and get a lot of response. Secondly, once you get a tenant in your property, they stay forever. Why? Because there isn't anything else available to rent. I get higher rent in small towns because people will actually bid up my asking rent in order to get the house.

The potential issues you have in small towns are something to consider.

Some towns are so small that there is only 1 main employer. if they move out or cut on jobs your tenant base could go over night. - higher vacancy risk. 

If you are planing to buy larger buildings, some lenders will require larger down payment, and charge high interest rates in smaller towns. 

Some have some criteria for different markets: Top Market (best terms), Standard Markets (not as great terms).

If you don't live in the market and counting on the only one property manager in the town then you are basically Scre-$$e if they don't preform.

@Hadar Orkibi People who live in small towns commute to larger cities and towns for work or they run a small business. Small towns attract those who want more land and less crime. They are willing to drive to get away from the traffic and noise of town.

Sure thing @Anthony Dooley   i live in small town 4k population and invest in Big Cities and towns. Mined you, i do own a commercial in my town as it is easy to manage and in the prime location. 

The question is what is a small town?  300, 3000, or 30,000 people?

Originally posted by @Hadar Orkibi :

Sure thing @Anthony Dooley  i live in small town 4k population and invest in Big Cities and towns. Mined you, i do own a commercial in my town as it is easy to manage and in the prime location. 

The question is what is a small town?  300, 3000, or 30,000 people?

 That is a good question. It is relative. What I consider a small town may not be small to someone else. In my experience, a small town offers good opportunities for rental property. Because the need for housing exceeds the number of new homes built in a small town, this supply and demand ratio works well for landlords.

it could be the case in some- I think it’s really depend on the town and can’t be generalised.  Some town will have more demand then supply, while other town could be over saturated, and another dead duck 🦆 with high vacancy because the main employer close the shop.

I live in one of the top RE markets in my state and the only property I own in my city is my primary residence because the rental rates are terrible here, typically below 1% up to 1.25%. I primarily invest in suburbs and a few key smaller communities where the properties are cheaper, and the rental rates are all a lot higher 1.5-2%+. There's less competition to buy properties, and less competition for tenants also. You want to be in towns with PM or close enough to you to self manage. If not, you're better off to do a RTO/LO or some other seller financing and make the tenant/buyer responsible for all or at least part of the repair and maintenance.

Im in Northern Iowa near Mason city, 35,000 and have rental properties in towns of 400, 3,000, and 35,000.  I am fairly new to multiple rentals 5 in the last year alone but 1 for 7 years.  Never had a vacancy more than a 2 weeks.

I just bought a 3/1 for $36k. Got an as- will be appraisal for 70k.  Got a 25yr commercial loan at 4.4 with a local bank. They gave me a loan for 44k, so I got a check at closing for 8k.   I put 6k of my own money in the 14k rehab and ill get $750/mo.    Cashflow of $237/mo 47% cash on cash and instant 20k equity on the balance sheet.

I use a property managemenrmt company and my last 3 properties were rented in less than a week.  

Another one i bought was a home path from fannie for 40k, got 44k loan so 4k back at closingand used that for a roof.  Ill put probably 10k in it and get $775/mo with $250ish cashflow 30% cash on cash.

Keep in mind i live here and do my own rehabs so some of the equity is sweat and ive only had 1 of then for multiple years so some people will say  capital projects will kill me... guess ill find out.

IG is - ( niabuyandhold l if you want to see any of the places

@Christopher Derr seems like small town investing is working for you. Are your properties within commuting distance of decent size towns such as Mason City? I don’t have a problem with purchasing in an area that is within 30 minutes of a sizable town because there will be jobs available and there will be a choice of different property management companies.
Have you found it difficult to hire property management outside of Mason City?

The management company will work anywhere in the area you just have to pay mileage and actual time outside of 15 minutes from Mason City for showings and service work.  $35/hr is the rate.  

Clear lake, manly, nora springs, rudd, rockwell i think would all be within that 15 miles and most of those towns outside of clear lake are under 1,000 population but many people just commute to mason city for jobs.  Mason city is really the only sizable city in north central Iowa 

@Brandon Sexton

Hi Brandon

Investors are migrating to tertiary and smaller markets for the reasons you posted above. What I have found is one of the biggest problems with small markets is the inaccessibility of finding a good/qualified management company.

Be sure that the small market is close enough to a job driver.  Once the economy softens, they will leave these smaller markets and move closer to the jobs

Gino

@Brandon Sexton

Hi Brandon, when looking at deals in these smaller markets there are several things you want to consider. A few of the most important are:

1. Employers. Is there one major employer? A small town can quickly go under if the one employer goes out of business or moves. There must be a diverse mix of larger employers.

2. Demand. Small towns of course will not have the demand of the larger markets. Talk to property management companies or brokers that manage and find out what the vacancy rate is in the town. Get local people’s opinion of the rental market. What we do sometimes to test demand is run a sample rental ad on Craigslist and see how many replies it gets. Keep in mind Craigslist may not be the primary marketing method so you may actually need to put "For Rent" signs out on the streets leading up to the property. We have hired “jobbers” on craigslist to do this for us as well.

3. Property management. As others have said there may not be many, if any, property management companies in town. Sometimes you can find brokers that manage as well and some will do a great job for you on smaller properties

@Gino Barbaro
I agree that small towns can often be “company towns” and they do great when the company is doing good but if there are lay offs or the company leaves then the town begins to dwindle as people search for better opportunities, such as Newton, IA which is well known in Iowa for being a former company town to Maytag. Small towns at least in Iowa have been on the decline for decades as people grow up and move to cities in search of better opportunities. Which is why I think it may be safer to do small town investing in diversified economies or within commuting distance to a larger city.

@Rod Khleif
Than you for the tips! I think property management would be more difficult or expensive to acquire as compared to doing so in a sizable city. Self-management would be a great option as long as the town is within a reasonable distance. Another thing you pointed out is in regards to the local rental market. I like your idea of “testing out” the market with rental ads before acquiring a property. That method would definitely help give you the data you need since it will be difficult to get accurate rental data in small towns. There are definitely many challenges with multi family investing in less populated areas especially when the deal looks great on paper but the real situation may be vastly different. Which helps to affirm that secondary and tertiary markets may have the best mix of risk and return for my goals.

I also love your podcast and it has definitely helped to push me to learn and grow more in the multi family arena. Thank you for all that you do in regards to investing education.

i have a triplex in Boone, it has worked out well for me, because it is still close to Ames and Des Moines, so i get renters that are professionals.  We had all 3 units rented within 2 weeks of finishing work.  However, the downside for me was that i paid cash, rehabbed, rented, then i tried to refinance.  There were literally no comparisons in Boone to get an accurate appraisal.  So my refinance fell through with the bank.  I was of course going to use that money to go buy another one, but now i am kind of stuck.  i did end up getting a "loan" for it, but it was with a family member on a 10 year loan.  the numbers on the deal still look fantastic, in fact i am netting 100% cash on cash return now.  But there are some downsides in the really rural small towns - lower rents, no appreciation.  I like towns like Nevada, Story City, Perry, Newton, etc that are close to larger metros to keep people employed, but are rural so that the prices are low.  

@Brandon Sexton for over a decade im investing out of Area/ town. all of my properties apart form one Commercial building which is a triple net lease  (easy as management ) are located out of area.  As the Real Estate guys say. " invest where the numbers make sense".  if a small town works for you and you can minimize risk then it could be great, if not then focus on larger towns or city with GOOD Property manager and make it happen.

Its really depends, my only small town property is in 4,500 peephole town.  BUT its in the "Golden Block" next to the local post office and best cafe - cant go wrong. 

As the saying go: "Horses for Courses". 

I hope that helps. H

@Brandon Sexton seems like you have gotten some good information but let me add a few thoughts. Almost all of my property is in smaller towns so I've got a front-row seat to it.

Like anything else, there are good and bad things to investing in small towns and there are good and bad small towns to invest in.

The most important thing, I think is to pick the right small town. You want 'path of progress'. Our area is north of Atlanta and south of Chattanooga and both of them are growing towards us so it's a good area. In Florida I've seen the same thing in small towns between Tampa and Orlando.

So in your area, look where the growth is happening in Des Moines and follow the freeways to the next area. I don't know the area but I would maybe head back I80 towards Iowa City because it's toward the Chicago population center. Take a hard look at each of the small towns along the way.

You want to look for towns where there's a good local government committed to growth. Talk to the government officials involved in the chamber of commerce/economic development and pick one where the superstars are.

Once you have your town identified plan to spend lots of time getting to know it and getting involved. Usually you are dealing with a small number of realtors, contractors, government official, bankers, attorneys. Getting to know them well will help you be successful.

@Hadar Orkibi

That definitely makes sense and I think my focus is midsize towns. I see that you are located in New Zealand, do you do any real estate investing in New Zealand?

@Jeff Kehl

Following the path of progress seems to be the best way to invest in small towns. One thing I’ve noticed is that small towns that are in the main path of progress are already seeing prices rise. I know it may be a little riskier but I feel like going towards areas that will be developed in the future but aren’t the headline towns may be a good strategy.

It seems that it’s not letting me tag people so I apologize for that.

@Brandon Sexton , I think Hadar is confusing small town NZ and small town USA. Providing you get to know what makes the town tick many small US towns are great for cashflow. I have invested in Memphis for years but more recently have started looking more at satellite towns. Quite small populations but often they have what I would call some "snob value" so have higher rents than Memphis and a lot less issues with vacancies and getting trashed.

Dean.  How far outside of Memphis have you looked?  I looked at a property in Covington today; I am trying to decide if it is to far away.  It's a great property

@Brandon Sexton Personal bias here: Small towns scare me but small suburbs don’t. Can you drive 20 minutes to a moderately sized metro area? Or is it 20 minutes to the suburb with good schools and 60 minutes to where your tenants will likely work? Buy the small suburb, not the small middle-of-nowhere town.

@Brandon Sexton

Hey Brandon! We are in Iowa City, and are taking same approach as you (looking in smaller towns within an hour of us).  When I look on loopnet.com, my thoughts are "wow, what's happening in these tiny towns?!" as I've been doing due diligence, part of the info I collect is to call the city, and ask for their Comprehensive Plan- this will outline studies the city has done regarding potential growth/decline, potential housing shortage/surplus, and what kind of housing is needed, along with future roads, infrastructure & development planned. Also, you learn info such as where historic districts are etc, to avoid buying something that will have to be maintained within the historic preservation guidelines, (unless you want something historic to maintain). It has been immensely helpful info for us. Best of luck! 

@Andrew Johnson I agree with with your approach to buying small suburbs and not traditional small towns. This is a good strategy on multiple ends because there is more demand and job opportunities. There is also more potential since your suburb may be in the path of progress which can lead to increased property prices and rents.

@Tiffany Ralston  I like your idea of calling the local city to get more information on city planning and current trends. There is much less reliable information out there about small towns as compared to large cities and most information from small towns would be from the the local or state governments. How do the local towns present this information to you? Do they give you a stack of documents or do they make small "cliff notes" that give you all of your required information in easy to digest methods?

@Brandon Sexton Brandon, usually they email me a pdf of their studies. Most cities have to have a comprehensive plan to qualify for federal funding.

Generally I call the city hall, introduce myself, and ask their help in determining who I should speak to in the city about housing (usually planning & zoning). Then contact that person, tell them, "we are interested in building or buying a multifamily building in the area. In your opinion do you see a need for that type of housing? If so, are there plans for MF in new developments?"  If not, do they know of current landlords that have mentioned selling their properties, and do they have their names? (you can also call the rental permit inspector, they know who the burned out landlords are and will share their names with you). 

 Then  continue the convo with, "we are interested in building or purchasing what the city needs, we are not interested in a lot of rezoning, etc, we would like to work with city." (this is huge, as city officials are often dealing with complaints and people wanting them to bend the rules for them- if you say that you are on their team, they are much more willing to help you) They will usually share a lot at this point.

After they share what they know, ask if they are aware of any city or county tax incentives for multifamily. (they usually have good intell on that as well).  Ask for them to email any info they have. (usually the long range plan, new development plans etc). After they email, follow up with a thank you email and review the info.  

I've been surprised of what i've learned by doing this. Good luck!

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